Restaurant chains that built their brands around a dine-in experience have suffered since the Covid pandemic. During the period where social distancing required eateries to close their dining rooms (or greatly limit their capacities), some companies simply weren't set up to pivot to an all-delivery model.
That left a number of restaurant operators taking on added debt that they have not been able to recover from once the pandemic-related rules were relaxed. In addition, restaurants have been dealing with inflation, higher ingredient prices, and consumers who are worried about the economy.
Related: Discount retailer faces Chapter 11 bankruptcy or liquidation
People have generally been eating out less at least partially because supermarket prices have fallen from inflation and supply chain problem-driven highs while restaurant prices have inched up.
"Historically, when commodity inflation runs ahead of labor inflation, grocery pricing pushes ahead of restaurants," Citi analyst Jon Tower wrote in a not to clients. "When labor inflation runs ahead of commodity inflation, restaurant prices tend to outpace grocery pricing."
Restaurants have been spending more on labor as 22 states raised their minimum wage on Jan. 1, 2024 while a tight labor market has generally pushed service industry wages higher. It's a difficult situation for restaurant operators with one popular brand that operates 650 restaurants globally showing signs that it might be in real trouble.
Red Lobster brings in a restructuring expert
Red Lobster, a sit-down seafood chain, has seen multiple chief executives make the same mistake. Edna Morris lost her job as president of the chain after she misjudged how much customers would eat during a $22.99 all-you-can-eat crab promotion.
The chain lost millions on her miscalculation.
“It wasn’t the second helping on all-you-can-eat but the third,” then Chairman Joe R. Lee told analysts, during a Darden earnings call back when that brand owned Red Lobster.
“And maybe the fourth,” added former Chief Operating Officer Dick Rivera.
Amazingly, the company repeated the same mistake under Its current owner Thai Union Group.
The seafood chain used an all-you-can-eat shrimp offer as a way to bring people into the restaurant. It worked, but at $20, it was priced too low for the company to make money on the deal. That deal is still on the menu, but the price has been raised to $25.
Now, the struggling chain has replaced its CEO Horace Dawson, who is retiring, with Jonathan Tibus, managing director of management consultant Alvarez & Marsal. Tibus is considered a turnaround expert who helped Kona Grill and Krystal through their Chapter 11 bankruptcy filings.
Chapter 11 filing looms for "zombie" brand
Thai Union Group has already shared that it intends to divest itself of the Red Lobster brand.
“During the past years, the combination of Covid-19 pandemic, sustained industry headwinds, higher interest rates and rising material and labor costs have impacted to Red Lobster business resulting in prolonged negative financial contributions to the company and its shareholders,” Thai Union said in a Jan. 16 media release. “...After detailed analysis, the board of directors has determined that Red Lobster’s ongoing financial requirements no longer align with our capital allocation priorities and therefore the company is pursuing an exit of the minority investment.”
FoodserviceResults CEO Darren Tristano believes the company is headed toward a resolution.
“It appears that Red Lobster is planning for a turnaround, bankruptcy, or fire sale,” he told SeafoodSource.
Red Lobster is now considered a “zombie brand,” Tristano said.
“[Red Lobster] continues to wander aimlessly looking for direction,” he said.
Thai Union Group has said it does not expect to make any money on a sale of the brand and has already taken a $527 million writedown.
"Because Red Lobster has not yet named a new buyer, it would appear that bankruptcy would be the best option followed by a sale after the balance sheet gets cleaned up," Tristano added.
ALSO READ:
- Discount retailer faces Chapter 11 bankruptcy or liquidation
- Costco makes a huge change to a signature food item
Red Lobster has been operating since 1968. The company started as a single, family-owned restaurant in Lakeland, Fla., and later grew to nearly 800 locations worldwide.
Thai Union, one of the largest seafood companies in the world, did not immediately respond to a request for comment.
