May 28, 2024

The Real Reason Behind Red Lobster’s Bankruptcy Filing

Red Lobster filed for Chapter 11 bankruptcy protection and closed 50 locations this past week, and the company wants you to know the culprit.

Endless shrimp.

In seemingly every news story about the filing, the talking points were the same. Red Lobster offered an endless shrimp promotion last year, it was too successful based on the $20 price point (customers were apparently too gluttonous), the restaurant lost $11 million in the third quarter, and therefore the company filed for bankruptcy.

I’m so thankful I’m on their mailing list because otherwise, I wouldn’t have received an intimately personal email addressed, “Dear Guests” (I’ll get back to the email later).

There was something about this whole thing that smelled fishy (sorry, too easy).

Don’t get me wrong, $11 million isn’t chump change, but it didn’t feel to me like the kind of number that tips the largest seafood chain in the United States into bankruptcy. So, I looked up annual revenues, which recently topped around $2 billion.

$11 million is 0.55 percent of $2 billion.

What’s going on here?

Photo credit: Shutterstock/Tada Images

I’ve had some very nice experiences at Red Lobster, usually visiting when one of my kids needs cheddar biscuits on his birthday. Throughout his childhood (he’s 18 now), it was a generally pleasant annual experience…until last year.

Usually in my experience, Red Lobster had long waits and the lobby was full during prime dinner hours. This time, there was no one waiting. The restaurant was only about half full when we were seated. And then…

The table was sticky. The floors were filthy. The food was marginal and not as good. The service was terrible. The app to earn rewards didn’t work. I haven’t been back.

Yes, this was one location. But maybe I’m not the only one?

In a declaration filed with the bankruptcy court, Red Lobster reports that its customer count has declined by about 30% since 2019. According to CEO Jonathan Tibus, the company’s CEO, negative factors include inflationary pressures, unfavorable lease contracts, poor locations, and strategic missteps in luring customers. All of which may certainly play a role in their struggles.

But conspicuously not mentioned…could it be that maybe, just maybe, the customer experience declined so the customers stopped coming back?

An investor group named Thai Union acquired Red Lobster in 2020, made drastic cuts, and the chain has had five leaders in five years. It kind of feels like a radio station that keeps changing program directors and formats.

Now, about that email, addressed to “Dear Guests”.

It reminds you that Red Lobster’s always been there for you for celebrations. It tells you that Chapter 11 doesn’t mean it’s going out of business, and in fact cites Delta and Hertz as companies that also filed for bankruptcy. Hey! They’re doing just fine! The company ends by pimping Lobsterfest, Crabfest, and those Cheddar Bay Biscuits.

Signed, “Red Lobster”.

In an iconic 1988 United States Vice Presidential debate, Senator Dan Quayle compared his experience in Congress to that of JFK at his age. Lloyd Bentsen smiled at Quayle, and perfectly delivered the line, “Senator, I served with Jack Kennedy. I knew Jack Kennedy. Jack Kennedy was a friend of mine. Senator, you’re no Jack Kennedy”.

Today, I’m here to tell Red Lobster, you’re no Delta.

As a member of both databases, I receive communications from each. Delta’s emails are written and signed by CEO Ed Bastian. He takes credit when things go well but is most impressive when things don’t go as well. In 2022, following a series of cancellation, delay, and customer service missteps, Bastian sent an email apologizing and laying out his plan to fix it. Today, I believe Delta’s app is the best in the business and customer service wait times have been drastically reduced. After missteps with their frequent flier program, there was Ed’s email, apologizing and taking steps to roll back the mistakes. Personal. Relatable. Empathetic.

“Dear Guests”, “Hey Delta filed for bankruptcy too”, “Lobsterfest!”, “Signed, Red Lobster” will not improve your customer engagement.

When brands are in trouble, the right move is to conduct a research deep dive with their customer base to determine where the issues lie. Then they fix them with a thoughtful strategic plan and coordinated execution.

Remember when Domino’s admitted their pizza wasn’t very good, fixed the problem, and then invested heavily in marketing to transparently admit they screwed up?

You could have bought a share of Domino’s stock for $3.86 in 2008. Today a share is about $512.

As the legendary Bubba once said to Forrest Gump, “Shrimp is the fruit of the sea. You can barbecue it, boil it, broil it, bake it, sauté it.” But shrimp isn’t the only reason why Red Lobster’s in bankruptcy. The brand has been damaged. Once a brand is damaged, it can be a tough road back.

I sincerely hope Red Lobster figures it out. My son hasn’t lost his taste for those cheddar biscuits.

6 thoughts on “The Real Reason Behind Red Lobster’s Bankruptcy Filing”

  1. Pat Holiday

    It would be great if DARDEN Co buys back Red Lobster. They owned it when it was great and also own a bunch of other excellent restaurants (Ruth’s Chris, Olive Garden, Longhorn, Cheddars, Bahama Breeze, etc). If you remember, Olive Garden was on its last leg a few years ago. But then Darden bought them. Now they’re a 2 billion dollar chain with constant lines.

  2. Matt Bailey

    There’s one other major problem bankrupting Red Lobster; private equity. Consider “asset stripping.” The company “sold” its restaurants’ real estate to a separate company controlled by the same owner, then Red Lobster leased back the restaurants at above market rates. Oh, and that money-losing Shrimp deal? They bought the shrimp from another company with the same owner at highly inflated prices. Now, Red Lobster, hobbled with expenses, is filing Chapter 11, while the private equity firm that owns the real estate subsidiary and the seafood wholesaler reaps the profits and the increased land values. Private Equity—where you can make big money by killing your business.

    1. BevSH

      Private Equity is exactly what is happening. Look at Pier1 Imports. It’s the same players. Nobody is “saving” Red Lobster. They are stripping it down to nothing.

  3. Bill

    This started out to explain the real reasons for RL failing. You never summarized answers to the question. I got lost. Did people stop going to RL? Did the prices become overinflated? Was seafood and labor cost rising faster than pricing could cover cost increases? Why did they sell real estate off to their owner(?)and then lease back at high prices? How did that hurt if the real estate got them a bundle of cash? Can you pin it down to single sentence(s) summary?
    Thanks,
    Bill

    1. Jay Nachlis Post Author

      Thanks for the comment, Bill. To your point, it’s not one thing, and yes, the numbers would suggest a large portion of customers did stop going to Red Lobster. The primary point I was trying to make was that endless shrimp was not the reason and there are larger factors (customer service, inconsistent management, and the sale to the private investment group among them) at play.

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