Front Burner - Was Red Lobster's fall caused by more than endless shrimp?

Episode Date: May 23, 2024

Red Lobster used to be one of the biggest names in the world of casual dining — but now the restaurant chain is on the brink of collapse as it files for bankruptcy protection. Was its famous "endless shrimp" promotion really too much for the restaurant to handle? Or is this more about the business decisions of a private equity firm and a major Thai seafood company?Business Insider senior correspondent Emily Stewart takes us through the story of Red Lobster's years-long fall from glory — and how it joins a club of other businesses knocked out by private equity.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Jamie Poisson. Wow, that's a lot of shrimp. And red lobster for a limited time, enjoy 30 shrimp. So that right there is a Red Lobster commercial from 1994. And I don't know about you, but it is conjuring up some very specific nostalgia for me. Red Lobster was at one point one of the biggest

names in the world of casual dining. Grilled in lemon pepper. 30 shrimp on one plate, just $8.95. Red Lobster for the seafood lover in you. And kids get shrimp. At its peak, they had over 700 locations, almost all of them in Canada and the United States. And of course, who could forget? If you love shrimp like I love shrimp, Red Lobster's Endless Shrimp is kind of a good deal.

It's finally back with as much shrimp as you want, any way you want it. If Endless Shrimp sounds like too good a deal to be true, you are not wrong. Business has been on the decline at Red Lobster ever since the golden era of casual chain restaurants in the 90s. And on Sunday, Red Lobster filed for bankruptcy protection. While Endless Shrimp certainly did play a role here, the full story has a lot more to do with the profit-motivated financial decisions of the private equity firm that bought the company in 2014, a story that we've seen many, many times before. Emily Stewart is a senior correspondent for Business Insider, and she's going to peel back the layers for us of what ultimately led

to the downfall of Red Lobster. Emily, hey, thank you so much for coming on to the show. Thank you for having me. So we are going to get into the fall of Red Lobster. But first, I just want to talk to you for a moment about the glory days of the restaurant. Like, I don't want to overstate its cultural significance, but there was a time when it was a pretty ubiquitous and popular restaurant, right? Like, I remember going there for birthday dinners. Like, did you go there as a kid? Is this the part where I admit that I have never been to Red Lobster? No, you have never had their cheese biscuits? No, because, you know, I grew

up in an area where there was a Red Lobster in Olive Garden and I was an Olive Garden gal, Olive Garden family, and we went to Italian. So yeah, never really been. I've heard much about it at this point. Kind of feel bad that I missed it. But yeah, I think maybe once. But yeah, never really an Olive or a Red Lobster girl. Okay. Okay. Well, I get, I think maybe once, but yeah, never really an olive or a red lobster girl. Okay. Okay. Well, I get, I actually also get the Olive Garden appeal, so I think you're good. Um, but, but talk to me a little bit about when the picture started to change for red lobster, right? Like when did things start going downhill? Right. So, I mean, to kind of step back a little bit, red lobsterster has been around since the 1960s. It was founded in Florida and grew out of there. It was owned by General Mills for a while. If you think of, you know, the people that make cereals, right? yes, I haven't been in kind of the cultural, I think, zeitgeist. It was kind of like, you know, not McDonald's, but like not a Michelin star, right?

It was like a nice place to go before the prom, like you said, for a birthday, something like that. So in 1995, General Mills spun that off as Darden Restaurants, which also has Olive Garden. And so, you know, in the 80s, 90s, it was it was pretty big. And then what we see sort of in the 2000s is that tastes start to change a little bit, right? Flat sales start to flag people stop going to the restaurant as much. You know, one person I was talking to for this story said, you know, the issue with a red lobster is if you're going out to eat in a group, all it really takes is one person to say they don't like seafood and you're not going there anymore. And so people have sort of aged out of it. You know, I wrote a story about this recently and I was kind of shocked at the amount of emails that I got from people saying, you know, the quality has gone downhill. It's

just really bad. I used to go, but I don't go anymore. And a lot of the stories were the same. I haven't been in 20 years. I haven't been in 15 years. And they wouldn't say why, but they all knew they'd kind of stopped going. Yeah. I guess if you're a business and people are just talking about how they went to you 20 years ago, that's not great for you moving forward. What about the pandemic? Did it really affect Red Lobster, Kind of add to all these headwinds

it was already facing? Yeah, you know, the pandemic was tough for I think all restaurants, but Red Lobster really has had a tough go of it. I was looking at a filing today that says, you know, its annual guest count is down by 30% since 2019. And it's gone up a little bit in 2020 and 2021, but not a ton. You know, its net sales have been up from 2021 to 2023, but they've been declining over the last 12 months. And especially in a moment, I think, with inflation, when people are thinking about where to go, is Red Lobster your answer? I don't know. You know, it's also worth noting that if you really are jonesing for seafood, a lot of steakhouses will offer that now. So maybe you don't have to have that struggle with your partner or your family or your friends over, well, one person doesn't like seafood or five people don't like seafood and three do. You can

all go to the steakhouse. When Red Lobster filed for bankruptcy on Sunday, how much debt was it in? A billion dollars. They're in a big hole. They are in a big hole. I want to talk about some of the other reasons for why sort of beyond consumer preferences and, you know, general trends. I know that this is not the ultimate reason for their demise, but I do feel like we need to take a few minutes to talk about endless shrimp. Because much has been said about this, much has been written about how it might possibly have been like the nail in the coffin for Red Lobster. And so for people that don't know about Endless Shrimp, it was like this occasional promotion that they decided to make permanent about a year ago. And for $20 US, you got to eat as much shrimp as you could like physically eat. And first of all, why did Red Lobster think that that was a good idea? And then how did it go terribly wrong?

Well, why I thought it was a good idea, there is currently drama over that. Basically, last year, Red Lobster said, hey, we're going to do this all the time. You know, it used to be in the once a week, maybe in certain locations or during a week that they would do this endless shrimp all you can eat. And they said, oh, we're going to do this all of the time. And it wound up being a very bad idea business-wise. Something which was different from our expectation is the proportion of the people selecting this promotion

was much higher compared to expectation. They lost $11 million doing this. They also had a lot of restaurants that were running out of shrimp because people were coming in and really taking advantage. Eating all the shrimp. I don't, yeah, I don't know if I'm allowed to recommend, but Luke Winkie at Slate has a very funny story out right now about former servers at Red Lobster, current servers, talking about people coming in and just ordering unimaginable amounts of shrimp because you can sit there for hours. You can hang out. And this was this, you know, the idea was to get people in the door. A lot of people apparently were coming in

and spending hours there and really eating thousands upon thousands of calories of shrimp. All right, we're at Red Lobster and we're about to do end of shrimp. This is my first shrimp and my goal is to eat 65 shrimps tonight. I'm Blake and I'm going to eat 100 shrimp. I'm honestly still really hungry. I can eat more, but they've been only bringing like one skewer at a time now and it takes like 15 minutes, so we're kind of calling it quits. some people have been suggesting that one of the reasons red lobster went so big on endless shrimp was because their biggest stakeholder is a seafood company called thai union and and can you tell me

a bit more about what might have been going on there? Yeah. So Thai Union is a big seafood company that sort of is the one in control of Red Lobster right now. They and a group of other investors formed an investment group called the Seafood Alliance to kind of take over Red Lobster. And what Red Lobster is saying in its bankruptcy filing is that there is a little bit of funny business going on because Thai Union is a seller of shrimp. And so what happened there was when Thai Union says, or not Thai Union, the CEO of Red Lobster said, hey, you know, we should do this endless shrimp deal. And oh, why don't we use Thai Union as a supplier? And so what Red Lobster's new CEO is suggesting is that this wasn't all completely above board, that maybe there was some favoritism, that some other

suppliers had been pushed out, that maybe they weren't getting the best prices and said, you know, we didn't need to do this. And it doesn't seem exactly right that we did this promotion and that we were buying all of this shrimp from Thai Union. Thai Union looks at their investment and Red Lobster says, hey, it's not worth anything in terms of our equity investment, but we can sell them endless shrimp. Maybe this goes well for us and at least is a way for us to make back some of our money. Now, I will say here, Thai Union says, no, no, no, nothing weird is going on here. But, you know, we're going to have to wait and see. And just tell me a little bit more about Ty Union and how they became like the biggest stakeholder in Red Lobster, because this is all part of the story, right, of where Red

Lobster finds itself now. Right. So I think for that, we kind of really back up. So in 2013, Wall Street hedge funds sort of started sniffing around Darden, which was the parent company, again, of Red Lobster, of Olive Garden. And in that moment, Darden kind of panics a little bit in 2014, says we're going to sell the company. And so they sell it to Golden Gate Capital, which is the San Francisco-based private equity firm for $2.1 billion. We will probably go back to them later. In 2016, though, Golden Gate sold a part of Red Lobster off to Thai Union for about $500 million. And then in 2020, Golden Gate said, we're actually out of it entirely. And they sold the rest of it to the Seafood Alliance that was led by Thai Union. And so, you know, Thai Union is a very big company. Another brand that people might recognize is Chicken of the Sea that they also own.

You know, they're a big company based in Asia. They have a lot of seafood. They're a very powerful company in the seafood world. And to some extent, them buying Red Lobster, getting involved in Red Lobster makes sense. I mean, that being said, some of the restaurant analysts I talked to said they didn't really know how to run a fast, casual business. Now, is it all their fault? No, Red Lobster has been struggling for years. But I don't think Thai Union, it's hard to look at it and say, oh, you guys must have done an excellent job given what's happened. Red Lobster's longtime CEO left pretty quickly after they took over and they had two CEOs that came in and came out really quickly. Yeah.

Which makes you always wonder, like, what are people seeing under the hood that they're not lasting? Right. And so I think we should just also mention that back in 2015, the Associated Press and the New York Times did these big investigations into the use of slave labor and the seafood industry, particularly in Thailand, and they found that it was absolutely rampant. Thai Union was one of the main companies that was implicated in those investigations, although I should make clear that they were not the only ones. It was very widespread in the industry. And since that investigation, Thai Union says that they've implemented a new sustainability policy called Sea Change. On their website, they say it incorporates a labor roadmap that promotes safe and legal employment. In the Dragon's Den, a simple pitch can lead to a life-changing connection.

Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo. 50%. That's because money is confusing.

In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Couples. this podcast, just search for Money for Cops. So let's come back now to Golden Gate Capital, who bought Red Lobster in 2014. It's a company that manages money for large private investors, and they generally do that by buying other companies with the intention of making them or their assets more profitable and thus making money for their investors, right? And so selling off a large part of Red Lobster to Thai Union was part of their strategy, right? And just talk to me a bit more about what else they did to the company when they took it over in 2014. Right. So pretty immediately, GoldenGate engaged in a sale leaseback transaction,

which basically means they sold off most of Red Lobster's real estate to a real estate investment company called American Realty Capital Properties. It's not around anymore. And so what that means is before, Red Lobster owned its restaurants, owned its real estates. Well, suddenly now it has leases. That means it has rent to pay. And what it says in the bankruptcy filing is that a material proportion of those leases are above market rates. They cost Red Lobster $190 million last year. And one person I talked to said, listen, this isn't that uncommon in restaurants and retail to do these types of transactions. And a lot of the time it's fine, right? In a world where Red Lobster is doing

banging business and everything's awesome, maybe it can afford those leases, but everything's not awesome at Red Lobster. And so what has happened now is that it can't afford those leases. And so part of the decision on bankruptcy is to say, okay, how can we get out of some of these leases? How can we shut down some of these locations so that maybe some form of Bread Lobster can continue to survive? And Golden Gate got out of their investment in 2020. I reached out to them a little and they said, we did our job. Everything was fine when we left. Hard to say. Obviously, it's not fine. But this is kind of private equity, right? The point of a Golden Gate Capital or any private equity firm is not to run a restaurant, right? That's not what they're trying to do. They're trying to make money for their investors however they can.

And they often do this by stripping companies for their parts, essentially, right? Yes. And is it fair for me to say that Golden Gate, just on the real estate alone, they probably would have made back their initial investment and perhaps even more, right? Yeah, if not that close to it. But I think it was the exact same amount, the sale lease back. That's how they paid for the transaction, basically. So at that point, they've made back their money. They are good to go. And this is often the case with private equity, whatever the transaction. private equity firms are generally not on the hook for most of the debt. The company itself

is on the hook. Can you talk about some other high profile examples where the same sort of thing has happened? You know, I think kind of in the public imagination, probably the best example is Toys R Us, the toys retailer. They were bought by a trio of private equity firms in 2005 for $6 billion. Those private equity firms kicked in a little bit of money, but they borrowed about $5 billion, a little less than that. And it's funny, I was looking through some old stories, and you can look back in 2010, a lobbyist for the Private Equity Council, which is a lobbyist firm for private equity, was telling me how well private equity had done with Toys R Us five years later. Oh, everything's going to be great.

Cut to 2017, seven years later, and Toys R Us is bankrupt. And thousands of people have lost their jobs. All of the stores are gone. It thrilled generations of children. This is the Lego set that I got. But the shelves at Toys R Us stores across the country are now bare. It's something that I grew up with, and to see it now empty, it's just sad and heartbreaking. Toys R Us kind of exists now, and some iteration maybe is going to make a comeback, but it really was kind of poof, one day to the next, it's gone.

I'm not sure if in Canada the retailer Shopko is known. I'm from Wisconsin, so we had it. They went bankrupt in 2019. And part of the issue there was a sale lease back because of a private equity company that had bought them in 2005. Klairs, the retailer, also has gone bankrupt. Mattress Firm has gone bankrupt. Now, I guess I should say here that some companies do wind up okay. Dollar General, the dollar store, was bought by private equity and now is a publicly traded company. But a lot of the time, it goes poorly.

And it doesn't just go poorly in terms of bankruptcy. It goes poorly in terms of what these firms do to these companies. The point is to, like you said, strip them for their parts and make as much money as possible. And it's not necessarily to turn the business around. And especially when these businesses a lot of the time are strapped with so much debt, it's hard to pay off your debt and invest in your business to grow.

Yeah. I'll just note for our listeners in case anybody's hearing you talk about Toys R Us and be like, what? I was at a Toys R Us. Toys R Us swolled off its Canadian division in 2018, I believe, in the aftermath of that bankruptcy. So that is why it still exists as a brick and mortar store here, even after the closure of all of the American stores. But here too, Zellers, the Canadian arm of Sears, very similar kind of stories playing out. It seems like particularly common in like brick and mortar retail, where the players tend to also hold a fair bit of real estate, like which is also what we saw with Red Lobster, right? And so how big of a factor is that? I mean, a lot of it is the real estate is part of it because that's pretty obvious that

it's something that you can get rid of. But you can find these companies, find ways to streamline in all sorts of ways, whether it be doing layoffs or saying they're going to find efficiencies, which a lot of the time is code for layoffs, right? Or shutting down locations. Even at media companies, we see this a lot, where you see a private equity firm take over. You think, oh, well, there goes my job.

And oh, you know, there goes one brand to somebody else. Oh, there goes another brand that's just being shut down. Oh, their brand got sold off to someone in Europe that no one's ever heard of. You know, the point here for them is to just kind of make money. And a lot of the time, too, these firms will do things like have the company that they've acquired take on more debt so that they can pay themselves dividends, which is really icky stuff. And again, if the point is to turn a Toys R Us or a Red

Lobster around, it just doesn't feel like the stuff that is going to help do it a lot of the time. What do you think this trend has meant for like the retail landscape more widely? I mean, it's not great. I think sometimes on this, there is also a reality that you can't just look and say, well, the problem with retail is private equity. The problem with retail is also like Walmart, right? And Amazon, for example. But these are giant competitors where Toys R Us can't survive because people are just buying stuff online now. Some of it is also, you know, e-commerce or in the States, Bed Bath & Beyond, you know, has really been struggling and went bankrupt. And that's not about private equity. That's like it didn't know how to adapt to e-commerce. But I do think it's hard to look at private equity and say,

oh, this is really helping in retail. Oh, yay. It's saved my favorite brand. I think it's pretty hard to find a lot of concrete examples where that really is the case. I know these private equity firms are obviously operating within the laws, right, that exist. But has there been any attempts to stop these kind of situations from happening? I mean, they're pretty lightly regulated. Back in 2019, ahead of the 2020 presidential election here, Senator Elizabeth Warren from Massachusetts had rolled out this Stop Wall Street Looting Act, which wouldn't have gotten rid of private equity, but basically would have made it a less appealing business. The idea was

to take aim at its fee structure. Who's responsible for the debt that it puts on companies that it buys? And what happens in the case of bankruptcy? And I remember at the time kind of talking to people in the private equity industry, and their response was a little bit like, LOL. But it was like, LOL, because this isn't going to happen ever. And they were well aware. There's also always chatter about taking away the carried interest loophole, which is a tax loophole for investment managers that lets them pay lower taxes. That's always being talked about here in the States. Never happens. Maybe someday. But it does seem like if a private equity firm wants to come in and has the money to, you know, it's going to do it.

Bankruptcy doesn't always mean the end of a brand or a company, right? So is it possible, just coming back to Red Lobster here, could Red Lobster make it through this and continue on in some form? Like, could I one day, you know, sit down again at that restaurant, you know, with its brand? Yes. You know, Red Lobster has been closing down dozens of locations. But even if you look at its bankruptcy filing, what it says is, you know, we want to improve operations. We want to simplify the business. Right now it's sold itself off to an entity controlled by its lenders and gotten $100 million in the process to try and stay afloat. So the idea is that it sells itself to someone

who can figure out what to do. And you someday are sitting down and having Red Lobster again, and maybe me for the first time, and we are supporting this business that we do or do not know and love. I hope you do get the chance to try those biscuits, though I feel like maybe I'm really overselling them. Like I'm just remembering them as my eight-year-old self and they're actually probably not very good at all. But yeah, I'll take the memory. I thank you so much for this. This is really great and interesting. Thanks so much, Emily. Lovely. Thank you. Lovely. Thank you. Thank you. All right, that is all for today.

I'm Jamie Poisson. Thanks so much for listening, and we will talk to you tomorrow. For more CBC Podcasts, go to cbc.ca slash podcasts.