Red Lobster has been a sinking ship dragged down not by clawed angry crustaceans seeking revenge, but by its own hubris. The chain, as has been widely reported lost $11 million because it misjudged how many helpings of shrimp customers would order during its “Ultimate Endless Shrimp” promotion.
That’s a lesson the company should have understood because it has happened before. Edna Morris lost her job as president of the chain in 2002 after she misjudged how much customers would eat during a $22.99 all-you-can-eat crab promotion.
Related: Another popular fast-food chain considers Chapter 11 bankruptcy
And while that’s over 20 years ago and the company has changed owners multiple times, you have to assume someone left a sticky note or some other warning that people will eat a lot of seafood at a low price if given the chance. Seeing Red Lobster lose money on a second low-priced all-you-can-eat promotion would be a bit like trusting the same company to build another Titan submersible or Disney bringing Johnny Depp back for a “Lone Ranger” sequel.
Ultimate Endless Shrimp did not lead Red Lobster to a Chapter 11 bankruptcy filing on its own. Instead, it’s just one of many mistakes made by the company’s multiple management groups over the past 20-plus years.
Consumers have shown that they want reasonably-priced seafood, but Red Lobster’s latest bankruptcy filing shows that its situation may go from bad to much worse.
Red Lobster shrimp and a lobster tail are seen on a plate. Lead.
Image source: Red Lobster
Red Lobster may close a lot more restaurants
A Chapter 11 bankruptcy gives a company facing financial challenges a chance to negotiate with its creditors. In Red Lobster’s case, the chain, which has already closed 93 locations, could end up closing over 100 more if its landlords won’t negotiate lower payments.
It’s possible that some of the chain’s landlords could be willing to make deals because the many recent retail closures could make it hard to find a new tenant. In some markets, the landlords might be willing to take less because it could be an extended period of receiving no rent if Red Lobster closes in their location.
The company, in a new court filing, showed that 228 total restaurants cannot make money with their current lease situations. With the 93 Red Lobsters already closed, that suggests that company could shutter an additional 135 restaurants.
Red Lobster Times Square location, a flagship for the chain, is one of the locations on the list and it’s in extreme danger of closing as its landlord wants to more than double its rent to $2.2 million, the New York Post reported.
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The restaurant chain has stopped offering “Endless Shrimp” and is currently in its annual “Crabfest” promotion. That’s a time of year where Red Lobster adds multiple crab dishes to its menu.
Red Lobster could head to a different court
Red Lobster does plan to survive its Chapter 11 bankruptcy.
“This restructuring is the best path forward for Red Lobster. It allows us to address several financial and operational challenges and emerge stronger and re-focused on our growth. The support we’ve received from our lenders and vendors will help ensure that we can complete the sale process quickly and efficiently while remaining focused on our employees and guests,” CEO Jonathan Tibus said in a press release.
The chain is currently considering taking action in a different kind of court, according to Sarah Foss, global head of legal at Debtwire, an ION Analytics company, in an email to TheStreet.
“Florida-based seafood restaurant chain Red Lobster recently entered Chapter 11 reeling from what CEO Jonathan Tibus characterizes as several ‘failed or ill-advised strategic initiatives,’ including the restaurant’s ‘Ultimate Endless Shrimp’ promotion,” she wrote.
Related: Popular movie theaters owner files Chapter 7 bankruptcy
That decision, she added “burdened the company with onerous supply obligations to equity sponsor and supplier Thai Union.”
This could lead the chain’s current leadership to sue its former owner (and current stakeholder) Thai Union.
“Red Lobster is evaluating whether to bring litigation against Thai Union and its former CEO and how their actions in connection with these initiatives contributed to the company’s financial woes. Specifically, the company is likely considering whether the promotion and development of the ‘Ultimate Endless Shrimp’ promotion was a waste of corporate assets and involved a breach of the former CEO’s fiduciary duties to the company as well as unjust enrichment on the part of Thai Union, among other potential claims,” Foss added.
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