Red Lobster's Downfall: Mismanagement and Endless Shrimp

The Endless Shrimp Controversy

We've all seen the memes and the tweets. Did the endless shrimp really take down Red Lobster? Some observers were quick to blame the financial woes on its decision last year to make its "Endless Shrimp" promotion, which used to be an occasional, limited-time offering, permanent. The move was not a smart one. The company blamed Endless Shrimp for its $11 million losses in the third quarter of 2023, and in the fourth quarter, the picture got even worse, with the restaurant chain seeing $12.5 million in operating losses. However, blaming Endless Shrimp would be like blaming Elvis’ last meal for his death. That’s not what happened; it was years of mismanagement.

A History of Mismanagement

Red Lobster used to be part of a big conglomerate of restaurants called the Darden group (Olive Garden, Longhorn Steakhouse, Cheddars) starting in the 1990s. However, Red Lobster was removed from the Darden group and sold off to a private equity company called Golden Gate Capital in 2014 because it was underperforming. The seafood restaurant business is a tough one in the US, and people who are hankering for lobster or fish are increasingly going to steak houses that offer those options. Red Lobster wasn’t standing up to its competition.

The Impact of Private Equity Ownership

Golden Gate sold 25% of the company in 2016 to Thai Union, a Thailand seafood company, for $575 million and unloaded the rest of the company to an investor group called the Seafood Alliance, of which Thai Union was a part, in 2020. Thai Union, which owns Chicken of the Sea and was one of Red Lobster's biggest shrimp suppliers, steadily became more involved in its management. They increased menu prices to keep pace with inflation while increasing the number of tables served by each waiter from three to ten. These cost reductions were seen as penny-wise and pound-foolish, as they hurt sales and made life miserable for employees.

Leadership Turbulence and Strategic Missteps

Red Lobster saw rapid turnover in senior executives, including its CEO, chief financial officer, and chief marketing officer. Kim Lopdrup, Red Lobster's longtime CEO, retired in 2021, and since then, the restaurant hasn't had much in the way of stable leadership. Thai Union’s influence may also have been at work when Red Lobster’s then CEO Paul Kenny decided on the “Endless Shrimp” venture despite significant pushback from other members of the company’s management team. Court filings suggest that Thai Union and Mr. Kenny encouraged excessive merchandising for the promotion, resulting in a glut of customers that caused major shrimp shortages.

The Financial Fallout and Bankruptcy

Thai Union took a one-time impairment charge of $530 million in Q4 of 2023 due to its struggling Red Lobster investment. According to Thai Union boss Thiraphong Chansiri, they are now pursuing an exit of their minority investment after determining that Red Lobster's financial requirements no longer align with their capital allocation priorities.

The Road Ahead for Red Lobster

John Gordon, a restaurant analyst, noted that Red Lobster had been on the decline for 20 years but didn't "fall on the knife" until Thai Union got involved. Despite filing for Chapter 11 bankruptcy, Red Lobster isn't going away completely. CEO Jonathan Tibus is optimistic about the restructuring process, stating, "It allows us to address several financial and operational challenges and emerge stronger and re-focused on our growth."

While Red Lobster's future remains uncertain, this story underscores the complex dynamics and challenges within the restaurant industry. Investors will be keenly watching as the chain navigates its path forward, hoping to regain its footing and thrive once again.

This topic was also discussed on an episode of Stock Club

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Red Lobster's Downfall: Private Equity and Endless Shrimp