Did ‘fishy’ shrimp deal ultimately end Red Lobster?

Mickey Kim and Roger Lee / June 7, 2024

Red Lobster, a $2 billion in revenue American seafood institution, was truly an innovator both as one of the first casual, full-service dining chains and the first to make seafood easily accessible to the vast non-coastal United States.  Its Cheddar Bay BiscuitsTM , CrabfestTM and LobsterfestTM were legendary.

Bill Darden was just 19 when he opened his first restaurant (a lunch counter he named “The Green Frog”) and by the 1960s owned a number of restaurants in the Southeast, including a Howard Johnson’s (aka “HoJo’s”) franchise.  In 1963 he purchased “Gary’s Duck Inn” in Orlando and began tinkering with a no-frills seafood concept.

In 1968 Darden and Charley Woodsby opened the first “Red Lobster Inns of America” in Lakeland, FL.

The duo’s concept impressed General Mills, which acquired the company just two years later and fueled Red Lobster’s explosive growth over the next 25 years.  Red Lobster thrived in its coveted niche, offering both a menu accessible for middle class budgets and a dining experience special enough to be aspirational.

In 1995 General Mills decided to “spin out” its restaurant business into a separate publicly-traded company, Darden Restaurants (“Darden”), which now owns well-known brands like Olive Garden, Capital Grille, Ruth’s Chris, LongHorn Steakhouse, Yard House and Cheddar’s.

In a famous exchange from Ernest Hemingway’s The Sun Also Rises, one friend asks “how did you go bankrupt?”  to which the friend replies, “two ways, gradually and then suddenly.”

Alas, Red Lobster’s coveted niche became increasingly crowded and competitive (think Applebee’s/Chili’s/Texas Roadhouse) just as “fast casual” chains (think Chipotle) exploded onto the scene.  Darden decided to allocate resources to its faster-growing concepts, starving Red Lobster.  “Activist” investors pushed Darden to unlock the real estate value of Red Lobster’s restaurants.

Indeed, the seeds for Red Lobster’s demise were sown in May 2014 when Darden sold Red Lobster in a leveraged buyout (LBO) for $2.1 billion to San Francisco-based Golden Gate Capital.  LBOs now have a nicer-sounding moniker (“private equity”), but the playbook remains the same; strip assets, slash costs, load up with debt and flip.  To finance the purchase, Golden Gate sold the land on which the majority of the restaurants stood for $1.5 billion to American Realty Capital Partners, which Red Lobster agreed to lease for the next 25 years.

While sale-leaseback transactions are common, they saddle the lessee with huge lease payment obligations, fixed costs that didn’t exist before and run for decades.  In this case, Red Lobster also stated a “material” number of leases on 687 restaurants were priced “above market.”  In 2023, Red Lobster spent $190.5 million in lease payments, over $64 million of which related to “underperforming” restaurants the company would otherwise have elected to close (presumably the 93 the company subsequently closed this May 13).

Thai Union (owned by the Chansiri family and supplier to Red Lobster for 30 years) bought a 49% stake in Red Lobster from Golden Gate in 2016 for $575 million and led a consortium that acquired the rest in 2020.  Thai Union knew a lot about catching fish (Chicken of the Sea tuna is one of its brands), but apparently little about running a restaurant chain, cycling through five different CEOs since 2021.

 CEO Thiraphong Chansiri considered getting rid of Red Lobster in March 2023 and Thai Union wrote down its investment to $0 this past February.

Here’s where it gets interesting.  This is an oversimplification, but when a company can’t pay its debts and files for bankruptcy, the lenders try to extract as much value possible to minimize their losses.  The equity/stockholders are wiped out.     

 Thai Union obviously knew Red Lobster was struggling and its equity investment was probably worthless.  However, as owner it also controlled the company’s board of directors and appointed the CEO, who decides how much shrimp to buy (among other things).

Red Lobster’s May 19, 2024 Chapter 11 bankruptcy filing, featuring commentary from new CEO Jonathan Tibus (appointed by the company’s lenders) is fascinating.

In May 2023, former CEO Paul Kenny made the decision to make the previously limited-time $20 Ultimate Endless ShrimpTM (“UES”) promotion permanent, despite “significant pushback” from other members of the management team.  Additionally, Thai Union and Kenny may have “encouraged excessive merchandising of the UESTM  promotion in-store (including heavy in-store promotion) which was atypical for the Company.”  Typically, Red Lobster (or any other restaurant or merchant) utilized promotions to drive customer traffic to the restaurant, but once seated they’d really prefer you order something with better profit margins.  Finally, Kenny may have “circumvented Red Lobster’s normal supply chain and demand planning processes,” leading to both excessive ordering and two suppliers of breaded shrimp being eliminated, leaving Thai Union as sole supplier.

Many Americans view “all you can eat” as a challenge and UESTM attracted customers who would tie-up tables while they leisurely devoured shrimp (one solo diner reportedly downed 30 orders of fried shrimp in one four-hour session).  UESTM was a financial debacle contributing to Red Lobster’s $76 million net loss in 2023.

Was UESTM a nefarious and deceitful last-ditch effort by Thai Union and Red Lobster’s hand-picked CEO to improperly funnel cash and transfer value from lenders to Thai Union by forcing Red Lobster to buy as much shrimp as possible?  You can connect the dots, but Thai Union disputes everything Tibus alleged.

Did UESTM ultimately end Red Lobster?  No, it was gradually going bankrupt over the last 10 years.  UESTM was just the last torpedo suddenly sinking the ship.

The opinions expressed in these articles are those of the author as of the date the article was published. These opinions have not been updated or supplemented and may not reflect the author’s views today. The information provided in these articles are not intended to be a forecast of future events, a guarantee of future results and do not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular stock or other investment.