What’s going on at Red Lobster and is the endless shrimp promotion to blame?

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After filing for bankruptcy in the U.S. this month, the future of the beleaguered seafood restaurant chain Red Lobster is up in the air. With rising costs, significant rent obligations and high labour costs, court documents suggest the chain has liabilities of up to US$10 billion. The Financial Post breaks down what we know about the bankruptcy and what it means for the company and its Canadian operations moving forward.

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What happened?

On May 19, Red Lobster filed for Chapter 11 bankruptcy in the U.S., citing liabilities of upward of US$10 billion. Under the filing, the chain can continue to operate while it works on plan to repay its creditors.

Red Lobster currently has 551 locations in the United States, 27 in Canada and another 27 internationally. The company employs 36,000 people in the U.S. and Canada, mostly part-time.

Under the proposal, Red Lobster will hand control of the company to its lenders, led by the New York City-based Fortress Investment Group.

What’s to blame for the downfall?

While there have been plenty of jokes about Red Lobster’s “Ultimate Endless Shrimp” promotion leading to problems with the business, the company says the truth is more complicated.

Bankruptcy filings show the promotion — which allowed customer to eat as much shrimp as they wanted for US$20 — has cost the company US$11 million since it was made permanent in May 2023, but that it was not the only factor.

Overall sales had sharply declined in the past year as inflation kept customers away and rising operating costs hurt the seafood chain’s bottom line.
The company reported a net loss of US$76 million in the fiscal year 2023 and bankruptcy filings show customer traffic has fallen 30 per cent from 2019.

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Meanwhile, others are pointing fingers at private equity. In 2014, Red Lobster parent company Darden sold the chain to Golden Gate Capital for US$2.1 billion and Golden Gate began selling off its real estate, which meant the chain then needed to pay rent on many of its locations.

In 2020, Thailand-based seafood company Thai Union bought a 49 per cent share in the chain, only to want out of the business entirely by January 2024. Executives anonymously told CNN last week that Thai Union’s involvement was the “pivotal factor” behind Red Lobster’s downfall, as the group pushed for the purchase of more shrimp. Thai Union denies the allegations.

What does this mean for Red Lobster in Canada?

On Tuesday, an Ontario judge said he would uphold and enforce Red Lobster’s U.S. bankruptcy filing, as the company looks to “stabilize” the business operations, The Canadian Press reported.

The chain has declined to comment on its future in Canada, but the company has stated it intends to sell all of its assets, including those in Canada.

Most of Red Lobster’s 27 Canadian locations are in Ontario, with four in Alberta, two in Saskatchewan and one in Manitoba. Its Canadian operations amount to less than five per cent of it’s consolidated revenue.

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The chain employs 2,000 Canadians. It also owns two properties in Ontario.

What comes next?

Red Lobster has said it intends to continue operating during the bankruptcy proceedings, but has declined to comment on the future of its Canadian restaurants.

In the U.S., the seafood chain has already shuttered at least 93 locations and listed kitchen equipment up for auction and is asking the court to reject the leases of another 108 locations.

With files from Bloomberg News and The Canadian Press

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