Anthony Behar/Sipa USA via AP Images
People walk past a Red Lobster restaurant located in Times Square, New York, May 15, 2024.
The ongoing retail apocalypse claimed another victim this week.
Red Lobster, the casual dining restaurant chain with 550 locations, is entering Chapter 11 bankruptcy proceedings, turning over ownership for a second time in ten years as its sales and revenues continue to nosedive precipitously.
The company abruptly shuttered roughly 50 of its locations across the country last week without informing employees, who showed up to work only to find signs announcing the closures, which may be a potential labor law violation. According to staff complaints, they only later received notice that they’d be laid off or transferred to the remaining stores, in some cases many miles away.
Several observers have attributed Red Lobster’s implosion to its “Endless Shrimp” promotional deal, which the company hoped would bring more foot traffic in the door. It might have been a hit with stoners, but broadly speaking the deal was a disaster that raised costs for individual restaurants without a compensating increase in revenue.
The company’s current management and CEO are eager to pin its demise on Endless Shrimp, which totaled $11 million in losses. Upon filing for bankruptcy, they also launched an internal investigation into whether their majority shareholder Thai Union Group, which is also their main seafood supplier, might have pushed the shrimp promotion in order to boost their own sales at the cost of the retailer’s finances. This ownership structure between parties that are supposed to be on opposite sides of restaurant transactions does appear to be a clear conflict of interest.
But the arc of Red Lobster’s collapse extends much further back than Thai Union, and bends toward what writer Cory Doctorow has vividly described as “enshittification.”
The Endless Shrimp fiasco was a minor speed bump amid a series of poor business decisions by the company’s numerous owners. Many of those mishaps look less like miscalculations and more like self-sabotage, intended to hollow out the restaurant chain to enrich the chain’s previous private equity owners, Golden Gate Capital.
Golden Gate crippled Red Lobster by selling off one of its most valuable assets, the real estate it owned, in what’s known as a sale-leaseback, for $1.5 billion. With that sale, Golden Gate nearly made back its $2.1 billion purchase of Red Lobster, while turning the chain into a permanent leaser, adding a massive additional cost in the form of rent that was orders of magnitude bigger than the cost of Endless Shrimp. When commercial leases started going up, Red Lobster was highly exposed, but by then Golden Gate had already sold off its shares to Thai Union, which inherited all the debts Golden Gate stacked on the company.
Even today, the financial extraction continues. The law firms conducting the bankruptcy on Red Lobster’s behalf have already billed the company $10.5 million, nearly equivalent to the entire loss on the shrimp promotion.
How Red Lobster originally fell under control of private equity foreshadowed the problems that would later follow under Thai Union Group. The downfall is an emblem of how the long-term effects of consolidation in seafood and restaurant retail laid the groundwork for corporate raiders to pillage the once-iconic American brand.
RED LOBSTER BECAME AN EARLY PIONEER of the no-frills casual dining experience that spread across the country in the second half of the 20th century. Per its name, the signature offering was a typically upscale delicacy out of reach for most Americans, brought to the masses at affordable prices. That sales pitch epitomized a cultural and business trend at the time, as other more upscale brands like Grey Poupon pivoted to a broader customer base.
But to make the business work, Red Lobster had to find a way to bring down the cost of seafood to something affordable for its middle-class customers. The chain rapidly expanded franchises across the country. With scale, Red Lobster could use buyer power to purchase in bulk from larger seafood processors and get discounts from them to lower costs, a similar business model to those other fast-food and chain restaurants employed during that period.
Red Lobster was tremendously successful and at its height had over 700 locations, becoming one of the biggest casual dining businesses in the U.S.
But according to The Wall Street Journal, its demise came about when the cost of global seafood started to go up around 2013. Red Lobster, with its mostly seafood-based menu, suffered from that more than the other causal chains like Olive Garden that were under the portfolio of its previous owner Darden.
Some of the spike in seafood prices could be accounted for by unusual weather events in open oceans that year, certain aquatic diseases, and rising consumer demand. But another unseen factor was a wholesale transformation in the structure of the fishing industry. Red Lobster’s own purchasing power would be countervailed by a rollup of its seafood suppliers.
Agriculture had been industrialized and monopolized much earlier into factory farming controlled by meatpackers and other middlemen. Those same trends were also taking place in the seafood sector, though it took longer.
U.S. fishing used to be much more regionally based and mostly made up of independent fishers who’d sell their catches into local markets. In the 1990s and 2000s, the U.S. government started implementing a “catch share” program, which capped the volume per fisher and imposed other restrictions to manage overfishing, for environmental reasons and to preserve wildlife. The high up-front costs for licensing and the limitations on the number of catches one fisher could sell by season mostly benefited the larger fisheries that were accruing market share at the time. Catch management was prone to consolidation, because the shares became tradable assets that dominant fisheries could simply purchase from smaller struggling ones.
“The retail apocalypse is all about having your real estate sold out from under you so that you have to pay the rent in good times and in bad.”
Around the same time, there was an onslaught of foreign imports of fishing (from companies such as Thai Union) that didn’t have the same environmental standards. To compete, U.S. fisheries started to race for market share, buying up catch shares and forcing fishers into contractual arrangements where they could only sell to one of the large processors. In the Alaska area, four companies control the share rights to over 77 percent of catches for specific crab species. Along the Pacific Northwest coast, one company—Pacific Seafood—effectively controls the local market fishers sell into for a wide range of catches, from salmon to shrimp.
Right around the same time as fish prices began rising for Red Lobster, plaintiffs filed a wave of major antitrust lawsuits against these giant seafood processors that had usurped the industry.
One core claim across these lawsuits was that the new fishing giants held vast “purchasing power” over the entire market. They used that power both to reduce what they paid the fishers, who had few other buyers to turn to for better prices, and also to exact markups to retailers. Even supposed competitors like Pacific Seafood and Ocean Gold Seafoods had entered exclusive partnerships with one another to share one another’s processing facilities and fix prices together.
“The difference between what the fishermen are getting paid and prices in the supermarket are such an astronomical difference,” one fisherman party to a 2011 complaint testified. The complaint argued that prices went from $77 per ton in 2004 to $137 in 2006, as a result of market power.
An especially troubling practice alleged by the plaintiffs was that during peak seasonal demand, large processors artificially reduced the time intervals when fishers were permitted to go out on the waters to bring back fresh catches. Companies like Pacific Seafood did this to advantage their own bargaining position as middlemen by limiting supply.
On the other side of the country, federal law enforcement in New England caught a fishing tycoon named Carlos Rafael, known as the “Codfather,” bragging about his ability to price-fix. He was later put in prison on a litany of charges for conspiracy and dealings with the Russian mafia.
These documented lawsuits shed light on the problems Red Lobster faced from its upstream suppliers. Red Lobster’s entire business model was reliant on its own buyer power over seafood suppliers; but once its suppliers merged together, they could wield their own power to add markups.
BECAUSE OF RED LOBSTER’S HIGH COSTS and declining profits, the company’s owner Darden sold it off in 2014 for $1.2 billion to Golden Gate Capital, which believed it could make the chain leaner and more efficient. That was also Golden Gate’s promise when it took over the iconic shoe retailer Payless in 2012, before selling it off to a separate private equity firm, Alden Global Capital, just a few years later, in worse shape than when it first took over the company. Over the first two years of Golden Gate’s reign at Payless, the retailer generated $322 million in operating profits and paid $352 million in one-time dividends to shareholders, the largest being Golden Gate, along with $83 million in interest payments on the debt it had been saddled with from the purchase. That left it with virtually no resources to adapt to the e-commerce era as its sales cratered.
Golden Gate followed the same pattern of behavior with Red Lobster. To finance the purchase, Golden Gate imposed a sale-leaseback on most of the real estate, which went under ownership of American Realty Capital Properties. This real estate play has become common in private equity purchases of other retailers and even hospitals, because it gives the PE owners a quick injection of cash from the get-go.
“The retail apocalypse is all about having your real estate sold out from under you so that you have to pay the rent in good times and in bad,” private equity expert Eileen Appelbaum told Business Insider.
That was just the start of Red Lobster’s problems. Restaurants would become chronically understaffed, as the owners tried to slash costs wherever they could. The extravagant payments that the company made to its owners made it difficult for the chain to adapt in a changing restaurant business shifting away from casual dining.
Thai Union, among the largest global seafood conglomerates and a major supplier to Red Lobster, first acquired a 25 percent stake in the company for $575 million in 2016. Then in 2020, it purchased the remaining portion of shares from Golden Gate. This new ownership structure was highly unusual; it would be analogous to Walmart’s largest discount supplier Procter & Gamble deciding to purchase the retail side of the operation.
Thai Union continued cost-cutting and failed to rejuvenate the business, which was still stuck with rising rent costs because of Golden Gate’s sale-leaseback. Red Lobster also suffered, like the rest of the restaurant industry, through the pandemic, when in-store dining was barred in much of the country for a period of time.
In 2021, Red Lobster refinanced its debt obligations, which led to another private equity firm, Fortress Investment Group, becoming a key lender. According to Bloomberg, Fortress is now in contention to take over the chain after bankruptcy, placing it back in the hands of a set of financial pillagers.
Leading up to its financial implosion and bankruptcy, Red Lobster joined a lobbying group called Stronger America Through Seafood. For the past several years, this group has been aggressively lobbying to essentially deregulate American fishing by opening up federal waters for industrial aquaculture farms to harvest fish at massive scale, despite ecological and competition concerns. Red Lobster’s owner Thai Union Group and other dominant fishing processors would stand to benefit by being able to acquire new permits to the waters and expand their operations. Those efforts haven’t succeeded yet but are still actively under way.
