# Was Endless Shrimp to Blame for Red Lobster's Bankruptcy?

An episode of [Patrick Boyle On Finance](https://invisiblenetwork.ai/podcast/1547740313), 27 May 2024, 18 min.

Audio: https://traffic.megaphone.fm/APO9519299606.mp3

Send us a textRed Lobster was America’s largest casual dining seafood chain, with almost 600 locations across the United States and Canada. Its bankruptcy was announced earlier this week.The bankruptcy declaration insinuates that the chains equity owner who was also their biggest seafood supplier might have decided that their equity stake in the business was worthless, but that they could extract some extra value from the company before it declared bankruptcy by selling them a lot of extra sh...

## Transcript

[0:00] Hello and welcome. You are listening to Patrick
[0:03] Boyle on Finance, a podcast exploring ideas from
[0:06] quantitative finance, examining events occurring in markets
[0:10] right now and financial history to see what lessons can be taken
[0:14] away, including interviews with some of the most interesting
[0:17] people in the world of finance. To learn more about the podcast,
[0:20] visit on finance.org. Probably the biggest downside to
[0:29] being a privately owned company is that if everything goes
[0:32] wrong, you don't get to fall back on becoming a meme stock.
[0:36] The first video I made on a bankruptcy was about Guitar
[0:39] Centre, which went bankrupt just a few months before the GameStop
[0:43] short squeeze began, which led to the whole meme stock craze in
[0:47] 2021. I remember thinking back then
[0:50] the Guitar Centre would have made a much better meme stock
[0:54] than GameStop or AMC, simply because guitars and musical
[0:58] instruments are obviously cool, unlike video games and movie
[1:02] theatres. But Guitar Center was owned by
[1:05] private equity and so went through a fairly standard
[1:08] bankruptcy proceeding. Red Lobster, the American fast
[1:12] casual seafood chain, filed for bankruptcy this Monday.
[1:17] And even though we're seeing a bit of a meme stock revival
[1:20] right now, Red Lobster doesn't get to participate because it's
[1:24] privately owned by a seafood supplier, Thai Union.
[1:28] The Bloomberg headline on Monday said Red Lobster chain goes
[1:33] bankrupt after unlimited shrimp deal.
[1:36] And I think bankrupting yourself essentially with a storyline
[1:39] from The Simpsons is the most meme stock thing that you can
[1:42] do. But there's no point in doing
[1:44] meme stock stuff at a privately owned company as there's nothing
[1:48] that Redditors can do to save you and for the gentleman.
[1:52] All you can eat. All you can eat.
[1:54] All right, when you're ready, take this plate over.
[1:57] Please don't take the steam tray, Sir.
[1:59] Because I'm quite out of touch, I only heard about the $20 all
[2:03] you can eat shrimp deal after the bankruptcy was announced and
[2:07] I sadly didn't get to see what damage I could have inflicted on
[2:11] their balance sheet. Then man, eat all our shrimp and
[2:14] two plastic lobsters. The restaurants are still open
[2:18] though, or at least some of them are, and I'd appreciate it if
[2:21] people could let me know in the comments section if the deal is
[2:24] still available as maybe can make a trip.
[2:28] Amusingly, this isn't even Red Lobster's first time making this
[2:32] mistake. In 2003, Red Lobster announced
[2:36] an Endless Crab special where customers could order as many
[2:39] plates of a popular crab dish as they wanted.
[2:43] For 2299. Management's calculation showed
[2:47] that they would make a profit if customers ordered two plates or
[2:51] less, but they lost money once a third plate was ordered.
[2:55] Now, to be clear, Red Lobster restaurants are mostly in the
[2:59] United States. What were they thinking?
[3:02] Even an American with a severe shellfish allergy is going to
[3:05] eat more than three plates of crab.
[3:08] There was probably a boom in the sale of Epipens that month
[3:11] because of the promotion. The endless crab deal was, of
[3:15] course, wildly popular, which was only so surprising as the
[3:19] crab dish was already one of the chain's most popular menu items.
[3:24] The vast majority of customers ordered significantly more than
[3:28] three plates of crab, so losses started piling up.
[3:32] If that wasn't bad enough, crab prices were already high when
[3:36] the promotion began, and they rose rapidly over the life of
[3:40] the deal due to shortages. On top of all of that, crab legs
[3:45] are both difficult and time consuming to eat, which led to
[3:49] customers spending much longer than usual in the restaurant
[3:53] while they ordered plate after plate of loss, making crab
[3:56] dishes, reducing restaurant turnover and causing long lines
[4:01] of frustrated customers to accumulate waiting for a free
[4:04] table. British Sea Fishing describes
[4:07] this as a textbook example of a badly thought out promotion, but
[4:12] it would appear that no one at Red Lobster read the textbook.
[4:16] But maybe they did, as if you remember Red Lobster is 100%
[4:22] owned by a seafood supplier, Thai Union, and things had not
[4:26] been going well at Red Lobster for quite some time.
[4:30] The bankruptcy declaration insinuates the Thai Union Red
[4:34] Lobster's controlling shareholder might have exercised
[4:38] an outsized influence on its shrimp purchasing and
[4:42] circumvented its normal supply chain and demand planning
[4:45] processes. The implication is that the
[4:49] equity owner might have decided that their equity stake in the
[4:53] business was worthless and that the company would soon be owned
[4:56] by its lenders, but that they could extract some extra value
[5:00] from the company before it declared bankruptcy by selling
[5:04] them a lot of extra shrimp. The decision to make the $20
[5:09] endless shrimp deal a permanent menu item is said to have led to
[5:13] an $11 million loss. The bankruptcy declaration says
[5:18] that the debtors are currently investigating the circumstances
[5:22] around these decisions. Now, as entertaining as it is to
[5:26] me that the unlimited shrimp deal bankrupted Red Lobster, it
[5:30] would appear that there's a bit more to the story.
[5:33] The bankruptcy filing goes through the history of Red
[5:36] Lobster since being founded by Bill Darden in 1968, describing
[5:42] how it grew into the largest casual dining seafood restaurant
[5:45] chain in the United States. Red Lobster is so dominant in
[5:50] their niche that they buy 20% of all North American lobster tails
[5:55] and 16% of all rock lobsters sold worldwide.
[6:01] The chain was bought by General Mills in 1970 and spun off in
[6:05] 1995 as Darden Restaurants, which included a number of other
[6:10] chain restaurants like Capital Grill, Olive Garden, LongHorn
[6:14] Steakhouse, and a few more. In 2014, the private equity firm
[6:20] Golden Gate Capital bought Red Lobster from Darden Restaurants
[6:24] in a leveraged buyout transaction.
[6:27] As the term leverage buyout implies, the private equity
[6:31] buyer levered up the restaurant chain with debt, but they also
[6:36] sold off most of the real estate assets for 1 1/2 billion
[6:40] dollars, meaning that the restaurant chain now had to
[6:44] lease those properties. That real estate deal covered
[6:48] most of what Golden Gate had paid for Red Lobster.
[6:52] It's not unusual for a restaurant chain to lease most
[6:56] of its storefronts, but after this deal, Red Lobster was
[7:00] locked into a long term triple net leases, which is a type of
[7:04] commercial property lease where the tenant promises to pay all
[7:08] expenses including real estate taxes, building insurance,
[7:13] repairs and maintenance. This is in addition to the cost
[7:17] of rent and utilities. These contracts were long term
[7:21] and had rent increases written into them.
[7:24] The bankruptcy filing state that a material portion of the leases
[7:28] are priced above market rates. The result is that last year the
[7:33] company spent over $190 million leasing properties, more than a
[7:38] third of which it's spent on leasing what are described in
[7:42] the bankruptcy filings as underperforming stores.
[7:46] The bankruptcy filings say that the company is seeking to reject
[7:51] unexpired leases and abandoned any personal property remaining
[7:55] at these leased premises on an emergency basis to avoid
[8:00] incurring post petition administrative rent.
[8:04] Thai Union, the seafood supplier, bought 49% of the firm
[8:09] from Golden Gate Capital in 2016 for $575 million.
[8:15] They bought up the rest of the business in the middle of the
[8:18] pandemic in 2020, teaming up with a consortium of other
[8:22] investors that included members of the Red Lobster management
[8:26] team. The company then went through
[8:29] five different CEOs over the next three years, which might
[8:33] partially explain the lack of institutional memory of the
[8:37] disastrous endless crap promotion from 20 years earlier.
[8:41] The new CEO, Jonathan Tibbas, is a bankruptcy and restructuring
[8:47] expert who oversaw the bankruptcies of a number of
[8:50] other restaurant chains. He was first hired in January as
[8:54] part of a team from management consulting firm Alvarez Marshall
[8:59] to assess the change situation. He became CEO in March when the
[9:03] prior CEO announced his retirement.
[9:07] Tibbets states in the court documents that it was
[9:10] immediately clear that Red Lobster's performance was
[9:13] deteriorating and had been doing so for several years.
[9:17] He says the guest count had declined by 30% since 2019,
[9:22] recovering only marginally as the pandemic subsided.
[9:26] While sales increased by around 25% from 2021 to 2023, they
[9:32] began to fall again over the last 12 months.
[9:36] And the company's consolidated EBITDA has fallen by more than
[9:40] 60% over the last year, which all but erased any ground Red
[9:45] Lobster recovered following the pandemic.
[9:48] The court documents say the latest symptom of this decline
[9:52] is Red Lobster's $76 million net loss during fiscal year 2023.
[9:58] Now, the entire restaurant industry was, of course, hit
[10:02] hard during the pandemic. And the casual dining segment
[10:05] has long been struggling with consumer shift, either up in
[10:09] price to fine dining or down to fast casual and quick service
[10:14] chains like Chipotle Mexican Grill and Chick-fil-A.
[10:18] While Red Lobster was popular with baby boomers, it's
[10:21] struggled to attract younger diners who view it as old
[10:24] fashioned. Red Lobster is not the only fast
[10:28] casual restaurant chain that's struggling. tgi Friday's began
[10:32] the year announcing dozens of closures, Tijuana Flats went
[10:37] bankrupt last April, closing multiple stores, and the owner
[10:41] of Boston Market attempted a second bankruptcy, only to be
[10:45] blocked by a judge for technical reasons.
[10:47] Consumer tastes have changed, and once popular chains are no
[10:52] longer popular, according to the court.
[10:54] Findings in Inflationary pressures have squeezed the
[10:58] casual dining sector as restaurant menu costs have risen
[11:02] faster than grocery and other consumer prices.
[11:05] Rising minimum hourly wages in many states have outpaced
[11:10] restaurants ability to increase prices, putting pressure on
[11:14] margins. The court filing states that Red
[11:17] Lobster is currently investigating the circumstances
[11:20] around the decision to make the $20 Endless Shrimp deal a
[11:24] permanent menu item, as well as whether Thai Union and prior
[11:28] management encouraged excessive merchandising of the promotion
[11:32] in store, which the filing says was atypical for the company.
[11:37] The filing also says that the new management are also
[11:41] investigating whether prior management circumvented the
[11:44] company's normal supply chain and demand planning processes,
[11:49] adding that Red Lobster's relationship with Thai Union as
[11:53] its equity sponsor and major supplier might have made matters
[11:57] worse, the filing says. I understand that Thai Union
[12:01] exercised an outsized influence on the company shrimp
[12:05] purchasing, as indicated by, for example, Mr. Kenny's April 2023
[12:11] purported direction to Thai Union to continue producing
[12:15] shrimp for Red Lobster that did not flow through the traditional
[12:19] supply process or bid cycle or adhere to the company's demand
[12:23] projections, the filing goes on to say.
[12:26] I also understand that in apparent coordination with Thai
[12:31] Union and under the guise of a quality review, Mr. Kenney made
[12:35] a series of decisions that eliminated two of the company's
[12:39] breaded shrimp suppliers, leaving Thai Union with an
[12:42] exclusive deal that led to higher costs to Red Lobster.
[12:47] Thai Union dispute that any wrongdoing occurred and a Red
[12:50] Lobster lawyer read a statement from Thai Union at the first
[12:55] bankruptcy court hearing on Tuesday, saying that Thai Union
[12:59] disputes all statements concerning the company and its
[13:02] relationship to Red Lobster. One way or another, the biggest
[13:07] losers in this deal are Thai Union, who will likely lose
[13:10] their entire investment in the restaurant chain, even if they
[13:14] did manage to sell some additional shrimp.
[13:17] Luke Winky, a journalist at slate.com, spoke to a number of
[13:21] Red Lobster employees over the last month, and he argues that
[13:25] the main victims of the endless shrimp deal were the servers,
[13:30] cooks and Busters at the restaurant chain.
[13:33] James Burke, a waiter in New Jersey, describes having to
[13:36] watch a man eating 16 rounds of shrimp scampi over a 2 hour
[13:41] period on a Friday night. Tis no man, tis a remorseless
[13:46] eating machine. Burke also noted that the
[13:50] average entree price at Red Lobster is around $35, which
[13:54] meant that once people started ordering endless shrimp at $20,
[13:59] he was suddenly making far less on tips.
[14:02] A 19 year old waitress who asked to be anonymous, described the
[14:06] horrors of watching a solo diner take down 30 orders of fried
[14:11] shrimp within 4 hours, which she pointed out is 14,000 calories.
[14:17] She told Slade he was a skinny guy too.
[14:20] I was like, where is it all going?
[14:23] Now, to be clear, as I stated earlier, I've never been to a
[14:26] Red Lobster restaurant, and I would not put the service staff
[14:30] through having to watch that. Slade, of course, took a
[14:34] balanced approach and spoke to a customer named Michael Durant,
[14:38] who told the journalist that he was broke and had recently
[14:41] relied on a night of endless shrimp to sustain himself.
[14:45] He said that he spent between 3:00 and 4:00 hours Downing 83
[14:49] shrimp in total and took at least one nap at the table.
[14:53] I mean, who hasn't done that, right?
[14:55] But. The sign said all you can eat.
[15:01] A few of my long term viewers are possibly wondering why I'm
[15:05] so interested in the Red Lobster bankruptcy.
[15:07] It might seem irrelevant to my audience or the channel as a
[15:11] whole. Well, the whole reason this
[15:14] story came to my attention is that Flavor Flav of Public Enemy
[15:18] has proposed a plan to save the nationwide seafood chain.
[15:22] I. Love Red Lobster and to this day
[15:24] I'm still a red Lobster freak but was always elegant place
[15:28] before it got too. Popular The details of Mr. Flavs
[15:34] rescue plan are unclear at the moment, but in response to an
[15:38] official statement from Red Lobster posted on Twitter, Mr.
[15:42] Flav requested that Red Lobster call him.
[15:45] Following up with I Got You. For now, Red Lobster have said
[15:50] that they will continue operating during the Chapter 11
[15:53] process and use the proceedings to drive operational
[15:57] improvements, simplify the business through a reduction in
[16:00] locations, and pursue a sale of substantially all of its assets
[16:06] as a going concern. Negotiations are currently
[16:09] underway to sell Red Lobster to RL Parent Holdings LLC, a newly
[16:15] formed company controlled by some of the chain's largest
[16:19] creditors, with a goal of completing the sale by August
[16:23] 2nd. I'm obviously hoping that
[16:25] Flavour Flav comes in with a competing bid and makes the kind
[16:29] of operational improvements that are badly needed at Red Lobster.
[16:33] There are many criticisms that have been put forth about
[16:36] private equity firms, but I might be the only person to
[16:40] highlight how they're depriving the public of some truly great
[16:44] meme stocks. The UN economical sale of
[16:47] seafood is significantly more entertaining than the desperate
[16:51] attempts of a cinema chain CEO to attract press by doing
[16:55] interviews with no pants on or buying a gold mine with
[16:59] chemically trapped gold. Thanks for tuning into today's
[17:02] podcast, which is kept ad free by my supporters on Patreon.
[17:06] Have a great week and talk to you again in the next podcast.
[17:10] Bye. If you enjoyed this episode, be
[17:13] sure to subscribe so you're notified when a new episode is
[17:16] posted. Thank you to everyone who is
[17:18] supporting this content on Patreon.
[17:21] If you enjoyed this content, you can find more like it on
[17:24] YouTube, on the Patrick Boyle on Finance channel, or follow us on
[17:28] Twitter at Patrick E Boyle. Thanks for listening.
[17:31] Bye.

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