June 18, 2024

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Red Lobster chain goes bankrupt after unlimited shrimp deal

Red Lobster chain goes bankrupt after unlimited shrimp deal

(Bloomberg) — Seafood chain Red Lobster has filed for bankruptcy, hurt by onerous leases, high labor costs and disastrous endless promotion of shrimp.

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The Orlando, Florida-based company filed for Chapter 11 protection on Sunday, listing assets and liabilities worth between $1 billion and $10 billion each in the bankruptcy petition. Registration allows a company to continue operating while developing a plan to repay creditors.

Red Lobster plans to hand over control of the company to its lenders, led by Fortress Investment Group, who have agreed to provide $100 million in financing to support the chain through the bankruptcy. The takeover bid is in the form of a chase offer, meaning it will set a floor price for Red Lobster’s assets and be subject to better offers if any occur in the coming weeks, according to court documents.

The restaurant chain has been declining for several years, with the number of diners down nearly 30% since 2019, CEO Jonathan Tebus wrote in court papers. While the company has shown signs of recovery since the pandemic, sales have declined sharply in the past 12 months, Tebus wrote. It lost $76 million in fiscal year 2023.

Inflationary pressures prevented customers from dining out and rising labor costs strained the company’s finances. The “material portion” of Red Lobster’s leases were priced above market rates. In May 2023, the company changed its $20 “Ultimate Endless Shrimp” offer from a limited-time offer to a permanent promotion, costing it $11 million as diners gobbled up the pricey shrimp dishes.

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Red Lobster traces its roots back to a single restaurant in Lakeland, Florida, in 1968. It expanded rapidly in the 1970s and 1980s, developing a loyal fan base for its Cheddar Bay biscuits. The company now operates more than 550 restaurants in the United States and Canada.

The restaurant chain, owned by seafood supplier Thai Union Group Plc since 2020, serves 64 million customers annually and purchases 20% of all lobster tails in North America, as well as 16% of all rock lobsters worldwide.

Thai Union and Red Lobster had been in talks with lenders to reach an out-of-court deal that would give creditors 80% of the company, but discussions failed. Lenders made $20 million in additional loans to Red Lobster in February, but were unwilling to provide more money without support from the owner, according to court papers.

Red Lobster said it was also investigating the shrimp deal, including how it was marketed in restaurants and whether the Thai union “exerted too much influence” over shrimp purchases.

The chain employs 34,000 people in the United States and an additional 2,000 people in Canada. Last week, it closed 93 underperforming stores.

The case is before Red Lobster Management LLC, No. 24-02486, U.S. Bankruptcy Court for the Middle District of Florida.

-With assistance from Jonathan Randles.

(Updates with lender details in third paragraph.)

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