Red Lobster’s mistakes go beyond endless shrimp

Haddon spoke with Today, Explained guest host David Pierce about how Red Lobster became a restaurant icon and what contributed to its decline. Listen to the full conversation and follow Today, Explained 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 declared Chapter 11 bankruptcy and they are planning to restructure as a company. Red Lobster is not closing all of its restaurants but they have closed several dozen, and they have about 600 total. They are seeking bankruptcy protection basically to deal with nearly $300 billion in debt to their creditors.

By late last year, they only had $30 million left in cash, which is just not enough money to run a big, complicated business like this. And they were unable to pay a lot of their suppliers. Clearly, this is a situation that has been piling up for some time, but this is where it's ended up.

I am confident that there is more going on here than the unlimited shrimp. And I want to get to all of it, but I have seen some people connect the dots, more or less saying unlimited shrimp cost this company so much money that it went into bankruptcy. What happened there?

So Red Lobster certainly has run these kinds of bottomless promotions in the past where you could get all the shrimp that you want from a certain part of the menu. But they tended to run it as a limited-time offer, you know, one day a week for a limited time or just for a certain period. The company last June said,“Hey, we're going to run this all the time so you can come in and pay $20 and you can get as much shrimp as you want.” So it drove a lot of traffic, but the profits did not go along with those sales.

That's the sort of thing that makes sense to me when it's unlimited breadsticks. Unlimited shrimp — I can imagine how that would become a bad financial deal pretty fast.

I've actually talked to some restaurant executives since about that. Shrimp prices fluctuate quite a bit. And when they go up, particularly, that's just going to cost you a lot of money.

You mentioned not all the stores are going to close. What happens at this moment for a company like Red Lobster?

They're in the bankruptcy protection process. They have a CEO who is a restructuring specialist who was brought on to prepare for this bankruptcy process, when the company was already on very shaky ground. The goal was to get some new terms with their landlords and try to restructure into a new company and go forward.

Okay, so Red Lobster will continue to be open, at least for some people. Do you think the experience of going to Red Lobster is going to be really different after this bankruptcy proceeding?

At some point, they'll probably try to get it in a place where it could sell. But if you look at the filing, it talks about the history of Red Lobster and its legacy. So I wouldn't expect a lot of immediate changes, but maybe moving away from some of those limited-time offers.

Where did Red Lobster come from in the first place? This company has been around a pretty long time and is an American food institution.

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 you could bring your family or a date and have a nice meal out and not break the bank.

And there wasn't a ton of that at the time, right?

No, this was new. In the ’70s, General Mills invested in the company and that really helped it expand its reach in the US. From there they developed all these kind of fun, kitschy things like Lobster Fest and popcorn shrimp and coconut shrimp — things they really became known for. By the 1980s and ’90s, they're the biggest seafood restaurant chain in the US. They really hit on something that consumers liked.

Looking back, when was peak Red Lobster?

I'd probably say the ’90s were a heyday for them.

And when do things start to — I'm very sorry — flounder.

Darden Restaurants had an activist investor, Starboard, who was basically agitating for change and they wanted the company to be more profitable. Bill Darden, who I believe was still heading the company, was like, “All right, I'm going to deal with you by spinning off Red Lobster.” They sold Red Lobster in 2014 to the private equity firm Golden Gate Capital to deal with this activist.

Golden Gate Capital very quickly had the company sell off all its real estate, which gave them an infusion of cash. But it meant that Red Lobster was going to be forever leasing back their real estate. In 2016, Thai Union Group comes along, one of the world's biggest producers of canned tuna, and takes a minority stake in Red Lobster. Then in 2020, after the pandemic hit, they bought it out wholesale.

How common a story is that in the restaurant world? These private equity firms have a reputation for taking over companies and stripping them for parts. Is that something that happens a lot in the restaurant world?

Golden Gate has owned quite a number of restaurants. Private equity owning restaurants is pretty common, in part because they generate a lot of cash.

Were there any other sort of contributing factors to this? I know one of the things that showed up in Red Lobster's bankruptcy filing was that it just has an unbelievable amount of debt compared to the amount of money that it has coming in. Where did all of that come from?

In 2021, labor costs just shot through the roof because restaurants didn't have enough labor. They were really fighting to get workers and as a result had to really increase how much they were paying them. Then you have inflation in 2022 sending menu prices up and people starting to get unhappy about paying those prices.

By June 2023, things are starting to look a little better but consumers at this point are just not going out to restaurants as much. Consumers are just tightening their belts and then comes Red Lobster offering this shrimp deal in June 2023.

Some of that sounds like things that hit every restaurant, and to some extent every industry, during the pandemic. But it also seems like maybe sort of a perfect storm for Red Lobster in particular.

That's absolutely right. A lot of sit-down chains and independent sit-down restaurants have been struggling. They're more labor intensive than fast food and when that labor gets more expensive, that's really tough. Commodity costs have gone up for these restaurants, and the consumer is just not loving it lately.

What's specific to Red Lobster is the all-you-can-eat promotion. And being run and owned by their supplier was very unusual: The restructuring CEO has actually raised questions about whether Thai Union structured a deal that benefited them more than Red Lobster. According to this filing, they cut out some of the other shrimp suppliers, giving them a preferred status.

So does it feel like we're at the end of an era right now? We had decades of there being Red Lobsters and things like it in every strip mall everywhere. You practically couldn't turn around without finding one of these fast casual restaurants. Are we at the end of that part of our lives in history now?

I don't think we're at the end of the era, but it is definitely changing. You see chains like Applebee's, even Chili's closing locations. I do think we are seeing a little bit of shaking out in casual dining where units are closing and, talking to the restaurant analysts, they think it could actually rightsize the business a bit better, that we just have too many of these restaurants and we need fewer of them to serve the amount of consumers there are for their food.

Red Lobster in particular, I feel like was very clever about being slightly elevated in what it was for a really long time — it didn't feel quite as casual as some of the other casual restaurants — and I wonder if that's what Red Lobster lost over the years was it felt fancy?

Absolutely. And some of that is a cultural shift. You know, when this chain started, a lot of people didn't have a seafood restaurant, especially if you're in the middle of the country. I'm from New Jersey where you go to the Jersey Shore and have seafood; a lot of people didn't have that. A lot of the consumers I talked to had vivid memories of going out and having their birthday parties when there were 10 at Red Lobster. It was seen as a treat, an occasion, and something to celebrate.

So if these restaurants aren't doing well, have we seen anyone that has been on a huge upswing as a result of some of the changes you're talking about?

Some of these fast casual chains are doing pretty good. But I would say in general, this is not a great time for restaurants — even Starbucks and McDonald's aren't doing good. I think we're going to have to see what happens later this year, if consumers start to feel a little looser with their money. I think that there are going to be price promotions and value wars coming this summer.

So for Red Lobster, is there any hope for this storied brand at this point, or are we in kind of a slow, inexorable decline?

The current CEO certainly believes there's hope that this restructuring process will work. And the firm he works for, they've done this before. So I wouldn't lose all hope for Red Lobster.