Financing

How Red Lobster got in over its head

Leadership problems, a tough economy and all-you-can eat shrimp have brought the nation's biggest full-service seafood chain to the brink of rock bottom.
Red Lobster sign under water
Thai Union Group tried to rescue Red Lobster last year but is now looking for a buyer. | Photo illustration by Nico Heins, Shutterstock

EDITOR'S NOTE: We're making this premium article available for all readers. To get more in-depth content like this, subscribe to RB+

In the summer of 2003, Red Lobster unveiled a blockbuster promotion to help reel in diners: all-you-can eat snow crab for $22.99. 

The deal worked a little too well. Guests ordered more helpings than the brand had bargained for at a time when the price of snow crab was going up.

The debacle cost Red Lobster a reported $3.3 million and triggered a stock selloff for then-owner Darden Restaurants. It also cost CEO Edna Morris her job. Endless Crab is now remembered as one of the biggest marketing blunders in industry history—a classic cautionary tale about the risk of offering free refills on a volatile commodity. 

And yet 20 years later, Red Lobster did it again.

The chain last summer added a $20 all-you-can-eat shrimp deal to the menu in a bid to boost sluggish traffic. The move would end up having arguably more extreme consequences than its snow crab predecessor. The steep discount not only contributed to a more than $11 million quarterly loss for minority owner Thai Union Group, but also effectively ended the company’s efforts to rescue the struggling restaurant brand. 

In January, the Bangkok-based seafood supplier announced that it was cutting ties with the 650-unit Red Lobster and looking for a buyer. The experience left such a scar on Thai Union CEO Thiraphong Chansiri that he quipped in February that he plans to never eat lobster again. 

In further signs of trouble, Red Lobster last month replaced its outgoing CEO with a restructuring expert known for guiding restaurant companies through bankruptcy.

This is the story of how the nation’s largest full-service seafood restaurant chain came to the brink of rock bottom. It is based on earnings transcripts, company filings and sales data that show how leadership problems, strategic missteps and a difficult economy combined to hobble the iconic chain. 

Thai Union Group declined to comment for this story, saying that it’s in the process of exiting its investment. Red Lobster did not respond to a request for comment. 

Treading water

Red Lobster’s sudden fall was preceded by years of stagnation. Before the pandemic upended everything, the chain had been mostly at a standstill since 2014, when it was sold by venerable casual-dining operator Darden Restaurants to private equity firm Golden Gate Capital for $2.1 billion. 

Red Lobster had been created by legendary restaurateur Bill Darden himself in 1968. It was not only one of the first seafood chains in the U.S. but also one of the first casual-dining concepts, period. Together with another of Darden’s creations, Olive Garden, it became part of the foundation of Darden Restaurants Inc. when it was formed in 1995. 

Red Lobster grew steadily through the early aughts and reached a high of 679 locations in 2012. But by that time, the brand was struggling to bounce back from the Great Recession and had become a drag on Darden’s growing portfolio. Facing pressure from shareholders, Darden decided to sell the chain so it could focus on its other concepts. 

Golden Gate avowed at the time that its new asset was “an exceptionally strong brand” with “significant opportunities for future growth.” It offloaded more than 500 of Red Lobster’s U.S. properties in a $1.5 billion sale-leaseback deal, shedding valuable real estate to help finance the acquisition. But six years later, when Golden Gate fully exited Red Lobster, the chain’s unit count and annual sales were virtually unchanged.

A Golden Gate spokesperson said that the firm was a “strong and supportive partner to Red Lobster,” noting that under its ownership, the brand opened eight new restaurants in five new countries and three in the U.S., invested more than $100 million in kitchen renovations and restaurant technology, and improved food quality, service and value. It also supported Red Lobster’s investments in off-premise prior to the pandemic, which became crucial when dining rooms were shut down in 2020, the spokesperson said.

In 2016, Thai Union Group acquired a 25% stake in Red Lobster from Golden Gate with the goal of growing its own direct-to-consumer seafood business. Four years later, the longtime Red Lobster supplier led a group of international restaurateurs and members of Red Lobster’s management in buying the rest of the brand from Golden Gate. Echoing the PE firm's outlook from six years earlier, Thai Union emphasized the “tremendous” long-term opportunity ahead for Red Lobster and aired plans for development both in the U.S. and overseas.

Like many full-service restaurants in 2020, Red Lobster was in the midst of a pandemic-driven transformation. Under its long-tenured CEO, Kim Lopdrup, it had amped up its off-premise business as well as digital initiatives like its My Red Lobster Rewards loyalty program. Sales jumped by 31% in 2021, according to Technomic data, as customers both returned to dining rooms and continued to order takeout at a steady clip. 

That June, Lopdrup announced plans to retire after 14 years in charge—a period that included three turnarounds, according to a press release. His parting words suggested Red Lobster was in a good place coming out of the pandemic, with a pipeline of new initiatives, strong leadership, a newfound off-premise revenue stream and “the best menu we’ve ever had.”

Waiting in the wings to replace him was Kelli Valade, the CEO of industry data firm Black Box Intelligence who had previously orchestrated a turnaround at Chili’s Grill & Bar, where she was COO and then president for more than eight years. Valade in a statement called Red Lobster’s future “very bright.”

She spent the ensuing months putting together an executive team that included restaurant veterans CMO Patty Trevino, CFO David Schmidt and CIO Cijoy Olickal. Then in April 2022, Valade suddenly resigned. She was named CEO of Denny’s a month later. Schmidt soon followed. It was a glaring sign that something wasn’t right at Red Lobster.

Another turnaround

For Thai Union, the Orlando-based seafood chain had indeed become a problem. Red Lobster lost $33 million in 2022 amid slumping traffic and rising food and labor costs. Sixteen struggling restaurants permanently closed their doors. And the seafood supplier began taking a more hands-on approach at its lone restaurant holding.

“Before, it was really managed by our other partners,” Thai Union CFO Ludovic Garnier told investors during an earnings call last March, according to a transcript from AlphaSense. “But now, since the beginning of the year, we really started up in the management.”

Thai Union executives began visiting restaurants to get a sense of the chain’s challenges. They found spotty operations and a menu that lacked the value options cash-strapped consumers were looking for. At the same time, menu prices had apparently not been adjusted to keep pace with soaring inflation. 

Despite the mounting issues, Thai Union said it was intent on fixing Red Lobster. “Our priority is to turn around the business,” Garnier said.

Targeting traffic

In May, Thai Union greeted investors with some good news: Red Lobster had turned a profit in the first quarter. Historically its strongest three-month period of the year, Q1 includes Valentine’s Day as well as the chain’s tentpole Lobsterfest event.

It helped that the company was also able to get costs under control. It raised menu prices 10% to offset inflation, and the price of core items like lobster, shrimp and crab was coming down. Though Thai Union was still projecting a loss for the year, executives were optimistic. Red Lobster was on track to at least meet expectations, they said.

The next order of business was driving traffic. “We have to entice more customers to come to our branches,” said Chansiri.

The company laid out a number of strategies to get more guests in the door, including adding more value-priced options to the menu, improving training and execution, refreshing older restaurants and firing up marketing after a pandemic wind-down. 

The plan was almost identical to what many other full-service restaurants were doing as they battled for increasingly price-conscious consumers.

“Restaurant chains are reacting very strongly,” Garnier said. “They are very aggressive on the promotion and they are always trying to attract, giving large portions at a cheap price.”

A bold proposition

By August, Thai Union executives said they were more confident than ever that Red Lobster could be saved. A labor model change—increasing servers’ coverage from three tables to 10, with more time on the floor—had improved service, they said. Quality and cleanliness scores were also on the rise.

The chain still lost money, but its losses narrowed, largely thanks to higher menu prices: Average customer spend had risen 32%, to $33 a head, compared to $25 before inflation set in. In a sign that it was serious about its Red Lobster efforts, Thai Union said it was sending six more employees stateside to help with financing, strategy, operations and procurement.

And though traffic continued to fall, the company had come up with a new menu offering that it believed would help reverse the slide: All-you-can-eat shrimp, all day, every day. Previously available only on Mondays, Red Lobster put Endless Shrimp on the permanent menu in June at an attractive price of $20.

“Here we have a very, very bold proposition for the consumers in the U.S.,” Garnier said. “It's $20, so it's really affordable. … The profitability will be decreasing a bit because we are decreasing the overall check. But we do expect the situation to improve overall.”

And in September, the chain finally named a permanent CEO, nearly a year and a half after Valade resigned. Horace Dawson, Red Lobster’s general counsel since 2014, took the reins amid what he described as “an important time for our brand.”

“We are continuing to evolve our menu and guest experience to give our guests more of what they want every time they visit one of our restaurants,” he said in a statement at the time.

Too much shrimp

But with Endless Shrimp, Red Lobster gave guests perhaps too much of what they wanted. Rather than accelerate the brand’s momentum, the discount moved the chain backwards.

“We are back to a challenging situation at Red Lobster,” Garnier told investors in November. 

More customers cashed in on $20 bottomless shrimp than Red Lobster was expecting. Traffic rose 4% in the third quarter as a result, but it came at a loss of more than $11 million. The performance forced Thai Union to harshly downgrade its expectations for the year to a total loss of $20 million, from the previously projected $14 million. 

“We knew the price was cheap, but the idea was to bring more traffic in the restaurants,” Garnier said. “We need to be much more careful regarding what are the entry points and what is the price point we are offering for this promotion.” Thai Union elected to keep the deal on the menu, but raised the price to $25. 

Despite the adjustment, Red Lobster’s losses widened in the fourth quarter. It ended 2023 more than $22 million in the red.

Giving up lobster

In January, just five months after it said its turnaround plan was working, Thai Union gave up on Red Lobster. It announced in a press release that it was exiting its investment in the chain, citing industry headwinds, higher interest rates and rising costs.

“After detailed analysis, we have determined that Red Lobster’s ongoing financial requirements no longer align with our capital allocation priorities and therefore are pursuing an exit of our minority investment,” Chansiri said in a statement. 

Thai Union recorded a $530 million impairment charge to get the seafood chain off its books. A month later, it was taking the first steps toward selling Red Lobster. But it had stopped putting money into the brand, and it had little hope of reaping any returns on its investment

“We're not expecting to get anything much from the sale,” Chansiri told investors. “So you don't need to expect any one-time gain from Red Lobster.”

As far as the chain's more recent performance, Garnier said only that the top line was “doing OK,” while it was still “facing some challenges in terms of profitability.” The executives were clearly eager to move on. 

“Other people stop eating beef,” Chansiri said. “I'm going to stop eating lobster.

In March, Horace Dawson retired after six months as Red Lobster’s CEO. He was replaced with Jonathan Tibus, a restructuring expert who has led a number of restaurant chains through bankruptcy. 

In a statement, Tibus said he was excited to take on the challenge.

Members help make our journalism possible. Become a Restaurant Business member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.

Multimedia

Exclusive Content

Financing

Podcast transcript: Virtual Dining Brands co-founder Robbie Earl

A Deeper Dive: What is the future of digital-only concepts? Earl discusses their work to ensure quality and why focusing on restaurant delivery works.

Financing

In the fast-casual sector, Chipotle laps Panera Bread

The Bottom Line: The two fast-casual restaurant pioneers have diverged over the past five years, as the burrito chain has thrived while Panera hit a wall. Here's why.

Food

How Chick-fil-A's shift on antibiotic-free chicken signals an industry evolution

Chick-fil-A was a No Antibiotics Ever brand, but now its standards are more in line with KFC and others. Will consumers understand the nuanced difference?

Trending

More from our partners