The Real Reasons Red Lobster Went Bankrupt

May of 2024 brought the news that Red Lobster was joining the growing list of national companies filing for bankruptcy. The beloved national chain dating back to 1968 enjoyed the distinction of being the leading seafood restaurant in the country. Howver, recent challenges proved overwhelming for the popular eatery chain.

Red Lobster attempted to stay current over the years by adding new menu offerings such as "lighter seafood dishes to cater to health conscious consumers," according to company CEO Jonathan Tibus per Restaurant Dive. The popular chain created beloved seasonal events including Lobsterfest and Crabfest featuring variations on these seafood items for limited time offerings.

Red Lobster got creative in these efforts to expand the company's reach. It started offering delivery through Doordash to increase delivery sales. Red Lobster also launched a line of retail products, such as Cheddar Bay Biscuits, that customers could buy at the grocery store then bake in their homes.

Even with all these notable efforts, the $2 billion company saw its finances begin to precipitously decline starting in 2019. A five-year saga of declining traffic, undependable sales, and shrinking cash ensued. When 2023 began, Red Lobster found itself forced to delay payments to vendors in order to hold on to cash reserves.

Frequent changes in leadership were only hampering Red Lobster's efforts to steady the ship. A new interim CEO Paul Kenny took over from the serving prior CEO Kelli Valade, who lasted under a year in the role. Since then Jonathan Tibus has stepped into the role to do damage control, trying to salvage as much of the struggling restaurant chain as he can.

Management hoped the chain could catch up in the typically strong holiday December restaurant season. Yet despite its best efforts, the customer base did not come through sufficiently. These cash flow problems, inflationary impacts, misguided endless shrimp promotions, and a key vendor betrayal turned out to be impossible challenges for Red Lobster to overcome.

CEO Jonathan Tibus explained that "by the end of 2023 it became clear that the company's liquidity crisis would not be cured by the seasonal bump in revenue." Key problems began with a plummeting restaurant guest count that plunged by 30% from 2019. The abysmal customer numbers only marginally improved following the COVID-19 pandemic.

While net sales grew by about 25% in years 2021 to 2023, these sales dropped over 12 months from mid 2023 to 2024. EBITDA figures crashed by over 60% in the first six months of 2024. Such disappointing results "all but erased any ground Red Lobster recovered following the pandemic," stated Tibus to Restaurant Dive.

The company also suffered from higher wage payouts thanks to inflation, poorly performing restaurant locations, and leases that disadvantaged the firm. For fiscal year 2023, Red Lobster announced losses of $76 million. The company was forced to pay back $27 million in debt after changing over to a new vendor-managed inventory system. With these losses and payments of $32 million in interest, the restaurant chain watched its cash stockpiles dramatically decline to under $30 million.

Two final blows were too much for Red Lobster to financially overcome. Their first critical mistake was the ill-fated "Ultimate Endless Shrimp" promotion. Kenny made the fatal decision to permanently offer the all you can eat shrimp promotion at $20, even "despite significant pushback from other members of the company's management team," per Jonathan Tibus in Restaurant Dive.

During the Endless Shrimp offer, Red Lobster doubled down on the money loser with an unusual level of in-store promotions. Tibus explained that "this decision created both operational and financial issues for the debtors (Red Lobster), costing the debtors $11 million and saddling the company with burdensome supply obligations, particularly with its equity sponsor Thai Union."

The problems with Thai Union could have been largely avoided had Red Lobster not made another poor decision regarding its supply chain. Thanks to the extended endless shrimp promotion, it could ill afford to have things go wrong with shrimp deliveries. This is just what happened next.

Red Lobster's ensuing struggle with shrimp supplier Thai Union became the restaurant's second devastating debacle. Former Red Lobster CEO Paul Kenny had undertaken a quality review. He then subsequently chose to cut two key breaded shrimp providers from the chain's suppliers.

The result led to total dependence on Thai Union supplying Red Lobster's shrimp. Thai Union took advantage of the supply and demand imbalance in the following period. Soon Red Lobster was struggling under the higher costs for critically necessary shrimp inventory because of a lack of supplier competition.

In February of 2024, Thai Union made matters even worse for Red Lobster when it ceased supporting the restaurant with capital through divesting from the chain. A combination of bad corporate decisions and poor operating environments have nearly destroyed the iconic restaurant as the supplier problems developed and worsened. The hope for seafood lovers around the country is that the end of Chapter 11 bankruptcy protection will deliver a revitalized and leaner Red Lobster without it having to close many locations.

Red Lobster has managed to grow through decades of changes in the national restaurant scene. Founder Bill Darden wanted his high-quality seafood to be affordable and readily available to all Americans, even those who lived away from the country's coastline. His company turned the original family-run location in Lakeland, Florida into an empire.

The company has experienced a five-year run of problems, but this is not the end for Red Lobster. Red Lobster's company website states that there are now more than 700 locations around the U.S. and internationally. It has closed 93 locations that were never well-trafficked or profitable. This is all part of the ongoing plan to reduce costs.

CEO Jonathan Tibus continues to work on other elements of his "three-prong strategic priority plan designed to improve the company's operations." Besides cost cutting, he is working to transform Red Lobster into both a terrific place to eat and to work. Red Lobster is also undertaking a strategy to update its targeted investments and IT systems. Finally, it has addressed issues that sent the company down the ill-fated financial path in deciding to become more sensible with product promotions like endless shrimp offerings.