It wasn’t just free shrimp that tanked Red Lobster.
The Orlando-based seafood chain applied for it Chapter 11 bankruptcy citing $1 billion in debt last week, according to court filings. The company has announced dozens of store closings nationally, along with plans to sell company assets — including took Interior furniture and kitchen accessories.
The announcement comes after a disastrous 2023 Endless Shrimp Promotion Where, for about $20, patrons can order as many shrimp as they want, prompting users to take on the eating challenge. tick tock. But when it brought customers into stores, it put the chain $11 million in the red.
Heather Haddon covers the restaurant industry for the Wall Street Journal and broke the news of Red Lobster’s pending bankruptcy. He explained that other casual restaurants like Olive Garden — owned by Red Lobster’s chain-mates and Darden Restaurants — and Applebee’s are facing the same headwinds: customers looking for eat cheapplus increasing labor and Real estate expenses.
Haddon says the endless shrimp saga was just one in a long series of blunders going back a decade. In the early 2010s, the company was sold to private equity firm Golden Gate Capital, which sells Red Lobster-owned real estate, which sees them to landlords and leases. 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 cut the bait The company continued to lose money due to the pandemic and mounting debt.
Talked to Haddon Today, explained Guest host David Pierce on how Red Lobster became a restaurant icon and what contributed to its downfall. Listen and follow the full conversation Today, explained on Apple Podcasts, Spotify, pandora Or wherever you find podcasts.
This conversation has been edited for length and clarity.
David Pierce
What happened to Red Lobster this week?
Heather Haddon
Red Lobster has filed for Chapter 11 bankruptcy and plans to reorganize as a company. Red Lobster isn’t closing all of its restaurants, but they have closed dozens, and they have about 600 in total. They are seeking bankruptcy protection mainly to deal with nearly $300 billion in debt to their creditors.
At the end of last year, they had only $30 million in cash left, which is not enough money to run such a large, complex business. And they were unable to pay much to their suppliers. Obviously, this is a situation that has been building up for a while, but it ends here.
David Pierce
I’m sure there’s more going on here than unlimited shrimp. And I’d like to get it all, but I’ve seen some people connect the dots, more or less saying that Unlimited Shrimp cost this company so much money that it went bankrupt. What happened?
Heather Haddon
So Red Lobster must have run this kind of bottomless promotion in the past where you can get all the shrimp you want from a certain section of the menu. But they wanted to run it as a limited time offer, you know, one day a week for a limited time or for a certain period of time. The company said last June, “Hey, we’re going to run it all the time so you can come in and pay $20 and get as many shrimp as you want.” So it drives a lot of traffic, but the profit doesn’t go with those sales.
David Pierce
This is one thing that makes sense to me when it’s unlimited breadsticks. Unlimited shrimp — I can imagine how this would become a bad financial deal very quickly.
Heather Haddon
I actually talked to some restaurant executives about that. The price of shrimp fluctuates quite a bit. And when they go up, especially, it’s just going to cost you a lot of money.
David Pierce
Not all stores will close as you mentioned. What happens now for a company like Red Lobster?
Heather Haddon
They are in bankruptcy protection proceedings. They have a CEO who is a restructuring specialist who was brought in to prepare for this bankruptcy process, when the company was already very shaky. The goal was to get some new terms with their landlords and try to reorganize into a new company and move on.
David Pierce
OK, so Red Lobster will be open, at least for some people. Do you think the experience of going to Red Lobster is really going to be different after this bankruptcy?
Heather Haddon
At some point, they’ll probably try to get it to a place where it can be sold. But if you look at the filing, it talks about the history of Red Lobster and its legacy. So I wouldn’t expect many immediate changes, but maybe walking away from some of those limited time offers.
David Pierce
Where did red lobster first come from? This company has been around for quite a long time and is an American food company.
Heather Haddon
They were founded in the late 60s by Bill Darden, who is known as the father of casual dining. It was one of the first casual dining chains around, a place where you could bring your family or a date and have a nice meal and not break the bank.
David Pierce
And there wasn’t a ton of that time, right?
Heather Haddon
No, it was new. In the 70s, General Mills invested in the company and that really helped it expand its reach in the United States. From there they made fun, fun things like Lobster Fest and Popcorn Shrimp and Coconut Shrimp — which they became really known for. During the 1980s and 90s, they were the largest seafood restaurant chain in the United States. They really hit on something that consumers like.
David Pierce
Looking back, when was the peak red lobster?
Heather Haddon
I would probably say the 90s were an exciting time for them.
David Pierce
And when things start to – I’m so sorry – flounder.
Heather Haddon
Darden was an activist investor in the restaurant, Starboard, who was originally agitating for change and wanted the company to be more profitable. Bill Durden, who I believe was still the head of the company, was like, “Okay, I’m going to turn Red Lobster around and deal with you..They sold Red Lobster to private equity firm Golden Gate Capital in 2014 to combat this activism.
Golden Gate Capital quickly sold the company all of its real estate, which provided them with cash. But that means Red Lobster is going to give back their real estate forever. In 2016, Thai Union Group, one of the world’s largest canned tuna producers, came in and took a minority stake in Red Lobster. Then in 2020, after the pandemic hit, they bought it wholesale.
David Pierce
How common is the story in the restaurant world? These private equity firms have a reputation for taking over companies and stripping them for parts. Does this happen in the restaurant world?
Heather Haddon
Golden Gate owns several restaurants. Private equity owned restaurants are quite common, as they generate a lot of cash.
David Pierce
Was there any other sort of contributing factor to this? I know one of the things that came out in Red Lobster’s bankruptcy filing is that it has an incredible amount of debt compared to the amount of money it has coming in. Where did they come from?
Heather Haddon
In 2021, labor costs shot through the roof because restaurants didn’t have enough labor. They were really struggling to get workers and as a result they had to really increase how much they were paying them. Then you have inflation menu prices going up in 2022 and people start to resent paying those prices.
By June 2023, things are starting to look a little better but right now consumers aren’t going to restaurants as much. Consumers are just tightening their belts and then comes Red Lobster offering this shrimp deal in June 2023.
David Pierce
Some of these sound like things that hit every restaurant and, to a lesser extent, every industry during the pandemic. But it seems like a perfect storm, especially for Red Lobster.
Heather Haddon
That’s right. Many sit-down chains and independent sit-down restaurants are struggling. They’re more labor intensive than fast food, and when that labor is more expensive, it’s really hard. Product prices for these restaurants have gone up and consumers are not loving it lately.
What stands out for Red Lobster is the all-you-can-eat promotion. And being managed and owned by their supplier was highly unusual: the restructuring CEO actually questioned whether Thai Union had structured a deal that benefited them more than Red Lobster. According to this filing, they cut out other shrimp suppliers with a preferred status.
David Pierce
So does it seem like we are now at the end of an era? We had red lobster and stuff like that everywhere in every strip mall there for decades. You practically 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?
Heather Haddon
I don’t think we’re at the end of an era, but it’s definitely changing. You can see chains like Applebee’s, even Chili’s closing locations. I think we’re seeing a little bit of a shake-up in casual dining where units are closing and talking to restaurant analysts, they think it might actually make business a little bit better, given that we have so many of these restaurants and the volume that we consumers have for their meals. They need less to serve it.
David Pierce
Red Lobster in particular, I think it was really smart about being a bit elevated to what it had been for a long time — it didn’t feel as casual as some of the other casual restaurants — and I wonder if Red Lobster lost that fancy feel over the years. ?
Heather Haddon
absolutely And some of that is a cultural change. You know, when this chain started, a lot of people didn’t have a seafood restaurant, especially if you were in the middle of the country. I’m from New Jersey where you go to the Jersey Shore and eat seafood; Not many people had it. Many of the customers I spoke with had vivid memories of going out and having their birthday parties when they were 10 at Red Lobster. It was seen as a treat, an occasion and something to celebrate.
David Pierce
So if these restaurants aren’t doing well, have we seen anyone who’s had a huge upswing as a result of the changes you’re talking about?
Heather Haddon
Some of these fast casual chains are doing quite well. But I would say in general, it’s not a great time for restaurants – even Starbucks and McDonald’s aren’t doing well. I think we’ll have to see what happens later this year, if consumers start to feel a little more relaxed with their money. I think price promotions and quality wars are going to happen this summer.
David Pierce
So as for Red Lobster, is there any hope for this storied brand at this point, or are we in for a slow, inexorable decline?
Heather Haddon
The current CEO certainly believes this restructuring process will work. And the firm he works for has done it before. So I won’t lose all hope for Red Lobster.
