Red Lobster used to be the place to be. The home of endless shrimp
and of cheddar bay biscuits. The place you kind of
went to be fancy-ish. But in May 2024, Red
Lobster declared bankruptcy. It's obviously more than mediocre seafood going out of style. It also has to do with private equity, and there's talk of a
shrimp mafia involved. In some ways, it's a perfect example of how to kill a business. I'm Emily Stewart, and I'm a senior correspondent
at Business Insider. So the first Red Lobster opened in 1968 in Lakeland, Florida. The goal of Red Lobster was
sort of to bring seafood to the masses, especially in places that were landlocked, right? You're not on a coast, you probably don't have fresh seafood. It also wanted to have family prices and, you know, something that
regular people could afford. Thirty of them. I mean, it's terrific.

Thirty shrimp for under $10. It grew from one to five locations within a couple of years. In 1970, it was acquired by General Mills, a food conglomerate, and it grew more from there,
across the Southeast at first, and then across the US. By 1978, it had grown to 236 restaurants and had sales of almost $300 million. It opened up in Canada for
the first time in 1983, and then over the years it
just kind of grew, grew, grew. By 1991, it had grown to 568 restaurants and had sales of $1.5 billion. In 1995, General Mills
spun off Red Lobster as part of Darden Restaurants. Red Lobster grew pretty
steadily in the early 2000s, but it had some hiccups. In 2003, it launched an
endless crab promotion, which is what it sounds like. You could eat all the crab
that your heart desired.

Turns out a lot of people
really wanted to do that. And so the company lost a lot of money, and their president
eventually stepped down. They also made other updates
to their restaurants, like adding in wood-fire grills,
or updating their designs. But things eventually started to go awry. Darden stopped investing
as much in Red Lobster, instead opting to put
money into Olive Garden, which it also owns. And sales at Red Lobster started to flag. In 2013, Darden came under
pressure from activist investors who were unhappy with the
company's strategy and direction, and wanted some changes. Darden sort of panicked at
this and sold off Red Lobster. That wasn't what the activists had wanted, but there really wasn't
anything they could do about it. The deal was done. It got bought by Golden Gate Capital, which is a private equity
firm based in San Francisco, for $2.1 billion.

So in order to finance the deal and raise cash for the deal, what Golden Gate did was a
sale-leaseback transaction. What that means is that they
sold off the real estate. They sold off Red Lobster's restaurants, and then they immediately
leased them back. So suddenly, all of
these Red Lobster stores that didn't have rent
to pay before had rent. Now, this maybe would've been fine, but as Red Lobster's business started to struggle in the years to come, those rents really became a problem. It's a pretty common private equity move. I think it's important to remember these people are there to make money, not often to revive the business. And so they're going to strip assets and monetize assets in
any way that they can, including through strategies like this. So in 2016, Golden Gate
sold 25% of Red Lobster to Thai Union, which is a
Thai seafood conglomerate. And then in 2020, they sold
the rest of the company off

to the Seafood Alliance,
which is a group of investors that Thai Union is also a part of. So obviously, in 2020, COVID hits, and a lot of restaurants are in a pickle. Red Lobster is not an exception here. There are shutdowns. People stop going to restaurants. Traffic falls. So this is a bad time
for a lot of restaurants. But a lot of restaurants
really did weather the storm. But Red Lobster does
have some pretty unique problems for itself. It's hard to run a seafood
restaurant in the United States. If it were easy, there would
probably be more of them. And you know, if you think about it, if you're going out to eat in a group, and one person doesn't like seafood, you're not going to Red Lobster. Also, nowadays, if you're
super in the mood for fish, you can probably get it at a steakhouse. And so again, you're not
going to Red Lobster for that.

Red Lobster's longtime CEO retired in 2021, and it really hasn't been able to find its footing in terms of leadership since then, and that's made it really hard to execute a turnaround plan, right? If you don't know who's in charge, you also don't know what direction you're going in. Some experts have said that a lot of the problem here is that Thai Union just had no idea how to run a restaurant business. They came in really wanting to cut costs, to cut staffing, and not necessarily on reviving Red Lobster. They didn't really land on a good plan for what to do to kind of turn it around finally. So in the middle of 2023, what Red Lobster decided to do was to make its endless shrimp promotion permanent. Someone had the bright idea, let's do this all the time. And so what that means is that for $20, $25,

you walk into Red Lobster, eat
as much shrimp as you want, and a lot of people, again,
took advantage of this. So what happened is that Red Lobster started to lose a lot of money. For the gentleman? All you can eat. All you can eat. Al right, when you're
ready, take this plate over. Please don't take the steam tray, sir. Red Lobster lost $11 million on the endless shrimp promotion in the third quarter of 2023, and it lost even more money
in the fourth quarter. But obviously, endless
shrimp isn't the thing that killed Red Lobster. A couple of quarters of a silly promotion isn't going to take an
entire business down. So there are a few reasons why. First, it was struggling
with high labor costs. You know, labor's expensive right now, and Red Lobster doesn't have some special scheme to escape that. It also had those leases
that Golden Gate Capital

had saddled it with a decade ago. So suddenly, all of these
restaurants cannot pay their rent, and they need out of those leases. Analysts also say that unstable
leadership is to blame, because if you don't
have stable leadership, it's really hard to execute some sort of consistent turnaround vision. Years of changing tastes,
poor brand management, and tough conditions have all contributed to Red Lobster's demise. And a lot of restaurants have been able to weather these storms,
but Red Lobster hasn't. What sets Red Lobster apart
is a decade of private equity and investor interference. Thai Union is a supplier
of shrimp for Red Lobster. If I'm Red Lobster, maybe
it's not a great idea for me to be buying all of the shrimp. But if I'm Thai Union, and
I'm selling the shrimp, that's kind of a great deal for me. And so the new CEO is
saying that Thai Union

had outsized influence at Red Lobster. Basically saying, looks like something a little funky was going on, that Thai Union was pushing out other suppliers and charging Red Lobster a lot of money for this shrimp that apparently was causing Red Lobster to lose a lot of money. Now, Thai Union says, this is meritless, this is not what has happened. But still some people are joking about the Thai shrimp mafia. Basically, the implication there being that something was a little untoward going on and that Thai Union was throwing around a little bit of weight at Red Lobster to line its own pockets. So Red Lobster did declare bankruptcy in May of 2024, and it right now is trying to figure out a path forward, what to do with its debt. Who's going to own the company? It's talking to its creditors, who are private equity. Thai Union wants out of its Red Lobster investment, and it says it's going to take a $530 million loss on it.

And it's also closing down dozens of stores in the meantime. According to the
restaurant chain's website, more than 80 locations
in at least 27 states were listed as temporarily closed. So that means a lot of
workers are out of work, suppliers are in trouble, and you know, a lot of these
businesses are just gone. So if you love Red Lobster, the good news is it's probably
not going away forever. Plenty of companies survive bankruptcy in some way, shape, or form. On a broader level, this is
sort of a textbook example of how to kill a business. Investors sucked money out of Red Lobster and made money in the short term without setting it up
for long-term success. This is what Wall Street
does a lot of the time. It swoops in, takes money
out, and walks away.

Red Lobster's Fall Is A Case Study Of How To Kill A Business | Rise and Fall | Business Insider

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