Red Lobster is blaming its bankruptcy on top shareholder and its ex-CEO, saying an $11M all-you-can-eat-shrimp fiasco contributed to its demise

Red Lobster is blaming its bankruptcy on top shareholder and its ex-CEO, saying an M all-you-can-eat-shrimp fiasco contributed to its demise

The new CEO of seafood chain Red Lobster says a never-ending shrimp deal is a nail in the coffin for the brand, which has filed for licensing. bankruptcy this week.

While the crab, lobster and seafood brand’s restaurants remain open, new CEO Jonathan Tibus, a restructuring advisor, is reverse the decisions of his predecessor and doesn’t seem impressed.

Tibus, who is also managing director of the North America division of consulting firm Alvarez & Marsal, called out former Red Lobster boss Paul Kenny for marketing and operational “missteps”.

In a Chapter 11 filing viewed by Fortune, Tibus wrote: “Certain operational decisions by former management have adversely affected the financial condition of the debtors (Red Lobster) in recent years. Historically, the debtors’ Ultimate Endless Shrimp (“UES”) promotion has been used. as a limited time promotion. However, in May 2023, Paul Kenny, the former CEO of Debtors, made the decision to add UES as a permanent $20 item to the menu despite significant pushback from other members of the UES management team. business.

The decision cost the Florida-based brand $11 million and also taxed the company “heavy supply obligations” relating in particular to one activity: Thai Union, which acquired 49% of the company’s capital in 2016.

Thai Union is a seafood producer, providing customers with ambient, frozen and chilled seafood. through retail channels like restaurantsand wholesalers.

Even at the time, Thai Union said it knew the company wouldn’t make much money from the promotion. In a earnings conference call last year, Ludovic Garnier, Thai Union’s chief financial officer, said: “With this promotion, we don’t make a lot of money. At $22, it’s not. The idea was to bring traffic. » Some upward price revisions from $20 to $25 have dampened some of the flow but, according to CNNGarnier added: “We need to be much more careful about the entry point? And what is the price we are offering for this promotion.”

Even the price increase of this popular but ill-fated promotion could not heal the wound. In January This year, Thai Union announced plans to sever ties with Red Lobster, saying “Red Lobster’s current financial needs no longer align with our capital allocation priorities.”

During the first nine months of 2023, when Red Lobster’s UES offering became permanent, Thai Union recorded a share of the chain’s losses worth $19 million.

Tibus appears unimpressed with Kenny’s decision to tie an imperiled deal with Red Lobster to a seafood supplier who conveniently held great influence in the boardroom. The UES promotion, according to Tibus, also benefited from an “atypical” amount of promotion, which led to “supply issues resulting in significant shrimp shortages, with restaurants often spending days or weeks without certain types of shrimp.

Thai Union and Red Lobster did not immediately respond to Fortunes request for comment.

Fish business

But the restructuring expert also examines other choices made under Kenny’s leadership regarding a growing reliance on Thai Union supply.

The shareholder, which had a market capitalization of about $1.9 billion at the time of writing, had “outsized influence over the company’s shrimp purchases,” the new CEO claimed.

This influence manifested itself through a number of decisions, says Tibus. In 2023, for example, Kenny ordered Thai Union to continue producing shrimp for Red Lobster at levels that “did not follow the traditional procurement process or supply cycle or meet demand projections for the company”.

Thai Union products also began to appear more widely at Red Lobster restaurants after the firing of two breaded shrimp suppliers previously used by the chain, which Tibus said happened “under the guise of a ‘quality review’.” The dismissal of these two suppliers led to an exclusive agreement for Thai Union and higher costs. for the restaurant brand.

External factors

While a multimillion-dollar shrimp debacle may not have improved Red Lobster’s prospects, the brand said in its Chapter 11 filing that it has liabilities of between $1 billion and $10 billion. dollars, an amount too great to lay entirely at the feet of anyone. -promotion of seafood that can be eaten.

In its takedown of Red Lobster, Thai Union said the brand was battling the aftereffects of the pandemic as well as “sustained industry headwinds, higher interest rates and rising material and manufacturing costs.” workforce “.

Indeed, the analysis that Tibus and his team have carried out since March paints the portrait of a company drowning in problems. Among the issues he highlights in his statement is declining customer numbers, down 30% since 2019, with only a “marginal” rebound post-COVID.

Added to this is a factor which is weakening the industry more broadly: inflation. Consumers are less likely to want to eat out right now, Tibus writes, adding that this drop in customer income has been accompanied by rising labor costs due to rising utility bills. minimum wage.

Elsewhere, the boss added, the company spends huge sums to rent stores that do not provide a return on investment. He wrote: “In 2023, the company spent approximately $190.5 million on lease obligations, of which more than $64 million relates to underperforming stores. »

This situation may have already changed. By USA today, On Red Lobster’s website, which is not functioning as of this writing, 87 restaurants across 27 states have been listed as “temporarily closed.”

This story was originally featured on Fortune.com

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