The Journal. - Red Lobster's New CEO Plots Its Comeback

Episode Date: September 24, 2024

This month, Red Lobster emerged from bankruptcy. At the helm of the restaurant chain is its new CEO, 35-year-old Damola Adamolekun. Ryan Knutson talks to Adamolekun about what brought about Red Lobster’s decline and his plan to revitalize the company.  Further Listening: - McDonald’s Wants To Offer Quality And Value. Can It Do Both?  Further Reading: - The 35-Year-Old CEO Plotting Red Lobster’s Comeback  - Red Lobster Exits Chapter 11 Bankruptcy With New Owners, CEO  Learn more about your ad choices. Visit megaphone.fm/adchoices

Red Lobster It's been a staple of strip mall casual dining for more than 50 years. You might remember some of those classic ads. Or we can fry a heap of red strips, put them on a plate, pop up shrimp. Home of the free Cheddar Bay biscuits, popcorn shrimp, the Admiral's Feast, brownie overboard, and endless shrimp. Red lobster for the seafood lover in you. But over the past few years, red lobster has been floundering.

It faced declining sales in aging restaurants. And this spring, it looked like red lobster was cooked. — Red lobster is officially underwater. The restaurant chain is filed for Chapter 11 bankruptcy. — America's largest seafood restaurant chain, Red Lobster, is in a serious financial pinch. — Branches in at least 27 states suddenly closing. — The seafood chain was hundreds of millions of dollars in debt. Dozens of restaurants were turning off the lights.

Some were auctioning off the microwaves, friars, and lobster tanks. Amid all these problems, one very important customer started dining at Red Lobsters across the country. He'd show up kind of incognito, sample the lobster tails, try the crab legs. And so when you'd go in, would you normally sit by yourself? Would you order the same thing? Like, kind of describe for me what it was like. If I'm by myself, I'll sit at the bar. If I'm with some friends, I'll sit at a table and just feel the experience.

What's the ambiance like? What's the lighting? What's the music that's playing? What's that greeted? Is there even a host? What was I quoted in terms of a wait time? What's the lighting? What's the music playing? What's that greeted? Is there even a host? What was I quoted in terms of a wait time? What was it actually? And the food? Overall, the food I thought was quite good and relatively consistent, right? All things considered, given what the business has been through over the last few years,

especially. It's no secret that this has been a story of underinvestment. This month, Red Lobster is emerging from bankruptcy with new owners. And that mystery diner? Turns out he's the new boss. Do you mind just doing what we ask all of our guests to do, which is introduce yourself? Absolutely. My name is Damola Adam Lakin.

I'm the CEO of Red Lobster. And it's on us to make this what I think can be the greatest comeback in the history of the restaurant industry. Welcome to The Journal, our show about money, business, and power. I'm Ryan Knudson. It's Tuesday, September 24th. Coming up on the show, can a new CEO finally crack Red Lobster's problems? What's 2FA security on Kraken?

Let's say I'm captaining my soccer team and we're up by a goal against, I don't know, the Burlington Bulldogs. Do we relax? to crack. Go to kraken.com and see what crypto can be. Not investment advice. Crypto trading involves risk of loss. See kraken.com slash legal slash ca dash pru dash disclaimer for info on Kraken's undertaking to register in Canada. If you were a detective investigating what killed Red Lobster, a leading suspect might be shrimp. Ultimate endless shrimp is here. Endless shrimp is kind of a big deal.. Ultimate endless shrimp is here. Endless shrimp is kind of a big deal. It's endless shrimp at Red Lobster.

Indulge in endless choices. Last year, what was once an occasional promotion was made permanent. Customers could come in all day every day, and for as little as $20, get all the shrimp they could possibly eat. And people were really into it. It set off a bit of a feeding frenzy. I'm Dina. This is my first shrimp. And my goal is to eat 65 shrimps tonight.

And we got some more shrimp. This is how much shrimp you need to eat at Red Lobster for their endless shrimp deal to not only break even, but to profit. They underestimated how much shrimp people can eat. Eat more shrimp. Eat more shrimp. Eat more shrimp. It was, and I don't think this is debatable, a disaster. It cost Red Lobster $11 million in one three-month period. Not long afterward, the largest shareholder in Red Lobster at the time, a shrimp supplier called Thai Union, put the restaurant chain into bankruptcy.

Demola Adamalakan, the new CEO, did not work for Red Lobster during the endless shrimp debacle, but I did have to ask him about it. So when you would go into these Red Lobsters on your sort of undercover tour, would you ever order the Endless Shrimp? I... The Endless Shrimp? Uh, I did. I missed the period where it was a complete free-for-all, where people were leaving with Tupperware tubs full of shrimp, and it was a total operational nightmare.

So it was under control by this point, but yes, I did see what that was all about. How many shrimp could you eat in one sitting? I wasn't trying to max out, my friend, so I can't tell you. Endless shrimp will get talked about as the final nail in the coffin, and it was. That is true.

But you don't get from great to bankrupt by one decision. It's a culmination of multiple decisions across multiple owners that led the company here. In what ways was endless shrimp the nail in the coffin? I'll say three things. Number one, financially it didn't make sense. The cost of the product that was being given away was greater than the cost of the product that the consumers were paying. So they're sort of selling shrimp at a loss. Which isn't a great recipe for business success, right? So there's a simple financial evaluation

that didn't work, right? Two other things that it did, it created an operational chaos within the restaurants, right? So when you have guests that are coming in and ordering one product in that much volume, it puts a lot of stress on the kitchen. Stresses out the operators,

makes it difficult to do their job, ultimately causes turnover, people quit. And then finally, I'll say there's a brand impact. When you're giving away free shrimp, people start to believe that it's not high quality, whether or not that's the case. So why do you think the prior ownership did that? I'm speculating because I wasn't there.

Obviously there's some element of traffic that they wanted to drive, which was successful. Now, not all traffic is good traffic. Just because you get people in a restaurant doesn't mean it's good for the business, right? So I call it empty calories, right? But they did get traffic, so that's one reason. And then, you know, if you read the bankruptcy report,

there's at least speculation that, you know, this was the shrimp supplier that owned the business, right? So there's a case to be made that they benefit in some way or another if a lot of shrimp leaves the building, whatever it's priced at for the restaurant. Right, so like, yeah, the owner that owns the shrimp company, they can just buy as much shrimp from Red Lobster and just make money that way.

Speculating, they haven't said that, but if you read the bankruptcy report, that's certainly a theory. In a statement, Thai Union, the shrimp supplier that used to be the largest owner of Red Lobster, said it had invested hundreds of millions of dollars into the chain. It said its decisions were, quote, conducted in accordance with the highest standards. Demola says Red Lobster's problems didn't begin or end with endless shrimp.

I think fundamentally it's, restaurants require investment to continue to grow, right? You need to invest in the product, you need to invest in the infrastructure, you need to invest in the systems and technology, you need to invest in the people, most importantly. And when that investment doesn't take place, the brand can stagnate and start to decline. Now, first, it's gradual, but gradual declines over many, many years can lead to a significant decrease in overall performance. So you said that Red Lobster was a company that was under-invested in.

In what ways, when you were going to all these Red Lobster locations, in what ways would you see that manifest? Like what were some specific examples that you came across where you saw, boy, that looks like they haven't been spending money on that? Well, the obvious thing and anybody will notice is the physical infrastructure, right?

So it's easy to spot a carpet that looks too old or something that's torn or, you know, a chair that looks like it needs to be replaced. So things like that are pretty obvious. And now the good news is they're pretty also easy to fix, right? If you have the money and you have the dedication to correct it, it's just a matter of organizing your facilities teams and your vendors and your management companies and just dealing with it. Another area where DeMola says Red Lobster was lagging was in technology.

For example, he says the restaurants didn't have those hand-held credit card processors that let people pay their bills at the table. And you know, another example, I walk into a restaurant and I get quoted for 25 minutes wait time by the host, right? Now it ends up being 10 minutes and I wait because I'm dedicated and I'm determined to go there, but a lot of people would leave, right? Now why did that happen? It's easy to kind of say the host made a mistake,

but I know there's technology that will give you quote times based on your capacity, based on how long people have been sitting, based on what the turning times are for your tables. And you can get that answer precisely with technology. Now they don't have that. So that's a systems under investment to me, right? So these things are, again, it takes investment, it takes capital, it takes determination, it takes some training. But once you get that in place,

your quote times become more accurate. People can pay more easily. They're not abandoning tables as frequently. And that improves the whole operation. And then there's the staff or sometimes lack thereof. When DiMolo walked into some Red Lobsters, he says there wasn't even a host there to greet him or a bartender to make drinks. Some of the less busy restaurants cut those positions to save money.

I think that's a mistake, right? Because it creates a bad experience for the customer that creates this virtuous cycle of things consistently getting worse and sales continue to drop and now you have less to invest, now you have to cut another position. So that's a process and people investment decision, right? Where I would say have a host in every restaurant, have a bartender in every restaurant. Are these actual things that you experienced on your tour? Absolutely. Absolutely.

It's frustrating. If you don't know the restaurant business, you'll just sit there frustrated and not understand why. Why is there no host? Why is there no bartender? Oh, they must be understand. What the hell is going on here? Yeah. It's a decision. A lot of these are just decisions. What are you willing to invest in?

So with all the problems that we talked about, why did you want to take this job? The opportunity for impact here is out of this. There's nothing else like it, right? It's an important project. It's an important company. It's an important part of American history. And I want to see it restored. I believe it can be. I think there's a solution here

and I want to be a part of that. So what's Demola's plan to turn red lobster around? That's after the break. Introducing TD Insurance for Business with customized coverage options for your business. Because at TD Insurance, we understand that your business is unique, so your business insurance should be too. Whether you're a shop owner, a pet groomer, a contractor, or a consultant, you can get customized coverage for your business. Contact a licensed TD Insurance Advisor to learn more.

Demola Adamalekian is 35 years old, relatively young for a CEO of a big restaurant chain. He got his start in finance, working in private equity. He made the leap into the restaurant business a few years ago, when the private equity firm he worked at acquired P.F. Chang's and put him on the board. He eventually became CEO there in 2020. At P.F. Chang's, Demola updated systems for digital ordering and to-go dining, a move that paid off massively during the pandemic. And he earned a reputation as someone with

good instincts in the restaurant business. It's this experience he hopes to bring to Red Lobster as its new CEO. But the first thing he'll need is money. There's no way to turn this around without investment. And so the reality is if you can invest and turn this around, there's more value there to the owners than to continue to let it decline, right? And that's just the reality of the situation. Red Lobster's new owners do plan to invest.

The company was purchased out of bankruptcy by a group of its lenders, led by the private equity firm Fortress. They're planning to put more than $60 million into the company. So let's talk about your ideas and your solutions for how to turn this business around. What are like the top, you know,

three or four things on your to-do list? Well, right away, we got to build the executive team. The executive team is depleted right now. I've got positions I need to hire. I want to invest in the restaurants and fix things that are broken and, you know, deal with the carpet that's torn and the HVAC unit that's not working and the kitchen equipment that's dated.

That's starting now. We're not going to wait for that. Demola also said he's committed to getting turnover under control. Number one is investment in people, right? So making sure people are paid well and turnover comes down. Salaries are going to be raising wages? I take an agnostic view to wages. I let the market set the wages is my philosophy, right?

And that's market by market. So the wages in Nashville will be different than the wages in Chattanooga. Are the wages at Red Lobster now adequate or do you think that some markets need to come up? Some markets need to come up. It's market by market. The other thing Demola says he wants to tweak? The menu. It's gotten too big, frankly, right?

There's a lot of non-core stuff there that not only complicates the kitchen, but it confuses the guest, right? When you come in and you get three menus and one has 200 items on it, and I'm exaggerating, but, you know, it's difficult for the ops and it's difficult for the guests. So cleaning up some menu process, creating some discipline, these are the things that we can do to improve the business right away.

Red Lobster raised prices during the pandemic, but Damola doesn't plan on adjusting prices much going forward. Instead, he says Red Lobster will try to promote certain menu items that are more affordable. I mean, Olive Garden does this, right? They have really affordable pasta and they might have some higher priced items, but there's a value item that you can always get, right?

We have that too. We just don't talk about it enough. So that's, that's one thing is to advertise the things that are good value, you know, or you can do promotions, right? Now you have to be careful. You don't want endless shrimp, but there's promotions that make sense, right? To get people some value in the you don't want endless shrimp, but there's promotions that make sense, right? To get people some value in the menu.

So this is the end, by the way, this is the end of endless shrimp. Yeah, I don't want to say anything's forever forever, but the way it was done on an endless fashion without managing, you know, how much is being given away. And yeah, the way it was done, it's certainly the end. Red Lobster has tried to change before. It's had several different owners since 2014, including private equity firms.

And Demola is now the company's sixth CEO in three years. And yet it's still found itself in bankruptcy. How confident do you think people can be that this isn't gonna be another repeat of the same story?? Well the good news here is that from day one there's an understanding of what went wrong and a lot of it was lack of investment and lack of long-term thinking from previous owners and so that that recent history in a way is beneficial because fortunes that are gonna come in and do the same thing. So if you want to win long term and you want to, even if your

plan is to exit in five years, you want to exit, the way to exit is to have a business that people want to own in five years. And the way to do that is to have it beyond this trajectory, right? To be going up. That requires investment. You can't cut your way to success in this business, right? You need to grow your way to success. And people are recognizing that. And I think you're seeing a fresh approach to the restaurant business. So I have to admit something to you, which is that I have never been to Red Lobster as far as I'm aware. Ryan, what's stopping you? We've got to get you out there ASAP. Well, yes. I mean, like, you know, you and I are around the same age.

But what's your plan to try to get people like me to come in and try the restaurant? Well, I think the first thing you can always do is improve the product quality to appeal to new customers. Right. So the first thing is the investments that I want to make in people and service and infrastructure and technology. Number two is marketing more effectively to younger people, which I don't know that we do a great job of now. But the order is product and then marketing, because once the product is great, marketing is more effective. The first step is to speak to our core customers that are there today, and the second step is to expand the tent, and we'll find great ways to do that.

So how long do you think it'll take before you start to see these kinds of changes at Red Lobster, both from a customer point of view and then also from a financial point of view? So it'll take, you know, the better part of a year to make these investments that we want to make. Right. And then on the financial side, you know, we're starting now, but all of that, again, will take some quarters. Right. So I think the, the best way to think about it is the first year is an investment year.

And then after that, you'll start to see meaningful improvement in the financials and, you know, hopefully a great outcome for everybody involved. Red Lobster has closed about a hundred of its locations, meaning it's down to about five hundred and fifty restaurants. Demola doesn't plan to close anymore. He wants to make sure the customers know that Red Lobster is still open for business. The bankruptcy was but one chapter in the restaurant's story. Did you know that lobsters can live to over 100 years old?

I didn't know that. I didn't know that. I'm learning a lot about lobsters, but they're very interesting little creatures. Absolutely. So where would you say that red lobster is in its life cycle? That's an interesting question. I mean, we're 56 years old,

so it's easy to say almost directly halfway through, right? Uh-huh, middle age. A little midlife crisis maybe for Red Lobster? It's easy to say we're in a midlife crisis phase. But listen, it's peaks and valleys in life. It's peaks and valleys in business. And certainly in the restaurant industry,

you'll see a lot of peaks and valleys, right? It's unquestionable that we're coming out of a valley and the goal is to climb to the next peak. There's no reason this business can't be around as long as restaurant businesses exist in America. It's got the foundational elements that you want. You know, without putting a timeline on it, I think this can be a great business for the foreseeable future.

All right. Thanks so much for your time. Really appreciate it. All right. Thank you. Really appreciate it. All right. Thank you. I appreciate it. That's all for today. Tuesday, September 24th.

The Journal is a co-production of Spotify and the Wall Street Journal. Additional reporting in this episode from Heather Haddon. Thanks for listening. See you tomorrow.