The new CEO of seafood chain Red Lobster said an endless shrimp deal was a nail in the coffin for the brand, which filed for bankruptcy this week.
While restaurants for the crab, lobster and seafood brand remain open, new CEO Jonathan Tibus – a restructuring consultant – is taking over his predecessor’s decisions and appears unimpressed.
Tibus, who is also director of the North American division of consulting firm Alvarez & Marsal, has blasted former Red Lobster boss Paul Kenny for marketing and operational “missteps.”
In a Chapter 11 declaration seen by Fortune, Tibus wrote: “Certain operating decisions made by former management have harmed the debtors.” [Red Lobster] financial situation in recent years. Historically, the Accounts Receivable’s Ultimate Endless Shrimp (“UES”) promotion was used as a limited-time promotion. However, in May 2023, former Debtors CEO Paul Kenny made the decision to add UES as a permanent $20 item to the menu, despite significant opposition from other members of the company’s management team.
The decision cost the Florida-based brand $11 million and also saddled the company with “onerous supply obligations” involving one company in particular: Thai Union, which acquired a 49% stake in the company in 2016.
Thai Union is a seafood manufacturer, supplying chilled, frozen and chilled seafood to customers through retail channels such as restaurants and wholesalers.
Even at the time, Thai Union said it knew the company would not make much money from the promotion. During an earnings call last year, Thai Union CFO Ludovic Garnier said: “We are not making a lot of money with this promotion. We won’t do that for $22. The idea was to generate some traffic.” Some revisions to the price tag from $20 to $25 have stopped some of the flow, but according to CNN, Garnier added: “We have to be much more careful about: what is it starting point? And what is the price we offer for this promotion.”
Even raising prices for the popular but ill-fated promotion couldn’t bandage the wound. In January this year, Thai Union announced its intention to cut ties with Red Lobster, saying: “Red Lobster’s continued financial needs no longer align with our capital allocation priorities.”
In the first nine months of 2023 – during which time Red Lobster’s UES offering became permanent – Thai Union recorded a share of the chain’s $19 million loss.
Tibus seems unimpressed by Kenny’s decision to tie a sinking Red Lobster deal to a seafood supplier who, conveniently enough, had a lot of influence in the boardroom. The UES promotion also received an “atypical” amount of promotion related to the deal, according to Tibus, which in turn led to “supply issues that resulted in major shrimp shortages, with restaurants often going days or weeks without certain types of shrimp.”
Thai Union and Red Lobster did not immediately respond Fortune‘S request for comment.
Fishy stuff
But the restructuring expert also sifts through other choices made under Kenny’s leadership regarding increasing dependence 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 purchasing,” the new CEO claims.
This influence was made clear by a number of decisions, Tibus claims. For example, in 2023, Kenny instructed Thai Union to continue producing shrimp for Red Lobster at levels that “did not flow through the traditional supply process or bidding cycle or did not meet the company’s demand forecasts.”
Thai Union products also began appearing more widely in Red Lobster restaurants after two suppliers of breaded shrimp previously used by the chain were eliminated, which Tibus said was done “under the guise of a ‘quality review’.” The dismissal of these two suppliers led to an exclusive deal for Thai Union and higher costs for the restaurant brand.
External factors
While a multimillion-dollar shrimp debacle may not have helped Red Lobster’s prospects, the brand said in its Chapter 11 filing that it has debts of between $1 billion and $10 billion — an amount too large to lay entirely at the feet of whoever can be laid. -can-eat seafood promotion.
In mining Red Lobster, Thai Union said the brand was struggling with the aftereffects of the pandemic as well as “ongoing industry headwinds, higher interest rates and rising material and labor costs.”
The analysis that Tibus and his team have made since March paints a picture of a company drowning in problems. One of the issues he outlines in his statement is a declining number of customers, down 30% since 2019, with only a “marginal” recovery post-COVID.
On top of that, there’s another factor plaguing the sector more broadly: inflation. Consumers are currently less likely to want to eat out, Tibus wrote, adding that this drop in customer sales comes with higher labor costs due to rising minimum wage costs.
Elsewhere, the boss added, the company is spending eye-watering sums on leasing stores that aren’t delivering a return on investment. He wrote: “In 2023, the company spent approximately $190.5 million on lease obligations, of which more than $64 million related to underperforming stores.”
This situation may have already changed. Per USA today, 87 restaurants in 27 states on the Red Lobster website — which is down at the time of writing — were listed as “temporarily closed.”
This story originally appeared on Fortune.com
