Red Lobster's fall is a case study on how to kill a business
Once a seafood powerhouse in America, Red Lobster is bankrupt and shutting down dozens of restaurants. Is Wall Street to blame?
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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.