At this point, even yak herders in Mongolia are likely aware that Red Lobster filed for bankruptcy two weeks ago after trusting Americans to say, “Oh, no—that’s too much shrimp for me.” A former and possibly future U.S. president is on trial for allegedly lying about hush-money payments to a porn star, yet the conversations at countless backyard barbecues this weekend may well have begun, “Hey, can you believe Red Lobster went belly-up?” The brand is an icon, and its collapse represented more than just another business sinking into trouble.
If there was a thread running through the blizzard of post-filing media coverage, it had to be the notion that the chain shot itself in the flipper. When the tab for a fast-food meal is inching closer to $20, not even an Economics 101 washout is going to slap that price on an all-you-can-eat shrimp deal.
A veteran restaurant operator would have realized what a cheddar-headed move that would be, especially if it’d learned the lesson the hard way. Someone like Darden Restaurants, say.
Darden, of course, was Red Lobster’s parent until management cut loose the seafood chain in 2014 in one of the most ridiculous deals of modern restaurant history. The chain of more than 500 restaurants—all corporately owned and operated—was sold to the private-equity firm Golden Gate Capital for just $2.1 billion. Golden Gate then turned around and sold the real estate under the restaurants in a $1.5 billion sale-leaseback. For $600,000, the PE company ended up with a chain generating annual systemwide sales of about $2.43 billion.
It wasn’t Darden’s smartest move, though there were ample extenuating circumstances. A hostile investor was leaning heavily on management to spin off Red Lobster and its Italian sister, Olive Garden, and focus on younger brands with more expansion potential, like Yard House or The Capital Grille. Management refused, but it was eventually cowed into giving the shareholder half a loaf (or Cheddar Bay Biscuit, to remain brand-appropriate). It kept Olive Garden and gave Red Lobster the heave-ho.
Since then, Red Lobster’s sales have declined by 6% while Olive Garden’s revenues have soared 31%, as Restaurant Business Editor-in-Chief Jonathan Maze pointed out in a recent column. Olive Garden also has considerably more units open, and a higher average-unit volume for each.
What’s more, Red Lobster was ultimately driven into bankruptcy because its rents were no longer viable with sales and traffic in a tailspin. The 500 properties sold by Golden Gate are now all leased, meaning the landlord gets paid before Red Lobster’s parent does.
The land beneath Olive Garden remains largely company-owned, as does the real estate for many of Darden’s restaurants. The company has historically opted to buy its dirt whenever it can, since that model gives it more control over the key expense of occupancy costs.
Now Red Lobster is looking for a buyer, a daunting quest given how much attention its decline and bankruptcy have drawn. The chain has voiced hopes that a suitor would step forward and buy it out of bankruptcy. Its key stakeholder (and shrimp supplier), Thai Union Group, would have been ecstatic to dump its 49% stake before the Chapter 11 filing.
In hindsight, Darden might have been better off if it'd kept both the seafood chain and Olive Garden a decade ago. Now it has an opportunity to turn back the clock.
Still, Darden wasn’t exactly having a swell time with Red Lobster before the 2014 sale. And would the seafood chain indeed be better off today if it hadn’t changed hands?
Time travel being what it is, we’ll never know. We're also unlikely to learn if a reunion would be beneficial to buyer and seller. A return of the Endless Shrimp deal is more likely than Darden bringing Red Lobster back into the fold.
Still, Darden’s strengths match up to a remarkable degree with what Red Lobster needs to stay afloat.
For one thing, the casual-dining giant has proven it can instill new life into a wheezing brand. At the time of Red Lobster’s sale, Olive Garden was struggling as it, too, dealt with issues of relevancy. With so many high-quality Italian restaurants in operation, why go to a chain promising Hospitaliano? The pitch felt like a come-on from the 1970s. It was hokier than a wedding band playing “Celebration.”
Yet in relatively short order, Olive Garden was outpacing the casual-dining segment, and continued to do so through the pandemic and the months afterward. Only recently has the drop-off in traffic caught up with the brand.
The turnaround pivoted on precisely what Red Lobster needs: a promise of value and a better experience overall for guests. Red Lobster is now as expensive as some white-tablecloth seafood place with lots of French words on the menu. Unless, of course, you were lucky enough to catch its shrimp special. For the kind of check you’ll otherwise pay, service has to be impeccable, and Red Lobster hasn’t exactly been rivaling Texas Roadhouse, Hillstone or The Cheesecake Factory.
Also engrained in Darden’s DNA is an acumen for controlling costs, an aptitude it developed back in the days when Red Lobster was its workhorse brand. With a pricey wild-caught specialty, the seafood chain's parent had no choice but to develop best-in-class controls. That wiring is still in place at the multi-brand operation today, and Red Lobster could only benefit from the discipline.
Unfamiliarity with the brand is, oddly, one of the issues that suggests Red Lobster can’t go home again. Ten years have passed since Darden owned it, and many of the executives who ran the seafood chain have moved on.
But a gem in Darden’s current portfolio is Eddie V’s, a higher-end seafood entrant whose swank ways could help in restoring Red Lobster’s image as a place to get a high-quality meal at a mass-market price.
And having The Capital Grille as a sibling brand might help Red Lobster bring some class and currency to its drinks program. Consider what it’s currently touting on the beverages section of its website: “New! Mocktails.”
Finally, there are ample indications that Darden could bring back its foundational brand at a sensational price. The brand has been losing money and is closing stores at a head-turning clip. And then there’s what its half-owner has acknowledged to the market. “We're not expecting to get anything much from the sale,” Thiraphong Chansiri, CEO of Thai Union Group, told investors during a call with financial analysts.
If it happens, there’ll be no living with me. All I’d want as a broker’s fee is one more day of endless shrimp for $20.