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Red Lobster, a $2-billion-in-annual-revenue American seafood institution, was truly an innovator both as one of the first casual, full-service dining chains and the first to make seafood easily accessible to the vast non-coastal United States. Its Cheddar Bay Biscuits, Crabfest and Lobsterfest were legendary.
Bill Darden was just 19 when he opened his first restaurant and, by the 1960s, owned a number of restaurants in the Southeast, including a Howard Johnson’s (aka “HoJo’s”) franchise. In 1963, he purchased “Gary’s Duck Inn” in Orlando and began tinkering with a no-frills seafood concept.
In 1968, Darden and Charley Woodsby opened the first “Red Lobster Inns of America,” in Lakeland, Florida.
The duo’s concept impressed General Mills, which acquired the company just two years later and fueled Red Lobster’s explosive growth over the next 25 years. Red Lobster thrived in its coveted niche, offering both a menu accessible for middle-class budgets and a dining experience special enough to be aspirational.
In 1995, General Mills decided to “spin out” its restaurant business into a separate, publicly traded company, Darden Restaurants (“Darden”), which now owns well-known brands like Olive Garden, The Capital Grille, Ruth’s Chris Steak House, LongHorn Steakhouse, Yard House and Cheddar’s.
In a famous exchange from Ernest Hemingway’s “The Sun Also Rises,” one friend asks, “How did you go bankrupt?” To which the friend replies, “Two ways. Gradually and then suddenly.”
Alas, Red Lobster’s coveted niche became increasingly crowded and competitive (think Applebee’s/Chili’s/Texas Roadhouse) just as “fast casual” chains (think Chipotle) exploded onto the scene. Darden decided to allocate resources to its faster-growing concepts, starving Red Lobster.
Indeed, the seeds for Red Lobster’s demise were sown in May 2014 when Darden sold Red Lobster in a leveraged buyout for $2.1 billion to Golden Gate Capital. LBOs now have a nicer-sounding moniker (“private equity”), but the playbook remains the same: strip assets, slash costs, load up with debt and flip. To finance the purchase, Golden Gate sold the land on which the majority of the restaurants stood for $1.5 billion to American Realty Capital Partners, which Red Lobster agreed to lease for the next 25 years.
While sale-leaseback transactions are common, they saddle the lessee with huge lease payment obligations and fixed costs that didn’t exist before, and they run for decades.In 2023, Red Lobster spent $190.5 million in lease payments, more than $64 million of which related to “underperforming” restaurants the company would otherwise have elected to close (presumably the 93 the company subsequently closed this May 13).
Thai Union (owned by the Chansiri family and supplier to Red Lobster for 30 years) bought a 49% stake in Red Lobster from Golden Gate in 2016 for $575 million and led a consortium that acquired the rest in 2020. Thai Union knew a lot about catching fish (Chicken of the Sea tuna is one of its brands), but apparently little about running a restaurant chain, cycling through five CEOs since 2021.
CEO Thiraphong Chansiri considered getting rid of Red Lobster in March 2023, and Thai Union wrote down its investment to $0 this past February.
Here’s where it gets interesting. This is an oversimplification, but when a company can’t pay its debts and files for bankruptcy, the lenders try to extract as much value as possible to minimize their losses. The equity/stockholders are wiped out.
Thai Union obviously knew Red Lobster was struggling and its equity investment was probably worthless. However, as owner, it also controlled the company’s board and appointed the CEO, who decides how much shrimp to buy (among other things).
Red Lobster’s May 19 Chapter 11 bankruptcy filing, featuring commentary from new CEO Jonathan Tibus (appointed by the company’s lenders) is fascinating.
In May 2023, former CEO Paul Kenny made the decision to make the previously limited-time $20 Ultimate Endless Shrimp promotion permanent, despite “significant pushback” from other members of the management team. Further, Kenny may have “circumvented Red Lobster’s normal supply chain and demand planning processes,” leading to both excessive ordering and two suppliers of breaded shrimp being eliminated, leaving Thai Union as sole supplier.
The all-you-can-eat promotion was a financial debacle, contributing to Red Lobster’s $76 million loss in 2023.
Was the shrimp special a nefarious and deceitful last-ditch effort by Thai Union and Red Lobster’s hand-picked CEO to improperly funnel cash and transfer value from lenders to Thai Union by forcing Red Lobster to buy as much shrimp as possible? You can connect the dots, but Thai Union disputes everything Tibus alleged.
Did that marketing promotion end Red Lobster? No, the restaurant had been gradually going bankrupt for 10 years. Ultimate Endless Shrimp was just the last torpedo suddenly sinking the ship.•
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Kim is Kirr Marbach & Co.’s chief operating officer and chief compliance officer. He can be reached at 812-376-9444 or mickey@kirrmar.com.
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Thai Union sucked that company dry faster than a million seafood-lovers could suck down shrimp.
The law needs to start recognizing these companies haven’t failed, they’ve been intentionally mismanaged and stripped for parts, harming the employees and communities they served.