The financial woes hitting seafood restaurant chain Red Lobster have prompted it to close dozens of locations and reportedly consider filing for bankruptcy, with some of the blame being heaped on the chain's endless shrimp bargain.
In the wake of the pandemic, Red Lobster looked to boost traffic to its restaurants by offering a $20 all-you-can-eat shrimp deal that the company hoped would serve as a loss leader and bring in more customers who would become regulars.
However, the deal itself proved too good for customers to pass up. The Los Angeles Times reported that some patrons took to social media to brag about how many shrimp they were able to scarf down, including one woman who said she ate 108 shrimp during a four-hour meal.
"I think the distinction between something like an Olive Garden with endless breadsticks and Red Lobster with bottomless shrimp is that shrimp is like an entree whereas breadsticks are more of a side," Jim Salera, a research analyst at Stephens focused on restaurants and packaged food and beverages, told FOX Business. "The goal with any type of deal like that is you bring in consumers, and then you either add incremental purchases to the ticket, whether it's alcohol or, you know, appetizers, things like that expand the ticket."
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"So, you bring them in, and then you convert them to a more regular customer such that maybe they come in for endless shrimp one time, but then the next time they come in they get something else. Unfortunately, in the current environment, I think what you saw happen is they had the $20 all-you-can-eat shrimp – that's a very short price point that attracts consumers," he said.
As customers looked to gorge themselves on shrimp and opted to continue consuming Red Lobster's discounted fare, the company took bigger losses on the promotion.
"You already have a small profit margin," Salera said. "You can very easily go beyond that when you're attracting consumers who are just looking to have that one item or engage with that one offering and not kind of branching out across the menu."
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Salera added that the combination of consumers looking to find value in an inflationary environment combined with higher operating costs due to rising interest rates played a role in pushing Red Lobster's finances deeper into the red.
"When you have lease agreements in a rising interest rate environment, your costs go up for running the restaurants," he said. "But then, simultaneously, if you operate a casual diner kind of concept or formal restaurant, you can also see your traffic trends that are pressured during more strained economic times because consumers have to make decisions around what do they do with their budget."
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Thai Union Group CFO Ludovic Garnier, whose firm was a leading financial backer of Red Lobster before it announced plans earlier this year to unload its stake in the chain, spoke to investors and analysts in November 2023 and noted that the deal proved more costly than planned even though it helped bring more customers in.
"The price point was $20, and you can eat as much as you want. For those who have been in the U.S. recently, $20 was a bit cheap. The rationale for this promotion was to say, 'We knew the price was cheap, but the idea was to bring more traffic to the restaurants because Q3 and Q4, it's always a season where we don't have much traffic in our restaurants,'" Garnier said at the time. "And it did work … there was an increase in the traffic."
However, Garnier said that "the proportion of the people selecting this promotion was much higher compared to expectation" as customers sought to capitalize on the deal.
"Bottom line, for the financial performance, it did not deliver what we were expecting, and it is one of the key reasons for the losses we generated in Q3 2023," Garnier said. He added that in the wake of those losses, the company upped the price point to $22 and then to $25 and planned to keep it on the menu because it's an "iconic promotion for Red Lobster" even though the company needed to be "much more careful" in its approach to pricing the seafood deal.
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The company is reportedly considering filing for bankruptcy as early as this month as it looks to mitigate losses, and last week a restaurant liquidation company said it would be charged with selling equipment at 48 Red Lobster locations.
Red Lobster did not immediately respond to a request for comment.
FOX Business' Suzanne O'Halloran and Timothy Nerozzi contributed to this report.
