Dead Lobster

It’s a sad time in small town USA, as seafood chain Red Lobster filed for Chapter 11 bankruptcy. One factor that accelerated its demise? Red Lobster’s ill-fated “Ultimate Endless Shrimp” (UES) promotion.

In a bankruptcy filing yesterday, Red Lobster CEO Jonathan Tibus said the following:

“In May 2023, however, Paul Kenny, the Debtors’ (Red Lobster’s) former CEO, made the decision to add UES as a permanent $20 item to the menu despite significant pushback from other members of the Company’s management team. This decision created both operational and financial issues for the Debtors, costing the Debtors $11 million and saddling the Company with burdensome supply obligations, particularly with its equity sponsor, Thai Union.

I understand that Thai Union exercised an outsized influence on the Company’s shrimp purchasing…Mr. Kenny made a series of decisions that eliminated two of the Company’s breaded shrimp suppliers, leaving Thai Union with an exclusive deal that led to higher costs to Red Lobster. The Debtors are exploring the impact of the control Thai Union exerted, in concert with Mr. Kenny and other Thai Union-affiliated entities and individuals, and whether actions taken in light of these parties’ varying interests were appropriate and consistent with applicable duties and obligations to Red Lobster.”

While the restaurant chain has filed for bankruptcy, it has secured $100M in financing from its existing lenders to remain operational.

Okay, a few things on this. First, when it comes to the battle of man vs food in the American restaurant industry, you bet on the American eater.

Buffet’s Inc. / Ovation Brands, the former owners of the now defunct Old Country Buffet, have filed for bankruptcy four times since 2008. If you give the American consumer unlimited food at a fixed price, their volume consumption will eat away at your profit margins. Buffets have been on the decline in America; the enduring presence of the likes of Golden Corral is more the exception rather than the rule.

The other interesting part of this is the second paragraph: Red Lobster eliminated two of its breaded shrimp suppliers, leaving Thai Union, its majority shareholder, with an exclusive shrimp supply deal. In 2022, another Thai Union subsidiary, Chicken of the Sea Frozen Foods, became the top US importer of Fair Trade-certified shrimp. Signing an inefficient supplier agreement with a parent company that dominates the shrimp market feels fishy, pun intended.

That being said, the unlimited shrimp deal was simply the final straw for an already dying company. When previous owner Golden Gate Capital purchased Red Lobster from Darden, it financed the purchase through a $1.5 billion sale-leaseback deal, burdening the company with heavy lease expenses for years after. In 2023, for example, Red Lobster was paying above market rates at many of its locations, spending over $190 million in lease obligations across 687 locations, including $64 million on underperforming stores. Additionally, when Thai Union purchased a stake in 2016, the new owner wanted to leverage its new asset to build a direct-to-consumer seafood channel, which was a bad idea from the start.

In other words, just like the ill-fated shrimp promotion that’s catching most of the blame, the reasons for Red Lobster’s demise were endless.