Red Lobster Bankruptcy Caused by Much More Than "Endless Shrimp" Promotion

WCTU - Founded in 1968 by restaurateur Bill Darden, the first Red Lobster opened in Lakeland, Florida, quickly becoming a local favorite. In 1970, General Mills purchased the initial five restaurants, expanding the brand nationwide. By 1995, Red Lobster had over 700 locations across the U.S. and Canada. The chain was then spun off to create Darden Restaurants, which also owns Olive Garden and Longhorn Steakhouse.

In 2014, Darden sold Red Lobster to Golden Gate Capital for $2.1 billion. Golden Gate later sold a 25% stake to Thai Union, a major seafood supplier, which acquired the remaining interest by 2020. In January 2024, Thai Union announced plans to sell off its remaining stake, signaling a lack of confidence in Red Lobster's financial recovery. Shortly thereafter, on a Sunday night, Red Lobster filed for Chapter 11 bankruptcy.

The bankruptcy filing stems from financial missteps, including the costly "Endless Shrimp" promotion and the heavy debt burden imposed by its private equity owners. In 2022, the "Endless Shrimp" promotion cost the company $33 million. However, a deeper look reveals the significant impact of private equity practices. Private equity firms often acquire companies, extract valuable assets, and load them with debt, prioritizing short-term gains over long-term stability. This financial engineering can lead to bankruptcy, benefiting private equity firms while harming employees and smaller shareholders.

The company has already begun closing several locations across the United States, affecting local economies through job losses and reduced business for local suppliers. Despite these challenges, Red Lobster remains committed to its customers. CEO Jonathan Tibus, appointed in March 2024, expressed optimism in a news release, stating, “This restructuring is the best path forward for Red Lobster. It allows us to address several financial and operational challenges and emerge stronger and re-focused on our growth. The support we've received from our lenders and vendors will help ensure that we can complete the sale process quickly and efficiently while remaining focused on our employees and guests.”

The aggressive "Endless Shrimp" promotion, coupled with Thai Union's influence over the supply chain, exacerbated Red Lobster’s financial challenges. According to court documents, the chain directed its shrimp purchasing entirely through Thai Union, potentially driving up costs and straining the supply process. “Red Lobster’s supply process was strained by virtue of its relationship with Thai Union,” Tibus said in a court filing. Thai Union, which owns 100% of Red Lobster, has historically been a major supplier to the chain. Tibus noted that Thai Union has “exercised an outsized influence on the company’s shrimp purchasing.”

In April 2023, a month before former CEO Paul Kenny implemented the $20 Ultimate Endless Shrimp deal, Thai Union produced shrimp without adhering to traditional supply processes, bid cycles, or demand projections. Additionally, Red Lobster eliminated two of its breaded shrimp suppliers, giving Thai Union an exclusive deal that increased costs for the chain.

Red Lobster is now examining the impact of Thai Union's control over its supply chain and whether the involvement of Thai Union-affiliated entities was appropriate. The company filed for bankruptcy with $300 million in debt, days after abruptly closing about 100 locations, or one-sixth of its U.S. units. The company faced challenges from costly leases, declining customer traffic, and high costs coming out of the pandemic.

While much of the media coverage surrounding Red Lobster's bankruptcy has fixated on the failure of the "Endless Shrimp" promotion, this narrative overlooks the more significant issue of private equity practices and corporate mismanagement. The relentless focus on the promotional mishap detracts from a deeper analysis of how private equity ownership has systematically drained resources from the company, burdening it with insurmountable debt and stripping it of long-term viability. This is not the first popular company to succumb to the results of such practices.

Private equity firms like Golden Gate Capital, which previously owned Red Lobster, often acquire companies, extract valuable assets, and load them with debt, prioritizing short-term gains for shareholders over sustainable business practices. This financial engineering is a critical factor in Red Lobster's downfall, yet it remains underreported in mainstream media outlets.

Major media conglomerates and hedge funds, many of which are themselves backed by private equity, may avoid in-depth coverage of practices that could reflect poorly on their own operations or those of their financial backers. This interconnectedness within the corporate world results in a skewed narrative, diverting public attention from systemic financial practices that often lead to corporate failures.

In the case of Red Lobster, while the "Endless Shrimp" promotion certainly contributed to financial losses, it is a symptom rather than the cause of the company’s broader issues. The substantial debt imposed by its private equity owners and the strategic missteps in its supply chain management, especially under the influence of Thai Union, are crucial factors that deserve more scrutiny. However, these elements are often overshadowed by the more sensational and simplified storyline of a failed promotional campaign.

As of now, it does not appear as though any Red Lobster restaurants in Ohio are on the chopping block. More details will be released when available.

UPDATE: Red Lobster appears to be closing at least eight Ohio locations. These locations are Beachwood, Dayton, Findlay, Maumee, New Philadelphia, Parma, Strongsville and Toledo.