CONSUMER

What went wrong at Red Lobster

May 3, 2024, 3:49 PM

ROHNERT PARK, CALIFORNIA - APRIL 17: In an aerial view, a sign is posted on the exterior of a Red L...

ROHNERT PARK, CALIFORNIA - APRIL 17: In an aerial view, a sign is posted on the exterior of a Red Lobster restaurant on April 17, 2024 in Rohnert Park, California. Red Lobster is considering filing for Chapter 11 bankruptcy to address rising labor costs and in hopes of renegotiating property leases and long-term contracts. (Photo by Justin Sullivan/Getty Images)

(Photo by Justin Sullivan/Getty Images)

New York (CNN) —In 2003, Red Lobster ran an “Endless Crab” promotion. The all-you-can-eat deal backfired spectacularly.

Red Lobster misjudged just how many seafood lovers would pour into restaurants around the United States and fill up their stomachs with pounds of sweet, juicy crab legs drenched in lemon and dipped in melted butter. While it was a delicious deal for customers, it was terrible for the company: Red Lobster lost $3.3 million in seven weeks.

“It wasn’t the second helping on all-you-can-eat, but the third” that hurt profits, a Red Lobster executive said at the time to analysts.

Fast forward 20 years, and Red Lobster made a nearly identical mistake, but with shrimp — and under foreign ownership that caused a cascade of problems for the company.

Last summer, Red Lobster turned $20 endless shrimp into a permanent item on the menu, instead of a traditional limited-time offer.

The deal was once again too popular, and Red Lobster was unprepared for its customers’ insatiable lust for discounted shellfish.

Red Lobster’s major shareholder Thai Union, a Bangkok-based canned seafood company, lost $11 million. “We need to be much more careful,” a Thai Union executive said.

“They didn’t have the right management company in place,” said John Gordon, a restaurant industry analyst.

Endless crab and endless shrimp deals alone didn’t doom Red Lobster — they were just two missteps in a long spiral for a chain that was once an industry pioneer. Red Lobster is now reportedly considering filing for bankruptcy protection to restructure its debt and shed some of its 650 US locations. The chain has tapped a restructuring expert as its chief executive, a possible indicator of an impending bankruptcy.

Red Lobster and Thai Union did not respond to CNN’s requests for comment on this article.

The American poster child for seafood was dragged down by a range of factors, say former leaders at the chain and restaurant analysts — including handoffs between a mix of investors and corporate parents and Thai Union’s mismanagement.

“Thai Union forced huge cost reductions, including many that were penny wise and pound foolish because they hurt sales,” said a former Red Lobster executive who spoke to CNN under the condition of anonymity because of a non-disclosure agreement with the company.

The explosive growth and popularity of fast-casual chains like Chipotle and quick-service chains like Chick-fil-A over the past two decades also squeezed Red Lobster. And years of underinvestment in Red Lobster’s marketing, food quality, service and restaurant upgrades hurt the chain’s ability to add Millennials to its core Baby Boomer customer base.

“Red Lobster was the foundation of casual dining. They had a position of power and prominence and revolutionized how American consumers eat seafood,” said Alex Susskind, a professor of food and beverage management at Cornell University. “Red Lobster had incredible popularity among Baby Boomers. They didn’t bring in a newer generation.”

 

Owned by General Mills

 

When the first Red Lobster opened in 1968 in Lakeland, Florida, an hour south of Orlando, casual dining was in its infancy.

The brand was started by southern restaurateurs Bill Darden and Charley Woodsby. Darden owned several Howard Johnson’s restaurants, one of the first casual dining concepts.

“Our motto was informal and family prices,” Woodsby later said. They saw an opportunity to bring seafood to landlocked people at more affordable prices than fine-dining restaurants.

“In most of middle America, you couldn’t get decent seafood. Red Lobster brought it to the masses,” said Jonathan Maze, the editor in chief at Restaurant Business Magazine, a trade publication. “Red Lobster was part of this casual dining revolution.”

Just two years into Darden and Woodsby’s venture, General Mills acquired the brand. General Mills owned brands like Wheaties, Cheerios and Betty Crocker, and the company wanted to enter the restaurant industry with Red Lobster’s five no-frills restaurants.

By the early 1970s, with General Mills’ advertising muscle behind it, Red Lobster opened restaurants across the South.

Red Lobster rose quickly and was the first casual dining chain to advertise on network television, according to a Harvard Business School study. Red Lobster also developed the first national seafood distribution system in the 1970s.

“Many diners preferred their seafood fried in those days, and Red Lobster’s hush puppies could be considered an early ‘signature item,’” Joe Lee, the first general manager at Red Lobster and later its president, said in a journal article. “Families were welcomed with high chairs and a 59-cent child’s plate.”

By 1978, Red Lobster had 236 restaurants and $291 million in sales. It had 372 restaurants and $834 million in sales in 1985.

In 1995, General Mills spun off its restaurant division into a new company, Darden Restaurants, named for Red Lobster founder Bill Darden. The company initially included the legacy Red Lobster chain and Olive Garden, an upstart chain General Mills had started in 1982.

 

Red Lobster stalls

 

But Red Lobster fell behind its sister brand Olive Garden under Darden.

By 2008, Olive Garden’s sales had eclipsed Red Lobster’s. Darden also acquired fast-growing chains such as Longhorn Steakhouse, Capital Grille and Yard House.

“Darden stopped investing in Red Lobster. Things slowly deteriorated,” Les Foreman, a director of operations and divisional vice president at Red Lobster from 2002 to 2022, told CNN. Red Lobster’s sales began declining and Darden prioritized investments in its other brands.

Darden soon faced pressure from activist investors pushing the company to split in two.

Darden responded to activist pressure by announcing plans in 2013 to sell Red Lobster, separating the chain from the rest of its business.

The following year, Darden sold Red Lobster to Golden Gate Capital, a private equity firm, for $2.1 billion. To help fund the deal, Red Lobster spun off its real estate assets in a transaction known as a sale leaseback agreement. Red Lobster had long owned its own real estate but would now be paying rent to lease its restaurants.

Sale leasebacks are very common in the restaurant industry, but the arrangement wound up hurting Red Lobster because it became stuck with leases it no longer could afford to pay.

“That produced cost pressures on Red Lobster that they’ve never had before,” said analyst John Gordon. “It became a problem.”

At the same time, fast-casual and quick-service restaurants grew with lower prices, thousands of new drive-thru locations and online delivery. These chains pressured the casual dining sector.

Casual dining has slipped from 36% of total restaurant industry sales in 2013 to 31% in 2023, according to Technomic, a restaurant research firm.

 

‘Cutting costs everywhere’

 

Red Lobster’s controlling shareholder Thai Union also hurt the brand, say former employees and analysts.

Thai Union was a top supplier of shrimp to Red Lobster for more than 20 years. In 2016, Thai Union took a $575 million minority stake in the brand. In 2020, Thai Union deepened its financial interest in Red Lobster.

Thai Union saw an opportunity to grow its business and also become a bigger supplier to Red Lobster.

But Thai Union “didn’t have any idea about running a restaurant company in the United States,” said former Red Lobster divisional vice president Les Foreman.

“It was miserable working there for the last year and a half I was there,” he said. “It was just a matter of (Thai Union) cutting costs everywhere they could.”

Thai Union cut out longtime Red Lobster suppliers to distribute more seafood to restaurants itself, said a former Red Lobster executive who spoke to CNN under the condition of anonymity because of an NDA. Thai Union changed the menu based on cost-cutting decisions and executives’ tastes.

The menu decisions were driven by “executive opinion,” not customer preferences, the former executive said.

It also tested squeezing Red Lobster’s waitstaff to the breaking point to save on labor costs, switching from waiters covering three tables to 10.

Red Lobster executives began to run for the doors under Thai Union’s management, resulting in a huge amount of C-suite churn. In 2021 and 2022, Red Lobster brought on a new CEO, chief marketing officer, chief financial officer and chief information officer. All left the company within two years.

Then came the all-you-can-eat shrimp mishap last year.

Endless shrimp was an annual limited-time offer for Red Lobster for 20 years. But Thai Union saw it as a way to sell off the mountains of shrimp it was catching and made it a permanent menu item instead.

“If you were a large shrimp company based in Thailand, it would be a good idea,” said the other former Red Lobster executive who spoke with CNN.

But it backfired for Red Lobster, and it wasn’t just because shrimp wasn’t profitable enough at the seafood chain. It caused a cascade of problems as customers sat at tables for long stretches of time, eating course after course of shrimp, the former executive said. This slowed down service and created longer wait times — exactly what the chain didn’t need as people packed in the door for the chance to grab infinite fistfuls of shrimp.

“We were expecting an increase of 20% in customer traffic, but the actual number was up to 40%,” Thai Union CEO Thiraphong Chansiri said in November.

Two months later, Thai Union said it would divest from Red Lobster and take a $530 million loss on its investment. The company blamed the pandemic, as well as “sustained industry headwinds, higher interest rates and rising material and labor costs.”

“I’m going to stop eating lobster,” Chansiri said this year.


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What went wrong at Red Lobster