Red Lobster, the well-known seafood chain, finds itself in dire financial straits following a prolonged $20 endless shrimp promotion.
The promotion, intended as a permanent addition to the menu, has proven catastrophically costly for the restaurant chain, forcing widespread closures, as the Daily Mail reports.
Launched in June, the endless shrimp deal aimed to increase customer traffic by offering limitless shrimp for a flat rate. This marketing strategy mirrored a previous promotion in 2003, which resulted in a substantial financial loss over just seven weeks. Despite historical precedent, the restaurant moved forward, leading to severe unintended consequences.
The recent promotion saw a similar pattern, with customers consuming large quantities of shrimp, including one customer who proudly consumed 108 shrimp in a single sitting. This level of consumption contributed significantly to the chain’s losses.
Thai Union, the majority owner of Red Lobster, reported losing $11 million in just three months due to the promotion. Ludovic Garnier, the CFO of Thai Union, admitted the strategy aimed to draw more guests but fell short of expectations, with traffic increases failing to offset the financial hemorrhage.
The following quarter saw continued losses, with a staggering total of $12.5 million. Consequently, Thai Union is now considering a total write-off of $530 million as it looks to divest its stake in Red Lobster. This financial debacle has led to the closure of 100 restaurants and the auctioning of assets from 48 locations.
The potential filing of Chapter 11 bankruptcy looms as a next step for Red Lobster, signaling the possibility of restructuring and cost-cutting measures in an effort to salvage what remains of the business. This type of bankruptcy filing would allow Red Lobster to continue operations while attempting to stabilize its financial health.
Thai Union initially invested $575 million for a 25% stake in 2016, eventually acquiring a majority share. Their substantial investment is now at serious risk as the company struggles to recover from the promotion’s fallout.
Jim Salera, a restaurant research analyst at Stephens, noted the current economic environment has consumers looking for value, which likely contributed to the higher turnout for the promotion. However, the cost structure of the $20 deal made it nearly impossible for Red Lobster to maintain a profit margin.
Ludovic Garnier also highlighted that the actual customer turnout vastly exceeded expectations, with a 40% increase compared to the anticipated 20%. This overwhelming response overwhelmed the promotion's financial model, further compounding the losses.
Eric Chiang, discussing strategies at comparable dining establishments, mentioned that while others, like Olive Garden, have found success with complementary offerings, Red Lobster's approach failed to generate the necessary revenue to cover the costs associated with the promotion.
In retrospect, Red Lobster's endless shrimp deal seems to have been a risky gamble that did not pay off, placing the company on the verge of bankruptcy and leading to significant financial losses for Thai Union. The attempt to attract more customers through aggressive pricing backfired, leaving the company in a precarious position.
The future of Red Lobster now hangs in the balance, with critical decisions about restructuring and potential ownership changes on the horizon. As the company contemplates its next steps, the seafood chain's situation serves as a cautionary tale about the risks associated with price-driven promotions in the restaurant industry.
