Red Lobster's fall is a case study on how to kill a business

Insider

Once a seafood powerhouse in America, Red Lobster is bankrupt and shutting down dozens of restaurants. Is Wall Street to blame?

Transcript

00:00Red Lobster used to be the place to be.

00:03The home of endless shrimp and of Cheddar Bay Biscuits,

00:06the place you kind of went to be fancy-ish.

00:10But in May 2024, Red Lobster declared bankruptcy.

00:14It's obviously more than mediocre seafood

00:17going out of style.

00:18It also has to do with private equity

00:20and there's talk of a shrimp mafia involved.

00:23In some ways, it's a perfect example

00:25of how to kill a business.

00:27I'm Emily Stewart and I'm a senior correspondent

00:29at Business Insider.

00:31So the first Red Lobster opened in 1968

00:33in Lakeland, Florida.

00:35The goal of Red Lobster was sort of to bring seafood

00:38to the masses, especially in places that were landlocked,

00:41right, you're not on a coast,

00:42you probably don't have fresh seafood.

00:44It also wanted to have family prices

00:47and, you know, something that regular people could afford.

00:5030 of them, I mean, it's terrific.

00:5130 shrimp, run to $10.

00:54Now at Red Lobster, it's our biggest...

00:55It grew from one to five locations

00:57within a couple of years.

01:00In 1970, it was acquired by General Mills,

01:01a food conglomerate, and it grew more from there,

01:04across the Southeast at first and then across the U.S.

01:07By 1978, it had grown to 236 restaurants

01:11and had sales of almost $300 million.

01:14It opened up in Canada for the first time in 1983

01:17and then over the years, it just kind of grew, grew, grew.

01:21By 1991, it had grown to 568 restaurants

01:24and had sales of $1.5 billion.

01:27In 1995, General Mills spun off Red Lobster

01:30as part of Darden Restaurants.

01:32Red Lobster grew pretty steadily in the early 2000s,

01:36but it had some hiccups.

01:37In 2003, it launched an endless crab promotion,

01:41which is what it sounds like.

01:42You could eat all the crab that your heart desired.

01:45Turns out a lot of people really wanted to do that,

01:47and so the company lost a lot of money

01:49and their president eventually stepped down.

01:52They also made other updates to their restaurants,

01:55like adding in wood-fire grills

01:57or updating their designs,

01:59but things eventually started to go awry.

02:01Darden stopped investing as much in Red Lobster,

02:04instead opting to put money into Olive Garden,

02:07which it also owns,

02:08and sales at Red Lobster started to flag.

02:11In 2013, Darden came under pressure from activist investors

02:15who were unhappy with the company's strategy and direction

02:18and wanted some changes.

02:20Darden sort of panicked at this and sold off Red Lobster.

02:24That wasn't what the activists had wanted,

02:27but there really wasn't anything they could do about it.

02:30The deal was done.

02:31It got bought by Golden Gate Capital,

02:33which is a private equity firm based in San Francisco

02:35for $2.1 billion.

02:38So in order to finance the deal

02:40and raise cash for the deal,

02:41what Golden Gate did was a sale-leaseback transaction.

02:45What that means is that they sold off the real estate,

02:47they sold off Red Lobster's restaurants,

02:49and then they immediately leased them back.

02:51So suddenly, all of these Red Lobster stores

02:54that didn't have rent to pay before had rent.

02:57Now, this maybe would have been fine,

02:59but as Red Lobster's business started to struggle

03:02in the years to come,

03:03those rents really became a problem.

03:06It's a pretty common private equity move.

03:08I think it's important to remember

03:10these people are there to make money,

03:11not often to revive the business.

03:13And so they're going to strip assets and monetize assets

03:16in any way that they can,

03:17including through strategies like this.

03:20So in 2016, Golden Gate sold 25% of Red Lobster

03:24to Thai Union, which is a Thai seafood conglomerate.

03:28Then in 2020, they sold the rest of the company off

03:31to the Seafood Alliance,

03:32which is a group of investors

03:33that Thai Union is also a part of.

03:35Obviously, in 2020, COVID hits,

03:37and a lot of restaurants are in a pickle.

03:40Red Lobster is not an exception here.

03:42There are shutdowns,

03:43people stop going to restaurants, traffic falls.

03:46So this is a bad time for a lot of restaurants,

03:48but a lot of restaurants really did weather

03:51But Red Lobster does have

03:52some pretty unique problems for itself.

03:54It's hard to run a seafood restaurant in the United States.

03:58If it were easy, there would probably be more of them.

04:01And if you think about it,

04:03if you're going out to eat in a group

04:04and one person doesn't like seafood,

04:07you're not going to Red Lobster.

04:09Also nowadays, if you're super in the mood for fish,

04:12you can probably get it at a steakhouse.

04:14And so again, you're not going to Red Lobster for that.

04:18Red Lobster's longtime CEO retired in 2021,

04:21and it really hasn't been able to find its footing

04:23in terms of leadership since then.

04:25And that's made it really hard

04:26to execute a turnaround plan, right?

04:29If you don't know who's in charge,

04:30you also don't know what direction you're going in.

04:33Some experts have said that a lot of the problem here

04:36is that Thai Union just had no idea

04:38how to run a restaurant business.

04:40They came in really wanting to cut costs, to cut staffing,

04:43and not necessarily on reviving Red Lobster.

04:47They didn't really land on a good plan for what to do

04:49to kind of turn it around finally.

04:52So in the middle of 2023, what Red Lobster decided to do

04:56was to make its endless shrimp promotion permanent.

04:59I've had 24 shrimps.

05:01I ate 51 shrimps.

05:03I ate 50 shrimps.

05:05Someone had the bright idea, let's do this all the time.

05:07And so what that means is that for $20, $25,

05:10you walk into Red Lobster, eat as much shrimp as you want.

05:13And a lot of people, again, took advantage of this.

05:16So what happened is that Red Lobster

05:18started to lose a lot of money.

05:20For the gentleman.

05:20All you can eat, all you can eat.

05:22All right, when you're ready, take this plate over.

05:26Please, don't take the steam tray, sir.

05:28Red Lobster lost $11 million on the endless shrimp promotion

05:31in the third quarter of 2023,

05:33and it lost even more money in the fourth quarter.

05:37But obviously, endless shrimp

05:38isn't the thing that killed Red Lobster.

05:41A couple of quarters of a silly promotion

05:43isn't going to take an entire business down.

05:46So there are a few reasons why.

05:48First, it was struggling with high labor costs.

05:51Labor's expensive right now,

05:52and Red Lobster doesn't have some special scheme

05:55to escape that.

05:56It also had those leases that Golden Gate Capital

05:59had settled it with a decade ago.

06:01So suddenly, all of these restaurants cannot pay their rent,

06:04and they need out of those leases.

06:06Analysts also say that unstable leadership is to blame,

06:10because if you don't have stable leadership,

06:11it's really hard to execute

06:13some sort of consistent turnaround vision.

06:16Years of changing tastes, poor brand management,

06:19and tough conditions have all contributed

06:21to Red Lobster's demise.

06:23And a lot of restaurants have been able

06:25to weather these storms, but Red Lobster hasn't.

06:29What sets Red Lobster apart is a decade of private equity

06:32and investor interference.

06:33Taiyuna is a supplier of shrimp for Red Lobster.

06:37If I'm Red Lobster, maybe it's not a great idea

06:40for me to be buying all of the shrimp,

06:42but if I'm Taiyuna and I'm selling the shrimp,

06:45that's kind of a great deal for me.

06:46And so the new CEO is saying that Taiyuna

06:49had outsized influence at Red Lobster.

06:52It's basically saying,

06:53looks like something a little funky was going on,

06:55that Taiyuna was pushing out other suppliers

06:58and charging Red Lobster a lot of money for this shrimp

07:02that apparently was costing Red Lobster

07:03to lose a lot of money.

07:05Now, Taiyuna says this is meritless,

07:07this is not what has happened,

07:09but still some people are joking

07:10about the Tai shrimp mafia,

07:13basically the implication there being

07:14that something was a little untoward going on

07:16and that Taiyuna was throwing around a little bit of weight

07:20at Red Lobster to line its own pockets.

07:23So Red Lobster did declare bankruptcy in May of 2024,

07:27and right now is trying to figure out a path forward,

07:30what to do with its debt, who's going to own the company,

07:33it's talking to its creditors who are private equity.

07:37Taiyuna wants out of its Red Lobster investment,

07:40and it says it's going to take a $530 million loss on it.

07:44And it's also closing down dozens of stores in the meantime.

07:47According to the restaurant chain's website,

07:49more than 80 locations in at least 27 states

07:52were listed as temporarily closed.

07:55So that means a lot of workers are out of work,

07:58suppliers are in trouble,

07:59and a lot of these businesses are just gone.

08:03So if you love Red Lobster,

08:05the good news is it's probably not going away forever.

08:08Plenty of companies survived bankruptcy

08:10in some way, shape, or form.

08:12On a broader level, this is sort of a textbook example

08:14of how to kill a business.

08:16Investors sucked money out of Red Lobster

08:19and made money in the short term

08:21without setting it up for long-term success.

08:23This is what Wall Street does a lot of the time.

08:26It swoops in, takes money out, and walks away.

Category

Transcript

Recommended