It wasn't just free shrimp that got Red Lobster in trouble.
The Orlando-based seafood chain filed for Chapter 11 bankruptcy last week, citing $1 billion in debt, according to court documents. The company announced it was closing dozens of stores nationwide along with plans to sell company assets, including through an auction of interior furniture and kitchen appliances.
The announcement comes after a disastrous 2023 Endless Shrimp promotion that allowed customers to order as much shrimp as they want for about $20, sparking an eating challenge from TikTok users. But while it brought customers into stores, it also left the chain with an $11 million deficit.
Heather Haddon covers the restaurant industry for the Wall Street Journal and broke the news about Red Lobster's possible bankruptcy. She explains that other casual restaurants, such as Olive Garden and Applebees, which are fellow Red Lobster chains and owned by Darden Restaurants, are experiencing the same headwinds. Customers are looking for cheaper food, and labor and real estate costs are also rising.
Haddon said the endless shrimp story was just one in a series of mistakes over the past decade. In the early 2010s, the company was sold to private equity firm Golden Gate Capital, which sold properties owned by Red Lobster, putting it in the hands of landlords and landlords. In 2016, Thai Union Group, one of the world's largest canned tuna producers, acquired a minority stake in Red Lobster. This year, they decided to cut bait as the company continued to incur losses, citing the pandemic and rising debt.
Hadden said Today's explanation Guest host David Pierce explains how Red Lobster became a restaurant icon and what contributed to its decline. Listen to the entire conversation and follow along. Today's explanation On Apple Podcasts, Spotify, Pandora, or wherever you find podcasts.
This conversation has been edited for length and clarity.
What happened to Red Lobster this week?
Red Lobster has declared Chapter 11 bankruptcy and plans to restructure the company. Red Lobster isn't closing all of its restaurants, but it has closed dozens, for a total of about 600. They're basically seeking bankruptcy protection to deal with nearly $300 billion in debt to creditors.
By the end of last year, it had only $30 million in cash, which was far from enough to run such a large and complex business. And they couldn't pay their suppliers much. Obviously this has been a situation that has been building up for some time, but it is over here.
I'm sure there's more going on here than unlimited shrimp. And I want to get to all of that, but I've seen some people connect the dots and say that Unlimited Shrimp cost this company too much money and ended up going bankrupt. What happened there?
So Red Lobster has certainly had these kinds of endless promotions in the past where you can get all the shrimp you want from a certain part of the menu. But they tended to run offers for a limited time, or for a limited time, one day a week for a specific period of time. The company said this in June. “Hey, we’ll run this all the time, so you can come and pay $20 and get as much shrimp as you want.” So, although there was a lot of traffic, the profit was not proportional to the sales.
That's the kind of thing that makes sense to me when it's Unlimited Bakery. Unlimited shrimp — you can imagine how that would be a bad deal financially.
I've actually talked to restaurant executives since then. Shrimp prices can fluctuate quite a bit. And when it goes up, it gets especially expensive.
You said not all stores are closing. What's happening right now at companies like Red Lobster?
They are in bankruptcy protection. They have a CEO who is a restructuring expert who was hired to prepare for this bankruptcy when the company was already in a very unstable situation. The goal was to get new terms with the landlord, restructure into a new company and move forward.
great. Red Lobster will remain open, at least for some people. Do you really think your experience visiting Red Lobster will be any different after this bankruptcy proceeding?
At some point they will probably try to buy it somewhere that can sell it. But if you look at the documents, they talk about the history of Red Lobster and its legacy. So I'm not expecting much of an immediate change, but maybe we can get away with a limited time offer.
Where does red lobster originally come from? This company is an American food institution with quite a long history.
It was founded in the late 60s by Bill Darden, known as the father of casual dining. This was one of the first casual dining chains, a place where you could enjoy a delicious meal with family or a date without breaking the bank.
And that didn't happen much back then, right?
No, this was new. In the 70s, General Mills invested in the company, which helped the company expand its presence in the United States. From there, they developed fun and kitschy things like Lobster Fest, Popcorn Shrimp, and Coconut Shrimp that really became famous. In the 1980s and 1990s, it became the largest seafood restaurant chain in the United States. They actually discovered what consumers liked.
Looking back, when was Red Lobster at its peak?
Perhaps the 90s could be said to have been their heyday.
And when does work start? I'm really sorry. flounder.
Darden Restaurants had Starboard, which was basically an activist investor agitating for change, and they wanted the company to make more money. I think Bill Darden, who was still leading the company, said this: “Okay, I’ll spray Red Lobster and deal with you..” They sold Red Lobster to private equity firm Golden Gate Capital in 2014 to deal with these activists.
Golden Gate Capital very quickly sold all of the company's real estate to inject cash. But that meant Red Lobster would lease back their properties forever. In 2016, Thai Union Group, one of the world's largest canned tuna producers, emerged and acquired a minority stake in Red Lobster. Then, after the pandemic hit in 2020, they bought it wholesale.
How common are such stories in the restaurant world? These private equity firms are famous for acquiring companies and then selling off parts of them. Does this happen a lot in the restaurant world?
Golden Gate owns quite a few restaurants. Private equity funds owning restaurants are fairly common, in part because they generate a lot of cash.
Were there any other kinds of contributing factors to this? One of the things that emerged from Red Lobster's bankruptcy filing was that it had an incredibly large amount of debt compared to the amount of money it was bringing in. Where did it all come from?
In 2021, labor costs have skyrocketed due to a labor shortage in restaurants. They were really fighting to get workers and as a result they had to actually increase the amount they were paying them. Then, in 2022, menu prices rise due to inflation and people start to become dissatisfied with paying those prices.
Things start to get a little better by June 2023, but at this point, consumers just aren't going out to restaurants as much. Consumers are just now tightening their belts and Red Lobster is offering this shrimp deal for June 2023.
Some of that sounds like it's affecting every restaurant and to some extent every industry during the pandemic. But it may seem like a kind of perfect storm, especially for Red Lobster.
That's absolutely correct. Many sit-down chains and independent sit-down restaurants are struggling. It's more labor-intensive than fast food, and when that labor becomes more expensive, it's really difficult. The prices of products at these restaurants have increased, and consumers are not liking it these days.
Red Lobster's signature feature is its all-you-can-eat promotion. And it was very unusual for it to be run and owned by the supplier. The restructuring CEO raised questions about whether Thai Union actually structured a deal that benefited it more than Red Lobster. According to the filing, they gave them priority over some of the other shrimp suppliers.
So does it feel like we're at the end of an era? We've had Red Lobsters and things like that in every strip mall for decades. You really can't turn around without finding one of these fast casual restaurants. Are we now at the end of that part of our lives in history?
I don't think we're at the end of an era, but it's definitely changing. We're seeing chains like Applebee's and even Chili's going out of business. I think we're seeing a bit of a shake-up in casual dining where restaurants are closing. Talking to restaurant analysts, they actually think they can scale their business a little bit better. We have so many of these restaurants that we need less food to serve the volume of consumers that exist for the food.
I think Red Lobster in particular is very smart for being a little high for a really long time. It didn't feel as casual as other casual restaurants. And I wonder if that's what Red Lobster has lost. How many years have you felt cool?
totally. And part of that is cultural change. You know, when this chain started, not many people had seafood restaurants. This is especially true in the central region. I'm from New Jersey, where we go to the Jersey Shore and eat seafood. A lot of people didn't have that. Many of the consumers I interviewed had vivid memories of going out and having birthday parties at Red Lobster when there were 10 of them there. It was seen as a treat, an event, something to celebrate.
So if these restaurants are doing poorly, have you seen anyone see a big uptick as a result of the changes you're talking about?
Some of these fast casual chains are doing pretty well. But in general, I would say this is not a good time for restaurants. Even Starbucks and McDonald's are not performing well. I guess we'll just have to wait and see what happens later this year as consumers start to become a little more loose with their money. I think there will be price promotions and value wars this summer.
So, as for Red Lobster, is there any hope for this popular brand now? Or is it a slow, inexorable decline?
The current CEO clearly believes there is hope that this restructuring process will be successful. And the company he works for has done this before. So I'm not losing all hope for Red Lobster.