Red Lobster food chain goes bankrupt after unlimited shrimp deal
SEAFOOD restaurant chain Red Lobster filed for bankruptcy, succumbing to onerous leases, high labor costs, and a disastrous unlimited shrimp promotion.
The Orlando, Florida-based company filed for Chapter 11 protection on Sunday, listing assets and liabilities of $1 billion to $10 billion each in its bankruptcy petition. The filing allows the company to keep operating while it works out a plan to repay creditors.
Red Lobster plans to hand control of the company to its lenders, led by Fortress Investment Group, who have agreed to provide $100 million in financing to support the chain through bankruptcy. The takeover offer is in the form of a stalking horse bid, meaning it will set the floor price for Red Lobster’s assets and is subject to better bids should any materialize in the coming weeks, according to court documents.
The restaurant chain had been deteriorating for several years, with diners down around 30% since 2019, Chief Executive Officer (CEO) Jonathan Tibus wrote in court papers. While the business had shown signs of recovery since the pandemic, sales declined sharply in the last 12 months, Tibus wrote. It lost $76 million in the 2023 fiscal year.
Inflationary pressures have kept customers from dining out and higher labor costs strained the company’s finances. A “material portion” of Red Lobster’s leases were priced above market rates. In May 2023, the company changed its $20 “Ultimate Endless Shrimp” from a limited time offer to a permanent promotion, costing it $11 million as diners devoured expensive plates of shrimp.
Red Lobster traces its roots to a single restaurant in Lakeland, Florida in 1968. It expanded rapidly in the 1970s and 1980s, and developed a loyal following for its Cheddar Bay Biscuits. The company now operates more than 550 restaurants in the US and Canada.
The restaurant chain, which has been owned by seafood supplier Thai Union Group Plc since 2020, serves 64 million customers per year and purchases 20% of all North American lobster tails, as well as 16% of all rock lobsters worldwide.
Thai Union and Red Lobster had been in talks with lenders for an out-of-court deal that would hand the creditors 80% of the company, but discussions fell through. Lenders made additional loans worth $20 million to Red Lobster in February, but they weren’t willing to put in more money without support from the owner, according to court papers.
ENDLESS SHRIMPS
Meanwhile, Thai Union disputed the contents of a sworn statement filed in bankruptcy court from Red Lobster CEO Jonathan Tibus, which included allegations that the seafood supplier “exercised an outsized influence on the company’s shrimp purchasing.”
A Red Lobster lawyer read a statement from Thai Union during the restaurant chain’s first bankruptcy court hearing in Orlando, Florida on Tuesday. Thai Union disputes all statements concerning the company and its relationship to Red Lobster, the lawyer said.
Mr. Tibus alleged the decision by former management in May 2023 to change its $20 “Ultimate Endless Shrimp” deal from a limited time offer to a permanent deal cost the company $11 million. The deal also saddled Red Lobster “with burdensome supply obligations, particularly with its equity sponsor, Thai Union,” he said.
Ultimate Endless Shrimp was also heavily promoted in Red Lobster at its locations, which Mr. Tibus said was “atypical for the company” and led to major shrimp shortages at its restaurants. Some Red Lobster locations went days or sometimes weeks without certain types of shrimp, he said.
A former Red Lobster executive also allegedly directed Thai Union to continue producing shrimp for its restaurants “that did not flow through the traditional supply process or bid cycle or adhere to the Company’s demand projections,” Mr. Tibus said. Former management also eliminated other suppliers of breaded shrimp, “leaving Thai Union with an exclusive deal that led to higher costs to Red Lobster,” he said.
The chain employs 34,000 people in the US and an additional 2,000 in Canada. Last week, it shuttered 93 underperforming stores.
The case is Red Lobster Management LLC, number 24-02486, in the US Bankruptcy Court for the Middle District of Florida (Orlando). — Bloomberg