Endless shrimp didn’t cause Red Lobster to file for bankruptcy
A series of financial problems including $294 million in debt has led seafood giant Red Lobster to file for bankruptcy.
Red Lobster’s Chapter 11 bankruptcy filing and closing of multiple locations for the Florida-based chain is the culmination of massive debt, a whirlwind of CEOs, controversy over all-you-can-eat shrimp, and a general decline in guests.
Bankruptcy documents filed in the Middle District of Florida show how Red Lobster has suffered in various ways, including a 30% drop in guest numbers since 2019. In a 124-page document obtained by USA TODAY on Tuesday, CEO Jonathan Tebus explains Red Lobster, why the seafood restaurant chain filed for bankruptcy on Sunday and why it supports the decision.
“Recently, the debtors have faced a number of financial and operational challenges, including a difficult macroeconomic environment, a bloated and underperforming restaurant footprint, failed or ill-advised strategic initiatives, and increased competition within the restaurant industry,” Tebus said in the bankruptcy filing. document.
When Tibus was retained as Red Lobster’s chief revenue officer on Jan. 11, prior to being named CEO, he said it was “immediately apparent that Red Lobster’s performance was deteriorating and had been doing so for several years,” according to the filing.
“Red Lobster’s annual guest count is down about 30% since 2019 and has only improved slightly from pandemic levels seen during 2020 and 2021,” Tebus said. “Although Red Lobster’s net sales increased approximately 25% from 2021 to 2023 (which itself represents a modest recovery post-COVID-19), net sales have begun to show a material decline over the past 12 months.”
Red Lobster has $294 million in outstanding debt, according to its bankruptcy filing.
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Red Lobster’s liquidity declined rapidly
Red Lobster suffered a net loss of $76 million during fiscal 2023, according to Tibus. Cash losses, including $31 million from June 2023 to September 2023, caused Red Lobster’s liquidity to decline rapidly, the CEO said in the document.
Red Lobster expected to generate a “significant amount of cash” to recover cash losses by December, but things have not picked up.
“By the end of 2023, it became clear that the company’s liquidity crunch would not be remedied by a seasonal rise in revenue,” Tebus said.
According to Tibus, the Red Lobster business has continued to be successful because:
◾Menu prices are rising throughout the restaurant industry due to inflation, causing potential consumers to feel less inclined to eat out.
◾ The “material portion” of the leases for Red Lobster’s 687 locations are priced above market rates. The company spent $190.5 million on lease obligations, more than $64 million of which was paid for underperforming stores.
◾Operational decisions by the previous management harmed the company’s financial position in recent years.
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Adding an unlimited shrimp menu is being investigated
Tibus points to a significant example of mismanagement involving former Red Lobster CEO Paul Kenny adding unlimited shrimp as a permanent $20 item to the menu “despite significant opposition from other members of the company’s management team,” according to the bankruptcy filing.
Kenny’s decision on endless shrimp cost Red Lobster $11 million and saddled the company with “onerous supply obligations, especially with its investor, Thai Union,” Tebus said in the bankruptcy filing.
Red Lobster is investigating the circumstances surrounding Kenya’s decision, including whether he and the Thai union were behind the supply issues that led to a major shrimp shortage, according to Tibus. He added that restaurants went days or weeks without certain types of shrimp.
The Thai union was also heavily promoted in Red Lobster stores, which Kenney encouraged, Tebus said in the bankruptcy filing. Kenney also eliminated two of Red Lobster’s fried shrimp suppliers, leaving Thai Union with an exclusive deal that drove up the seafood restaurant chain’s costs, the document continued.
USA TODAY was unable to find contact information for Kenny and Red Lobster did not respond to an email requesting it.
“Restructuring is the best way forward.”
To get Red Lobster back on its feet, Tebus said he “developed a three-pronged strategic priority plan.” The plan includes ensuring Red Lobster is a “great place to work” by focusing on employee culture and retention, continuing to provide “consistent experiences and excellent customer service,” and reducing the company’s cost structure without compromising quality, it detailed in the bankruptcy case. Deposit.
After closing and evacuating 93 struggling stores on May 13, Red Lobster is now working to identify and eliminate unproductive spending across all departments, Tebus said. The company has tried to move “financially stressed” store employees to nearby locations and reorganize mid-level management, according to the CEO.
“This restructuring is the best path forward for Red Lobster. It allows us to address many financial and operational challenges, emerge stronger and refocus on our growth,” Tebus said in a statement Sunday night. “The support we have received from our lenders and suppliers will help ensure we are able to complete the sale quickly and efficiently while remaining focused on our employees and guests.”
Contributing: Gaby Houari
“Infuriatingly humble alcohol fanatic. Unapologetic beer practitioner. Analyst.”