Financing

Endless Shrimp becomes pivotal issue in Red Lobster bankruptcy

The chain’s CEO alleged that the promotion may have pushed more shrimp business to its largest shareholder at Red Lobster’s expense, setting the stage for a messy Chapter 11 proceeding.
All-you-can-eat shrimp cost Red Lobster $11 million. | Photo: Shutterstock

Just how much did Ultimate Endless Shrimp hurt Red Lobster?

That is shaping up to be a central question in the seafood chain’s bankruptcy case after the company’s new CEO alleged that the $20 all-you-can-eat promotion may have had darker dimensions than the average marketing mishap. 

The 550-unit, Orlando-based casual-dining chain filed for Chapter 11 protection late Sunday after years of sales struggles that accelerated rapidly over the past year. The filing blamed inflation, expensive leases and weak stores for Red Lobster’s mounting debt. But it also questioned the decision-making surrounding Endless Shrimp last year.

Red Lobster in June added the formerly limited-time offer as a permanent menu item in an effort to boost flagging traffic. The deal ultimately succeeded on that front, but cost Red Lobster millions because of the low price point and bottomless portions.

According to the filing, former CEO Paul Kenny approved Ultimate Endless Shrimp despite “significant pushback” from other members of the management team. The brand then marketed the deal in its restaurants so excessively that it left stores without certain varieties of shrimp for weeks. All told, Endless Shrimp cost the chain $11 million.

But the filing also alleges that the deal may have created a conflict of interest between Red Lobster and its largest shareholder and longtime supplier, Bangkok-based seafood giant Thai Union Group.

In the filing, Red Lobster CEO Jonathan Tibus wrote that the chain is investigating whether Kenny collaborated with Thai Union to buy more of Red Lobster’s shrimp from the supplier just before the promotion launched.

It says that last April, Kenny directed Thai Union to produce shrimp for Red Lobster that skirted the chain’s normal supply chain and bidding process and exceeded the chain’s projected demand for shrimp.

Then, as part of a supposed “quality review,” Kenny dropped two of Red Lobster’s breaded shrimp suppliers, “leaving Thai Union with an exclusive deal that led to higher costs to Red Lobster,” Tibus wrote. This change was made “in apparent coordination” with Thai Union.

Thai Union in January announced that it was divesting from Red Lobster after eight years of partial ownership, saying the chain had become too much of a financial burden. It has cut off financial support from the brand and is currently looking to sell its stake, with a deal expected this year.

In a statement, Thai Union called Red Lobster’s allegations “meritless.” 

“Thai Union has been a supplier to Red Lobster for more than 30 years, and we intend for that relationship to continue,” the company said. “We are aware of the meritless allegations in the Bankruptcy Court pleadings and look forward to a full representation of the facts.”

It will be up to the court to determine whether Red Lobster’s shrimp contract with Thai Union amounted to self-dealing, and how much of a role it may have played in the company’s financial straits. It lost $76 million last year and is $300 million in debt.

“The bankruptcy court will be looking at all of these issues,” said Brian Marks, an economics professor at the University of New Haven who specializes in bankruptcies. “It’s not going to be simply, ‘Oops, we made bad business decisions.’ … This opens a whole can of worms as it relates to the fiduciary duty of loyalty.”

If the court does determine there was a breach, it could lead to separate litigation or a settlement, said Alessandra Glorioso, bankruptcy partner at law firm Dorsey & Whitney. 

The situation is further complicated by the fact that Red Lobster had other problems besides bargain shrimp, particularly a long-term decline in full-service dining that has been compounded by inflation coming out of the pandemic.

“Dinner house concepts throughout the country have been under great stress since probably 2008, 2010,” said Joe Sabbagh, president of seafood consultancy Sax Maritime Associates. “Endless Shrimp was just one of a number of mistakes that Thai Union made.”

Red Lobster is also saddled with an inordinate number of leases above market rates, an issue that stems from its sale by Darden Restaurants to private-equity firm Golden Gate Capital in 2014. Golden Gate sold much of the chain’s real estate to help finance the acquisition, a move that has come home to roost in the form of onerous leases.

“The court is going to have to unpack the economic issues,” Marks said, “and the board and the management are going to try to assert that it’s the economics and nothing more.”

A key question, he said, will be whether an exclusive shrimp contract between Red Lobster and Thai Union was ever approved by the restaurant chain’s board.

Sabbagh noted that Red Lobster could have had good reason to buy more shrimp from Thai Union, given their relationship and the chain’s high quality standards. 

“It comes down to, OK, what were they charging?” he said. “Could other companies bid lower? And could they get lower bids on the spec that Red Lobster required, and then somehow Thai Union was given it?”

Red Lobster's status as the nation's largest seafood chain already makes its bankruptcy one of the biggest in industry history. But the questions swirling around it also make it one of the most unusual.

“Because of the wildcard vendor ownership and vendor deal with the Endless Shrimp meal, I don’t think that Red Lobster is exactly a bellwether for other retail and restaurant bankruptcies” Glorioso said. “Those factors make this one a pretty unusual case.”

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