It’s been a tough few months for Red Lobster. The seafood chain has struggled to generate a profit and closed locations. It then priced an all-you-can-eat shrimp deal too aggressively, leading to an $11 million operating loss. And now the Bangkok-based supplier that led its acquisition in 2020 wants to sell its stake.
The 718-unit casual dining restaurant chain, in fact, has not done all that well for the past decade. At least when compared with its one-time sister concept, Olive Garden.
Red Lobster, like Olive Garden, was owned by Darden Restaurants. The concepts are somewhat similar, as Red Lobster is more or less a seafood version of Olive Garden, with its own unique free bread item (Cheddar Bay Biscuits versus Olive Garden’s breadsticks) and a similar price point.
Darden generally preferred owning its real estate, in one form or the other. It wasn’t uncommon to see the two restaurants next to one another.
In 2014, beset by activist investors, Darden sold off Red Lobster to Golden Gate Capital. The private-equity firm then did what private-equity firms do: Sell assets.
Golden Gate unloaded much of Red Lobster’s real estate in a $1.5 billion deal.
Sale-leasebacks in and of themselves are not a bad thing. But it also tends to make a restaurant that much riskier, because it then has to pay off a lease. So it was that much less profitable on a per-unit basis.
It’s worth noting that the activist Starboard took over the full Darden board following the Red Lobster deal and then Darden unloaded some real estate of its own in a spinoff. But it was a much smaller amount, about $315 million, and not just restricted to one of its brands.
In fairness, Red Lobster later bought back $210.5 million of that real estate. Still, it sold off the vast majority of its sites.
Comparing Red Lobster’s performance since then is a study in contrasts. The chain and Olive Garden have been on two different paths.
Red Lobster has closed restaurants between 2012 and 2022. Olive Garden has expanded.
Red Lobster’s average unit volumes are down 5% since 2012. Olive Garden’s are up 16%. (That decline is even worse considering inflation over that period is up, uh, well over negative 5%.)
The result of this combination: Red Lobster is a smaller brand than it was a decade ago, with system sales down 6%. Olive Garden, on the other hand, has grown sales by 31%.
To be sure, Red Lobster was slumping before the sale, which is one reason for the pressure on the deal. And we certainly can’t simply blame the sale-leaseback, which in reality just makes a brand risky and doesn’t actually have any impact on whether a brand can sell more seafood.
But it’s indicative of the types of steps that investment firms make: Their goal is to make money, even if it means putting a brand’s future at risk with a massive sell-off of real estate assets. And if brands make a lower operating profit they have less money to make the types of investments that can build sales or improve efficiency.
There are other issues. One of them is that seafood is just difficult and has a generally weaker level of demand than the Italian in which Olive Garden specializes.
Another big one is the simple fact that the sale removed Red Lobster from the Darden umbrella.
Darden has long been a strong restaurant operator and in the aftermath of the sale is improved those operations, which has led to the generally strong performance of Olive Garden since then.
Red Lobster, on the other hand, has been a standalone brand. It no longer had the massive support system that it had for so long and didn’t have quite the bench of talent of the multi-concept Darden.
If anything, Red Lobster’s challenges in the decade since the Golden Gate sale is an argument for multi-brand ownership, particularly when the full-service sector is so uncertain. But financial engineering didn’t exactly help matters.