Everyone is talking about the bankruptcy of Red Lobster and it’s easy to see why. It is one of the largest casual dining chains in the world. Everyone has eaten there at least once. And it has been around forever.

Events continue to unfold - in fact, as this piece is being posted, it was announced that Fortress investment group will acquire Red Lobster in what might be described as a “debt for equity“ swap. The purchase price was announced as $375 million. For the mathematically disinclined, that is less than 20% of what Darden sold it for 10 years ago.

At the risk of immodesty, I am uniquely qualified to talk about Red Lobster's rise and fall. I successfully took a seafood dinner house restaurant chain called Rusty Pelican through bankruptcy, and my restaurant experience is heavily weighted toward seafood. I engaged multiple times with Red Lobster in various negotiations over the years (before and after its sale by DRI), including potentially selling them Bubba Gump. Finally, I personally know some of the players involved.

Someday the rise and fall of Red Lobster will make a great case study at Cornell’s Hospitality School. It’s a saga and contains all the elements- peak accomplishments, lots of missed danger signs and some disastrous mistakes.

From its beginning in central Florida in the late 60’s, it was popular. Seafood was (and still is) a mystery to people trying to cook at home but Bill Darden made it accessible to the average customer. His first restaurants were instant successes and he embarked on a growth plan. He drew the attention of food giant General Mills. They bought the company in 1970 and installed Darden as President.

Within a few years, there were almost 150 restaurants and they quickly became a central player in the casual dining genre. They appealed to middle America and were the special occasion restaurant of choice for lower income people. Constantly bringing in new promotions and limited time offers, the company thrived as a “value proposition” in the seafood segment.

By 1990, there were hundreds of Red Lobsters in the US and they had begun an international presence. In 1991, they created the garlic cheddar biscuits and even the highbrow set acknowledged their success. They were riding high.

In 1995, however, the first seeds of destruction began to be sown. General Mills decided to monetize their ownership. So, combining Red Lobster with Olive Garden and other concepts, Darden Restaurants was formed and taken public.

At the same time, Red Lobster began to experience the same issue as other seafood-oriented restaurant concepts- rapidly increasing raw cost. When the word “lobster” is in your name, you had better have it on the menu. But at $30-40 in 2005, it was way beyond the core customers’ ability to buy it. Therein lies the first issue. Seafood was not cheap and was only going to get more expensive.

Along with that, despite RL’s admirable and ongoing repositioning and remodel efforts, they found the younger demographic a tough shell to crack.

The older customer saw seafood as fried shrimp and fish sticks- but the market was changing. Fish fried ten different ways was still fried fish and the world was looking for other approaches. The market began to provide those alternatives above and below RL’s price point. And that was the second issue. RL’s core customer was literally starting to die off and they just couldn’t seem to attract the younger guest.

As competition grew in seafood (including Bubba Gump and Bonefish), RL’s historical rise began to slow. Italian was an ascendant genre and Olive Garden became the growth vehicle of choice for Darden. Their Seasons 52 concept was also gaining traction.

At this point in 2013, with costs rising and store sales slumping, going public came back to haunt Darden. Management came under fire from investors and in their haste to throw off the wolves, they put RL up for sale.

The next year, they sold Red Lobster to Golden Gate Capital, a San Francisco-based private equity firm for what some considered a fire sale price of $2.1 billion. Darden, hoping to fend off the activist shareholder, used much of the proceeds to execute a share repurchase program of $700 million. (Yet none of this saved Darden’s management, who were driven out a year later.)

Then, the new owners of Red Lobster, Golden Gate, did what every private equity firm does; they immediately monetized as much of the investment as possible.

Golden Gate's first big move, which they did virtually simultaneously with the purchase, was sell all the RL real estate in a giant restaurant sale leaseback.

You see, despite RLs profitability issues, they always had an ace in the hole: they owned the real estate under most of their restaurants.

I don’t know who it was along the way- maybe Darden himself or someone at General Mills- but Red Lobster owned the dirt under a significant number of their restaurants. In fact, they owned the vast majority of them.

In the restaurant business, owning the real estate is a distinct advantage in certain concepts and circumstances. The most successful privately-owned QSR chain in the US is In-N-Out Burger. They are well known for owning the real estate under their restaurants. If there is no rent or CAM charges, it immediately adds between 5% and 10% or even more to the P&L. There are concerns in terms of return on invested capital but the advantages are quite compelling.

But it's easy to see why Golden Gate sold the real estate and leased it back. They raked in $1.6 billion from the move.

Their next big move came in 2016. Forty-nine percent of the company was sold to Thai Union, a minority shareholder and one of the world's largest shrimp and seafood processors, for a reported $575 million.

The end result of these machinations?

Golden Gate owned 51% of a company theoretically worth about a billion dollars and had already eradicated all of their purchase debt.

While Golden Gate was riding high on their "financialization" of RL, the company itself now faced onerous rents on top of their already plummeting profitability.

Moreover, there were 2% kickers in the rent annually. Store level earnings before interest, taxes, depreciation, and amortization (EBITDA), which had always been good at RL when they had no rent, suddenly looked anemic.

While the financials at RL were changing, and not for the better, the concept was stale and needed an overhaul.

Although much of the sclerotic mindset at Darden was cut out during the activist shareholder’s management massacre in 2014, some stagnant thinking remained at the chain. A concept renewal was long overdue and one finally began in 2020. Unfortunately, this was same year the company lost over $130 million.

There were many “marginal” restaurants in the portfolio in terms of performance. Food costs continued to rise but management had very little (if any) pricing power. It was not a “glamour job” in the restaurant management recruiting world. As everywhere in the industry, the labor market was shrinking. Their $380 million in debt required large payments that was hurting their cash flow.

In short, they faced just about every headwind imaginable.

So, what did Golden Gate do?

In what may be one of the slickest deals the restaurant finance community has ever seen, Golden Gate sold their remaining interest. Thai Union partnered up with a couple of experienced operators and bought the rest of Red Lobster for an undisclosed amount. I estimate it could have been for as little as $50 million or as much as $300 million.

No matter what, Golden Gate had almost certainly been receiving a management fee from RL as well as other payments. They did fine, particularly when you factor in that they would have been left holding the bankruptcy bag if they had continued to hold on.

Initially, Thai Union seemed to have their heads on straight. They brought in a new CEO, Kelli Vlade, who was the successful former President of Chili’s. The brand revitalization was underway and there was nowhere to go but up. Or so it seemed.

Eight months later, Vlade was out in dramatic fashion and the CEO merry-go-round was to continue with 3 more CEO’s after her. The company lost a horrifying amount of money in 2022 and things were looking very dark. Drastic action was needed. But what?

Thai Union installed an individual by the name of Paul Kenney as CEO. An Australian who had been quite successful with restaurants in Southeast Asia as the head of Minor Food, Kenney was one of the aforementioned “experienced operators” who partnered with Thai Union.

The next big mistake first requires some backtracking...

In 2003, Red Lobster ran a nationwide promotion called “All you Can Eat Crab.” It had disastrous outcomes for the company.

First, it occurred while crab prices were rising.

Second, when you can just keep getting more, the customer does not mess around. Skinny crab legs are cracked open with enthusiasm, speed and glee. The promotion essentially becomes “All You Can Order."

Third, such promotions create “sitters.” These customers stay at the table, cutting down on turnover and therefore profitability. Needless to say, RL never ran that promotion again.

Despite the poor outcomes of "All You Can Eat Crab," Kenney decided to resurrect the promotion, swapping out crab with shrimp.

The “Endless Shrimp” promotion, besides creating sitters who eat enormous amounts of product, was heavily promoted in-house. A big industry no-no.

Why tell customers about a not profitable promotion that they didn't come in for?

An even bigger head scratcher, he subsequently added "Endless Shrimp" to the menu as a permanent item. It was a loss-leader- not a menu item.

I don’t like these kinds of promotions anyway but, as the saying goes, “Desperate times call for desperate measures.”

Where Kenney and Thai Union have subsequently run into real trouble is that the almost exclusive supplier of shrimp was - you guessed, it - Thai Union.

The CEO who replaced Kenney (the fifth in four years) has questioned this, thinking it - excuse the pun - fishy. He is looking into why and how it happened.

Maybe Thai Union provided that shrimp at a really good price, but at the same time was it was a ploy to juice Thai Union’s sales of shrimp?

Maybe it was a disguised way of pulling more money out of an investment that by then they knew was doomed?

We may never know the answers to these and other questions.

RL should have sold off every non-performing restaurant years ago and rationalized the business down to a size that made sense. Using that money, they should have retired debt.

The sale/leaseback could have happened at that point in selected units (maybe 200) with more affordable rents and smaller escalators. Using that money, they could have dividended shareholders to keep them happy and banked the rest.

They then could have embarked on a dramatic and fundamental concept makeover- perhaps three different tests of 2-3 units each (it’s why you are a chain, you can do that). Pick the winner and roll it out regionally and then nationally.

Coulda, woulda, shoulda. Armchair quarterback is an easy position to play. But it’s what we did when I took a company through Chapter 11.

When you get to the point where RL was nine or ten years ago, it’s time for big name trades, new management and innovative plays. But instead, the strategy was unfocused; everybody seemed to piecemeal pick their preferred short-term solution and kick the can down the road.... to bankruptcy of a major brand, household name and beloved restaurant by millions.