Will Red Lobster sleep with the fishes?

When Red Lobster declared bankruptcy in May, I’m not sure what initially drew me to the story. (Maybe it was the self-imposed challenge of saying lobster and not lobstah.) Once I started reading however, I realized it was one of the most curious bankruptcy stories I’ve ever come across.

If you are interested in learning about the overall rise and fall (?) of this notable restaurant chain, check out Ultimate Endless Real Estate Costs at Red Lobster on Art of Procurement.

Creating a Troublesome Union

Red Lobster went through multiple sets of hands after their founding in 1968. By 2016, the owner at that time, Golden Gate Capital, was ready to move on as well. They started selling their shares of the chain to a company called Thai Union.?

Golden Gate Capital initially sold Thai Union a 25 percent stake in Red Lobster for $575 Million. Then, in 2020, Thai Union purchased the remaining portion of Golden Gate Capital’s shares.

Thai Union is a global producer of seafood-based products, and they own a number of seafood related businesses as well. For instance, they own the Chicken of the Sea brand of canned tuna fish popular in the United States.

At the same time as they were buying up the shares of Red Lobster, Thai Union also happened to be the restaurant chain’s main shrimp supplier. What could possibly go wrong?

We’re Going to Need a Bigger Boat

In 2023, two pivotal decisions were made by Red Lobster under the leadership of then-interim CEO Paul Kenny.

The first was to add Ultimate Endless Shrimp to the menu permanently rather than just once a week. According to the company’s bankruptcy filing, this decision was made “despite significant pushback from other members of the company's management team."

It is never a good sign when an expensive or risky program violates the usual decision making procedure. The Red Lobster management team reportedly pushed back because the program didn’t align with their established decision making process, selecting suppliers based on projected demand.

“The insinuation,” according to bankruptcy attorney Patrick Collins of Farrell Fritz, “is that the price the company paid Thai Union was above market.”?

The all-you-can-eat shrimp promotion increased traffic to Red Lobster locations by 4 percent, but it also led to $11 Million in losses in just one quarter. Eventually, the cost of the deal was increased from $20 to $25, but the damage had been done.

Permanent Ultimate Endless Shrimp was not the only risky decision made by the chain. Red Lobster also got rid of their other two shrimp suppliers, setting up Thai Union as the company’s sole shrimp supplier - and their owner - at the same time.

According to a statement by current CEO Jonathan Tibus, in “apparent coordination with Thai Union and under the guise of a ‘quality review,’ [former interim CEO Paul] Kenny made a series of decisions that eliminated two of the company’s breaded shrimp suppliers, leaving Thai Union with an exclusive deal that led to higher costs to Red Lobster.”?

That decision raised seafood costs for Red Lobster at an already difficult time, and that is not all. The endless shrimp deal also received an “atypical” level of promotion from Red Lobster, to the extent that it created supply outages. It seems fair to ask whether the owners were prioritizing seafood production revenue over their fiduciary responsibility to Red Lobster's shareholders.

Endless shrimp was a disaster, but was it enough to sink the ship?

Red Lobster has an outstanding debt of $294 Million, but they only lost $11 Million on the shrimp promotion. It may be a depressingly large sum, but it only represents 3 percent of the company’s total debt.

We can also compare the value of the endless shrimp losses to their cash burn rate. Red Lobster went from having $100 Million in hand to just $30 Million in about 6 months. As dramatic as it sounds to have a seafood chain sunk by all-you-can-eat shrimp, there were other problems at play, including their real estate costs.

In January of 2024, Thai Union announced the intent to abandon their stake in Red Lobster. My question in response to that news is whether they will continue to supply the chain with shrimp, given what they know about the company’s finances and cash flow.

I suppose that is why a company shouldn't want to be owned by the largest supplier of the most critical product to their operation: the troubles quickly become ultimate and endless.

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