May 24, 2024
Red Lobster, the popular seafood restaurant chain that has been around since 1968, has recently filed for bankruptcy. The company plans to sell its business to an entity formed and controlled by its existing term lenders.
Even though Red Lobster recently shut down 50 locations across the U.S., the company has said that its restaurants will remain open during the Chapter 11 process.
Advertisement
In a press release, CEO Jonathan Tibus stated that filing for bankruptcy is “the best path forward” for the restaurant chain. The company has received a $100 million financing commitment from its existing lenders to continue operating during the restructuring.
Endless Shrimp to blame?
Some observers have suggested that the company’s financial woes stem from its $20 “Endless Shrimp” promotion. This popular deal allows customers to enjoy unlimited servings of shrimp prepared in various styles for a fixed price of $20.
While the promotion can be a significant draw for customers, encouraging them to visit and dine more frequently, it also puts pressure on profit margins. As customers indulge in more shrimp than anticipated, the expenses associated with sourcing and preparing large quantities of seafood can outweigh the revenue generated from the fixed price.
According to Red Lobster’s filing, “Endless Shrimp” was historically a limited-time promotion. However, former CEO Paul Kenny decided to add it as a permanent menu item in May 2023 despite “significant pushback” from management.
As a result, the decision has resulted in both operational and financial issues for the restaurant chain, costing it $11 million.
At the same time, the filing claimed that the promotion also saddled Red Lobster with “burdensome supply obligations, particularly with its equity sponsor, Thai Union.”
Thailand-based seafood producer Thai Union is the majority owner of Red Lobster and also serves as a supplier to the restaurant chain.
Advertisement
Red Lobster said that Thai Union “exercised an outsized influence” on the restaurant’s shrimp purchases.
Must Read
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — are you doing the same?
- Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how
- Robert Kiyosaki says this 1 asset will surge 400% in a year and begs investors not to miss this ‘explosion’
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
‘Unfavorable’ leases
According to management, another operational challenge faced by Red Lobster is “unfavorable” leases.
In particular, the company noted that “a material portion” of its leases are “priced above market rates.”
Red Lobster currently leases 687 locations, which results in significant rent expenses. In 2023, the company reports its lease obligations totaled $190.5 million, including over $64 million related to what it calls “underperforming locations.”
Historically, the restaurant chain didn’t have this much rent to pay as it used to own the real estate. However, when former owner Golden Gate Capital acquired Red Lobster for $2.1 billion in 2014, it sold the real estate to American Realty Capital for $1.5 billion in a sale-leaseback transaction.
This meant Red Lobster sold its owned real estate and simultaneously leased it back, transitioning from being a property owner to a tenant.
Advertisement
And these days, rent has become quite a burden.
“Given the company’s operational headwinds and financial position, payment of lease obligations associated with non-performing leases has caused significant strains on the company’s liquidity,” Red Lobster’s filing said.
Inflation
Inflation impacts everyone by eroding the purchasing power of money — and that can influence consumers’ dining choices.
“Because of inflationary pressures, restaurant menu prices across the industry have risen significantly faster than grocery and other consumer prices,” Red Lobster’s filing stated.
The company noted that because labor inflation tends to run ahead of commodity inflation, restaurant prices generally rise faster than grocery prices. As a result, “consumers are less inclined to eat out.”
Rising minimum wages in the U.S. have presented another challenge for Red Lobster. The company noted that 50% of states have increased minimum hourly wages in 2024, and for restaurants, the increase in average hourly wages has outpaced their ability to raise menu prices. This has put further pressure on restaurant margins.
Red Lobster isn’t the only one in the industry expressing concerns about the impact of rising minimum wages on its business. After California raised the minimum wage for employees at fast food restaurants to $20 an hour earlier this year, one restaurant owner estimated that the new legislation would cost him $470,000.
You May Also Like
- Turning 50 with $0 saved for retirement? Most people don’t realize they’re actually just entering their prime earning decade. Here are 6 ways to catch up fast
- Inside a $1B real estate fund offering access to thousands of income-producing rental properties — with flexible minimums starting at $10
- Vanguard’s outlook on U.S. stocks is raising alarm bells for retirees. Here’s why and how to protect yourself
- Here are 5 easy ways to own multiple properties like Bezos and Beyoncé. You can start with $10 (and no, you don’t have to manage a single thing)
Jing is an investment reporter for Moneywise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
