Red Lobster Is Hemorrhaging Millions Because of Endless Shrimp | WSJ What Went Wrong

The Wall Street Journal

1 May 202406:10

Summary

TLDRRed Lobster, a pioneer in casual dining, faced significant challenges from 2023 with millions in losses and a drop to 41st in US restaurant chains. The company's endless shrimp deal, while initially boosting foot traffic, led to an $11 million operating loss in Q3 2023 due to underestimating its popularity and low pricing. Economic factors like labor shortages and rising interest rates further strained profits. In 2024, Thai Union Group announced plans to sell Red Lobster, and the company brought in restructuring expert Jonathan Tibus as CEO, hinting at possible bankruptcy.

Takeaways

🦞 Red Lobster was a pioneer in casual dining, offering affordable yet nicer meals than fast food.
📈 In the 80s and 90s, Red Lobster expanded rapidly, becoming the largest casual dining seafood chain in the US by 2000.
📉 By 2023, Red Lobster faced significant financial difficulties, with tens of millions in losses and a drop in sales.
💵 The company was sold to a private equity firm in 2014 and then to Thai Union Group in 2020, which tried to turn it around.
🦐 The 'endless shrimp' deal was introduced in 2004 and became a customer favorite, but it was not initially profitable.
📊 Seafood prices, especially shrimp, spiked in 2013, causing a significant drop in Red Lobster's revenue compared to Olive Garden.
🏭 The company's real estate was sold and leased back to fund the sale price, which had negative long-term consequences.
🌐 Economic factors like labor shortages and inflation during the pandemic increased operational costs for Red Lobster.
📈 The 'Ultimate endless shrimp' deal was introduced in 2023 to boost foot traffic but was priced too low, leading to significant losses.
📉 The promotion led to a short-term increase in foot traffic but resulted in an $11 million operating loss for the third quarter of 2023.
🔄 Thai Union Group announced plans to sell Red Lobster in January 2024, and in March, a new CEO was brought in to lead restructuring.

Q & A

Who founded Red Lobster and in which year was it founded?
-Red Lobster was founded by Bill Darden in 1968.
Who acquired Red Lobster from Bill Darden, and what was their goal?
-General Mills, the cereal brand, acquired Red Lobster from Bill Darden with the goal to expand Red Lobster's locations and menu.
What was the impact of the 'endless shrimp' deal on Red Lobster's foot traffic?
-The 'endless shrimp' deal brought in 4% more foot traffic for the third quarter, which was a significant increase.
What was the financial outcome of the 'endless shrimp' deal for Red Lobster in Q3 2023?
-The 'endless shrimp' deal resulted in an $11 million operating loss for Red Lobster in the third quarter of 2023.
How did broader economic factors affect Red Lobster's profitability?
-Broader economic factors such as widespread labor shortages from the pandemic and higher inflation drove up the cost of labor, eating into profits. Additionally, rising interest rates increased the price of its leases.
What was the significance of the real estate leasebacks for Red Lobster?
-The real estate leasebacks allowed Red Lobster to get a significant chunk of capital upfront but also exposed it to potential consequences down the line, such as fluctuating lease prices.
Who took majority ownership of Red Lobster in 2020?
-A group including Red Lobster's longtime seafood supplier, Thai Union Group, took majority ownership in 2020.
What was the initial strategy of Thai Union Group when they took over Red Lobster?
-Thai Union Group aimed to increase the profile of Red Lobster, attract more customers, and make it a valuable part of their company instead of just a financial drain.
What was the outcome of Red Lobster's attempt to combat losses with a new deal in June 2023?
-The new deal, 'Ultimate endless shrimp', was initially successful in increasing foot traffic but ultimately led to significant losses due to its popularity and the low price point.
What was the ranking of Red Lobster among the biggest US restaurant chains in 2023?
-In 2023, Red Lobster ranked 41st on the list of the biggest US restaurant chains.
What steps did Red Lobster take after the financial struggles in 2023?
-In January 2024, Thai Union Group announced it would sell Red Lobster. In March, they brought on Jonathan Tibus as CEO, who has experience leading restructuring at other brands.

Outlines

00:00

🦞 The Rise and Fall of Red Lobster

Red Lobster, founded in 1968 by Bill Darden, was a pioneer in casual dining, offering affordable yet quality seafood. It experienced significant growth, becoming the largest casual dining seafood chain in the US by the 1990s and 2000s. However, by 2023, the company faced substantial financial challenges, including tens of millions in losses and a decline in investor interest. The script discusses the factors contributing to this downturn, such as the high cost of seafood, particularly shrimp, which spiked in 2013, leading to a significant drop in revenue. The company was sold to a private equity firm in 2014, and later, in 2020, Thai Union Group took majority ownership, hoping to turn the business around. Despite efforts to innovate and attract customers with deals like the 'endless shrimp,' economic factors like labor shortages and inflation further strained the company's profitability.

05:01

📉 Red Lobster's Financial Struggles and Future Uncertainty

The financial struggles of Red Lobster continued into 2023, with an operating loss of $11 million reported for the third quarter, a stark increase from the previous quarter's $2 million loss. Sales dropped 8% from 2022, and the company's ranking fell to 41st among US restaurant chains. In response to these challenges, Thai Union Group announced plans to sell Red Lobster in January 2024. The company brought in Jonathan Tibus as CEO, who has a background in restructuring, which could potentially lead to bankruptcy. Despite these dire circumstances, Red Lobster continues to offer its popular endless shrimp deal, albeit at a higher price of $25, up from the original $20. The future of Red Lobster remains uncertain, with the company not responding to requests for comment on its current situation and plans.

Mindmap

Keywords

💡Red Lobster

Red Lobster is a casual dining restaurant chain in the United States, known for its seafood offerings. Founded by Bill Darden in 1968, it became a pioneer in the casual dining sector, offering an affordable yet quality dining experience. The brand's popularity is highlighted in the script with phrases like 'Red Lobster for the seafood lover in you' and its historical significance as 'the biggest casual dining seafood chain in the country'.

💡Casual Dining

Casual dining refers to a type of full-service restaurant that offers a more relaxed atmosphere than fine dining but with a higher quality of food than fast food. In the context of the video, Red Lobster was an innovator in this space, aiming to provide 'an affordable meal, but a nice meal, like nicer than fast food, something you could take a date'.

💡Seafood

Seafood is a broad term that encompasses any form of sea life used for food, including fish, shellfish, and crustaceans. The video script emphasizes Red Lobster's focus on seafood, with phrases like 'seafood lover' and 'over 30 delicious seafood reasons' on their menu, indicating the central role seafood plays in their brand identity.

💡Endless Shrimp

Endless Shrimp is a limited-time offer introduced by Red Lobster, allowing customers to enjoy unlimited servings of shrimp for a fixed price. This promotion is highlighted in the script as a customer favorite and a strategic move to attract more customers, exemplified by the announcer's line 'Don't miss the only time of year, to enjoy all the shrimp you can eat'.

💡Loss Leader

A loss leader is a product or service sold at a low price or even at a loss to attract customers with the hope that they will make additional profitable purchases. The script mentions the endless shrimp deal as a loss leader, 'the deal itself wasn't profitable, but it would increase foot traffic at a time when diners were choosing to order in'.

💡Pandemic

The pandemic refers to the global outbreak of COVID-19, which had a significant impact on various industries, including restaurants. The script mentions 'widespread labor shortages from the pandemic' and 'higher inflation drove up the cost of labor, eating into profits', illustrating how external factors like a pandemic can affect a business's operations.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The script connects inflation to the restaurant industry by stating 'higher inflation drove up the cost of labor', which in turn affected Red Lobster's profitability.

💡Leasebacks

A leaseback is a financial transaction in which a company sells an asset and then leases it back from the buyer. The script explains that Red Lobster engaged in a leaseback deal for its real estate, 'as part of the deal, all of Red Lobster's real estate...was sold, and leased back to the company to fund the total price', which had both immediate financial benefits and potential long-term consequences.

💡Operating Loss

An operating loss refers to a situation where a company's operating expenses exceed its operating revenues. The script reports 'the company reported an $11 million operating loss' for the third quarter of 2023, indicating a significant financial setback for Red Lobster.

💡Bankruptcy

Bankruptcy is a legal process through which individuals or entities who are unable to repay their outstanding debts may seek relief. The script suggests that the hiring of a restructuring expert as CEO, 'an expert who has led restructuring, at brands like Krystal and Kona Grill', increases the likelihood of Red Lobster considering bankruptcy.

💡Thai Union Group

Thai Union Group is a global company involved in the seafood industry, which at one point held majority ownership of Red Lobster. The script mentions that 'a group, including Red Lobster's longtime seafood supplier, Thai Union Group, took majority ownership', indicating a significant change in the company's ownership structure.

Highlights

Red Lobster was a popular seafood dining chain in the 80s and 90s.

Known for its evolving deals, Red Lobster was 16th out of the 500 biggest casual dining chains in 2000.

By 2023, Red Lobster faced significant financial losses, leading to its sale.

Founded by Bill Darden in 1968, Red Lobster was an innovator in casual dining.

General Mills acquired Red Lobster in 1970, aiming to expand its locations and menu.

By 1997, Red Lobster had more than doubled its restaurant count from 1984.

The 'endless shrimp' deal debuted in 2004 and became a customer favorite.

Seafood prices spiked in 2013, causing Red Lobster's revenue to plummet compared to Olive Garden.

Red Lobster was sold to a private equity firm in 2014 for $2.1 billion.

The company underwent a real estate leaseback as part of the sale deal.

Thai Union Group took majority ownership in 2020, hoping to turn around Red Lobster's fortunes.

Economic factors like labor shortages and inflation hit Red Lobster hard.

Interest rates rose, increasing the cost of leases for Red Lobster.

Red Lobster introduced a year-round 'endless shrimp' deal at a low price to boost foot traffic.

The 'endless shrimp' deal was unexpectedly popular, leading to an $11 million operating loss in Q3 2023.

Sales in 2023 were down 8% from 2022, and Red Lobster's ranking dropped to 41st among US restaurant chains.

Thai Union Group announced plans to sell Red Lobster in January 2024.

Jonathan Tibus was brought on as CEO in March 2024 to lead restructuring efforts.

Red Lobster increased the price of its 'endless shrimp' deal to $25.