Emerging Concepts

Steering Clear of a Similar Fate as Red Lobster’s

Red Lobster has been front and center in the news media for the last week. What did they do to make the near-limitless headlines? They closed almost 90 restaurants in 27 states, auctioned off equipment, and ultimately filed for Chapter 11 bankruptcy on May 20. Many experts in the industry blamed their demise on the promotions that gave away the house and the bad management involved in those decisions. 

Some compared it to the “Live for Now” marketing campaign of PepsiCo and Bud Light’s fiasco that started on April Fool’s in 2023. The latter led to a 25% year-over-year drop and losing its position as the market share leader. 

So, the question remains: what happened? Could a promotion like Endless Shrimp for $20 take a major 56-year-old behemoth down? According to Restaurant Business, while the offer increased traffic by 4%, its popularity played a significant role in Red Lobster’s $19 million loss in the first nine months of 2023, with $11 million of those losses occurring in Q3. One of the contributing factors was then-CEO Paul Kenny’s decision to change the limited-time promotional item to a permanent menu fixture despite other management team members disagreeing. 

Lesson Learned or Not

In 2003, the company set out to compete with cheaper competitors such as Panera by promoting an all-you-can-eat “Endless Crab.” Crab prices rose, and the chain ended up losing millions. Sound familiar?

Since 2019, their yearly customer count has decreased by about 30%. Their adjusted earnings, or EBITDA, fell by over 60% over the last year.

Simplify and Sell

Currently faced with $300 million in debt, the chain’s 500-plus restaurants will continue to operate while the brand reorganizes. As part of the restructuring agreement, lenders will provide $100 million to support their operations. 

According to ABC News, they have entered a “stalking horse” agreement, which means they plan to sell to a company created and controlled by its lenders. A stalking horse bid determines the minimum price for a sales auction. This auction is set for July 23.

Other Chains in Trouble

As the biggest seafood chain in the U.S., their fall was extra sensational. Other brands are following suit, but due to their smaller footprint, they are going out a little quieter than the mega Red. 

Tijuana Flats, the Florida-based Tex-Mex brand, shut 11 restaurants after declaring bankruptcy. The remaining units, about 80, are being sold. Established in 1995, it made its way to the top with good food and a laid-back vibe, ultimately becoming one of the top chains in the seriously competitive Mexican food sector. 

Other chains announcing multiple closures include Cracker Barrel, Applebee’s, TGI Friday’s, and Boston Market.

Additional Headwinds for the Brand

Red Lobster’s demise also revolved around expensive leases. Golden Gate Capital, a San Francisco private equity firm, bought Red Lobster from Darden Restaurants for $2.1 billion in 2014. Red Lobster was now on its own, separated from the other restaurants in the Darden group, including Olive Garden, Longhorn Steakhouse, Yard House, and Capital Grille. 

To obtain the needed cash for the sale, the firm sold off the company’s real estate to American Realty Capital Properties and then leased the restaurants back. The result was added rent expenses that caused significant challenges when sales fell.

The other issue was a restaurant that remained stagnant despite changing consumer sentiment. While Baby Boomers remained committed to the brand, Red Lobster didn’t do enough to bring in the younger generations, whether through upgrades, food quality, or marketing. Menu decisions weren’t based on consumer preferences but on executives’ opinions. 

Add in the increasing costs of operating a restaurant, with food and labor taking the lead, and a tailspin almost seemed inevitable. When they made choices like switching servers from waiting on three tables to 10 to cut costs, the foundation shifted further. 

How to Steer Clear of a Similar Fate 

The lessons learned from a once iconic brand going down seem fairly clear. Keep a keen eye on costs, but not to the point of impacting the customer experience. Stay abreast of consumer preferences and sentiment and understand your marketing strategies. And a limited-time offer, designed to get people into the doors, should be just that—for a limited time.

At Emerging Concepts, we help leading restaurants and entertainment concepts strategically expand. Our real estate and data science experts find locations that optimize profits while minimizing risks, taking into account target markets, competitors, supply chains, labor, and demand. Using deep learning models, we create a Market Potential Map illustrating optimal locations, estimated sales, and the units a particular market can support. We also take the reins for our clients, negotiating with landlords and developers.

To learn more about strategically and thoughtfully taking your brand to the next level, contact Emerging Concepts today.

Author:
Categories:
Emerging Concepts
  • Subscribe to our latest insights

chatsimple

Are you capital raise ready?