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- [00:00]
David Brown
Wondery subscribers can binge all episodes of business TikTok vs. The USA early and AD free right now. Join Wondere in the Wondere app or on Apple Podcasts. It's 2024, and across the United States of America, people are rising to a new challenge. The challenge laid down by Red Lobster, the nation's largest chain of seafood restaurants. It's a challenge that's out to revive its ailing fortunes. And that challenge is Endless shrimp for just $25. Endless shrimp. All the shrimp I can eat for just 25 bucks. Let me get my hat.
- [00:47]
Katie
I'm Katie, and I think that I can eat 15 to 20 shrimp.
- [00:51]
Alex
I'm Alex.
- [00:52]
David Brown
I'm gonna say I think I can eat 20 shrimp. I'm Jasper, and I know that I could eat like 30 to 50 shrimp. I just eat more shrimp and I. E. Shrimp and then more shrimp and more shrimp. And now I'm paying the price because my belly hurts and I'm ready for a nap. Red Lobster started its endless shrimp promotions in 2004. Once a year, it would offer never ending shellfish at a bargain price for a limited time. Then in June 2023, Red Lobster made it permanent to lure people back through its doors, even if that meant losing money. Well, now it's May 2024, and for 11 months, America's been demolishing Red Lobster shrimp like a horde of hungry, hungry hippos. And the chain is flat broke. Red Lobster has filed for Chapter 11 bankruptcy protection. The chain has struggled recently, losing millions, saying that its endless shrimp deal was partly to blame. The greatest restaurant in the world, Red.
- [01:49]
Jasper
Lobster, is going out of business.
- [01:50]
David Brown
No. Yeah, I know what you're thinking. When this story hit the news, everyone talked about how the all you can eat deal sank Red Lobster. The math seems relatively straightforward. Sell lots of shrimp at a loss, and one day you'll go bust. But there's more to this fishy tale than just that. Sure, it wounded them, but it wasn't the fatal blow. The fall of this whale of the restaurant industry has a lot of layers, and it offers a veritable feast of business lessons. And that's why in this season, we're going to find out what really went down and ask what killed Red Lobster. As business owners and managers, you use software for your business every day. You use one piece of software to manage your customers, another to manage your employees, another to manage your finances. And the list goes on. You buy these pieces independently and hope they fit neatly together like a puzzle. And then you find out the hard way that they don't, and you end up with a mess at the heart of your business operations. Does any of this sound familiar? Well, fortunately, Zoho offers a solution to this chaos. It's called Zoho One. Zoho One is a suite of around 50 pre integrated business applications that fit together beautifully. So instead of dealing with disparate software from multiple vendors with multiple contracts and price points, you deal with one vendor with all the pieces of the business.
- [03:21]
Jasper
Software puzzle neatly put together, offered at.
- [03:25]
David Brown
A very attractive price. Now, if this sounds interesting to you, you gotta check out Zoho One. At Zoho One, that's Z O H O dot 1E. With Zoho, you're not just licensing apps, you're licensing peace of mind.
- [03:43]
Jasper
This episode is brought to you by State Farm. You've got to be kidding. It's something you might say when your small business has a problem, but that won't get you the help your business needs. What you should really say is something that can help. Like a good neighbor, State Farm is there. Their agents are ready to help you with your claim, to help you get back in business on the phone or in person, your State Farm agent is there to help. Like a good neighbor, State Farm is there.
- [04:17]
David Brown
From wondering. I'm David Brown and this is Business News. Red Lobster was founded in 1968, introducing a new generation to fresh seafood, Pioneering the casual dining restaurant in its 90s heyday, it had more than 700 restaurants in the US and Canada and annual sales of around $2 billion. That's a lot of lobster. But in May 2024, after 56 years in business, Red Lobster entered Chapter 11 bankruptcy protection. Now, to many, the fall of Red Lobster was an open and shut case. After years of decline, it tried to lure customers back by making its annual all you can eat shrimp deal permanent. But instead of saving the chain, the promotion KO'd the business. Well, that's probably the story you've heard, but there's a whole lot more to it. In fact, it's almost like a murder mystery. And like any great detective story, there's plenty of suspects in this frame. Including that infamous offer of endless shrimp for sure. But you know what the craziest thing is? That wasn't the first time that an all you can eat giveaway broke Red Lobster. This is episode one, caught in the net. It's 2003, 21 years before the endless shrimp debacle. And in a Red Lobster restaurant in the Midwest, a young server rushes to a table where a customer's waving her over. Hey there. What else can I get for you guys? I'll get another round of the snow crab, please. The waitress tries not to roll her eyes. There are four plates piled with broken crab shells on the table. Already both the man and his date are wearing plastic bibs splattered with grease. They've been here for an hour already, chewing and crunching their way through plate after plate of crab. And they're not the only ones. Every table in the restaurant is piled high with crab shells, and the line of waiting customers stretches out the door. Red Lobster's running an endless crab promotion. All the snow crab you can manage for less than 25 bucks. And just as head office hoped, this offer's proving enormously popular. The restaurant's packed. The server forces a smile at the request for more crab. Oh, yep, sure thing. Can I get you anything else with that? Maybe some more cheddar bay biscuits? The server thinks that if she can tempt this couple with Red Lobster's signature side order, they'll get full faster. And she wants them full. The endless crab promotion might get folks through the door, but now they're chowing down huge meals and spending less than $25 a head. And that means no matter how hard she works, her tips aren't getting any bigger. The man glances up at her. I do like those biscuits, but no thanks. We'll stick to the crab. The woman at the table cracks open her last crab leg, sucks out the meat, then wipes her fingers on her bib and pushes the plate away. The man looks up at the waitress once more. I guess you better make that two more plates of crab. The server walks away, wondering how she'll make ends meet. And she's not the only one worrying, either, because Red Lobster's executives are also counting the cost of this promotion. It's September 2003, and at Darden Restaurant's head office in Orlando, Florida, Edna Morris is under pressure. She's the president of Red Lobster, Darden's biggest brand. But her position in the company is far from secure, and now she's been summoned to the office of the company's CEO. Morris joined Red Lobster the previous year, fresh from running the Quincy's Family steakhouse chain. Her mission was to maximize Red Lobster's profits. Annual sales are rising, but growth is stalled, and if the chain's going to endure, she's got to fix that. So Morris deploys a sales tactic from her past those all you can eat promotions. These limited time giveaways always performed well when she worked at Quincy's, but they are risky business. The all you can eat promotion's aim is to entice customers with a splashy value proposition. Come on into the restaurant and eat as much as you want for a flat fee. So a meal that might be valued at over $100 winds up costing the customer 25. But for the restaurant, the hope is the customer doesn't have the stomach for more than a couple of plates. And that's because when you deeply discount your food like that, well, you're making little profit or maybe even a loss on every meal you sell. They call this the loss leader for a reason. The hope is you can make up those lost profits by selling more beverages, sides, and desserts, while also turning new visitors into regular customers. The initial financial analysis looked good for Red Lobster's endless crab deal. Industry wisdom is that few diners can eat more than two and a quarter pounds of crab meat in a single sitting. And in 2002, a pound of snow crab cost less than $1.40 when it comes off the boat. So even with the customary markup from seafood wholesalers, this promotion could actually deliver a profit. But then the cost of snow crabs starts to rocket. New fishing quotas in U.S. waters and a disappointing harvest in Canada cause a crab supply shortage, and that forces up prices. But by the time Red Lobster officially rolls out its endless Crab promotion in July 2003, wholesalers are charging nearly $5 a pound. That's enough to wipe out the slim profit Red Lobster expected to make. And then comes another shock. Red Lobster executives realize they woefully underestimated the appetite of American diners. Back when Edna Morris did those all you can eat steak deals at Quincy's, the heaviness of beef created a natural ceiling on consumption few people could push through. But crab? Well, crab is way lighter on the stomach. Instead of topping out at two pounds of crab meat, people just keep eating, ordering three, even four plates of crab per sitting, deepening Red Lobster's losses. The seven week promotion finishes in September 2003. But by then, Red Lobster's lost more than $3 million on its crab giveaway. Even worse, the misjudgment shatters stockholder confidence. Investors pull their money out of Darden, crashing the stock price and wiping $400 million off of the company's value. Three weeks after the end of the crab promotion, Edna Lewis resigns. Her exit calms investors, but it doesn't fix Red Lobster's problems. See, the chain might be big and profitable, but it's slowing growth Means it's slipping behind sales at Darden's other big brand, the Italian eatery Olive Garden, are growing much faster. But Darden CEO Joe Lee isn't about to neglect Red Lobster. It's Darden's biggest brand, and it's where his own career started. When Bill Darden co founded Red Lobster, he actually hired Lee to run its first location in Lakeland, Florida. Lee was an air force veteran from rural Georgia, and he would prove crucial to building it into a nationwide chain. Back when the first Red lobster Opened in January 1968, fresh seafood just wasn't easy to find in restaurants located far from the coast. You know, there's this old joke that folks who live inland far from the ocean used to say about going to a seafood restaurant. They'd ask you, you going for sushi or bait? Well, Red Lobster has never been a sushi place, of course, but you get the point. Away from the ocean, don't expect fresh seafood today. Many of us may take the availability of fresh fish and shellfish for granted, but things were way different back in the late 1960s. Transporting ocean fresh fish to the plates of diners in landlocked states was hard and expensive. So Lee used refrigerated trucking and airplanes to build a supply chain that could get fish from port to plate and fast. Crucially, he also bypassed the wholesalers and bought fish straight off the boats at port. Red Lobster then passed on those savings to its customers. And that gave millions of landlocked Americans the chance to eat fresh seafood without busting the household budget. Big deal. By tackling this price and distribution problem, Red Lobster transformed the seafood restaurant industry. But that was only the start, Because Red Lobster didn't just change how we ate fish, it also helped power the rise of what the restaurant trade calls casual dining. As the 1970s began, America's lower middle class was expanding in number and wealth. They now had money to spare and a desire for eating out experiences that went a bit further than a hearty meal at a roadside diner. But they didn't want the prices or.
- [13:34]
Jasper
Stuffy formality of upscale restaurants either.
- [13:36]
David Brown
They wanted informal restaurants where they could kick back and relax. And so the casual dining restaurant was born. These sit down restaurants still had table service, but without servers in suits and ties and intimidatingly expensive wine lists. There were supposed to be like, relaxing, no fuss places for everyday folks that offered better meals than diners and fast food joints. And it was exactly what the new middle class wanted. During the 1970s and 80s, Red Lobster and other casual restaurants like TGI Fridays and Pizza Hut took America by storm. You saw what happened there. Well, as the 90s began, Red Lobster had more than 400 restaurants across the continental U.S. making it the nation's largest seafood restaurant chain. It was also buying around 2% of all the seafood consumed in the country. And in 1992, it introduced the ultimate free side dish, Cheddar bay biscuits. Now, I've got to take a moment to talk about these babies. Speaking as someone who grew up on homemade biscuits and gravy, my own personal bar is set pretty high when it comes to biscuit cravings. But these cheddar bays, they meet that bar and then some texture. The sharp cheddar herby garlic, great combo. They're a Red Lobster fan favorite for good reason. Kind of underscores the emphasis on quality there. Anyway, bottom line is Red Lobster hit it out of the park in the late 20th century. But by the early 2000s, the excitement around the chain had faded. The novelty was gone. Young adults didn't want to eat at the chains their parents ate at. They wanted fresh ingredients, a variety chef inspired dishes. Not the same old predictable choices from decades old chain restaurants. But there was another, more intractable problem. Americans aren't really that big on seafood. The average American eats four or five times as much chicken as fish and a whole lot more beef and pork. If Red Lobster was going to turn things around, it had to overcome these major headwinds. It's May 2004, and nine months have passed since Edna Morris resigned over the endless crab debacle. Darden chief Joe Lee has just found a new president for the chain, Kim Lopdrup. Loptrup almost sounds like some obscure nautical term, doesn't it? Almost like he was destined for this gig. So let's talk Loptrup. He's a lean 46 year old with short, clipped hair and a serious demeanor. Something of a sharp contrast from Darden's larger than life CEO Joe Lee. But Lee doesn't need a mini Me. He wants someone who can take the helmet Red Lobster and navigate it out of troubled waters. And Loptrup's got a track record that suggests he can. He built his rep as a restaurant executive, turning around international franchises like Dunkin Donuts and Baskin Robbins. After that, he became chief operating officer of Burger King. Look, he knows this is going to be tough. Large restaurant chains are like supertankers. They're hard, slow to change. But Lop Drup knows this will be his greatest challenge yet, and perhaps his greatest victory. Because if Red Lobster is to change its ways to appeal to a new generation. Well, you gotta overcome this obstacle. There's the risk that its existing loyal fan base will might not be on board with the change.
- [17:10]
Jasper
You know, it's funny, sometimes self care looks like binge watching cooking shows in your PJs and other times it's just making sure you're taking care of the basics. And that's what Liquid IV is for. It's a little daily ritual that makes hydration actually exciting.
- [17:25]
David Brown
Let me tell you what makes it special.
- [17:26]
Jasper
It's powered by Liv Hydra Science, a blend of electrolytes, essential vitamins and clinically tested nutrients. You just tear open a stick, pour it into water and boom, you've got hydration that has three times the electrolytes of the leading sports drinks. I keep some sugar free Liquid IV packets in my car console. White Peach is my favorite. Just pull into a gas station, grab some bottled water, pour in some Liquid iv and that feeling of constant thirst on the road just disappears. All you need is one stick, 16 ounces of water and it hydrates so much better than just water alone.
- [17:59]
David Brown
So what's your ritual?
- [18:01]
Jasper
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- [19:27]
David Brown
It's 2006 and in North Olmsted, Ohio, a new Red Lobster restaurant's just opened. But this location isn't like any other in the chain. And that's because it's the test bed for Red Lobster 2.0. Customers can see the difference before they even step inside. The building doesn't even look like a standard Red Lobster. Certainly doesn't look like it belongs in this Midwest town on the outskirts of the Cleveland airport. With its stone tower, gable roof, and clapboard features, it looks like it belongs on the main coastline. And you go inside, the differences continue. Gone are those campy fishing nets and nautical trinkets that used to adorn the walls. And in their place, dark wood paneling, lighthouse inspired lanterns, softer lighting. Red Lobster calls it the Bar harbor look, or Ba Haba look, as they might say up there. It's meant to conjure up visions of upscale northeastern American towns like Kennebunkport, even though this is actually the parking lot of a shopping mall hundreds of miles from the sea. But if the new look goes down well in Ohio, Red Lobster president Kim Loptrup plans to remake all its restaurants in its image. It's a transformation that'll cost an estimated $350 million. And it's vital to Laptrup's grand plan to reinvigorate the chain. Since Loftrup took charge two years ago, the chain's been doing a lot of research into who eats at Red Lobster and why. And that research found that customers imagine that Red Lobster actually hails from Maine instead of its real birthplace down in Florida. But instead of correcting them, the plan is to lean into the misunderstanding and create a new look that further reinforces the fantasy. The research also finds something really interesting, that there are three kinds of core customers at Red Lobster. The researchers call the first kind the indulgence. These are people who want to get as much food as they can for as little money as they can. These are the folks looking for the value proposition, the kind of value that the chain's limited time deals, like the annual endless shrimp promotion deliver. The second kind of customer is the traditionalist. These are folks who always stick to what they know. They like the fact that wherever they travel, they can eat at Red Lobster and get the same experience. They find comfort in the routine and predictability of what a chain restaurant offers. And then you got the third kind of Red Lobster guest. They're called the experientials. They make up around a quarter of the customer base. And according to the market research, Red Lobster's been neglecting them. See, for experientials, eating out is all about. Well, you can fill in the blank, right? The experience. It's about sharing a special moment with friends or family. What these customers really care about is quality. And when it comes to seafood, they measure quality and freshness. You remember when we talked about Red Lobster making it big from bringing fresh fish to the inland states? Well, that's all true. Still is in 2006. Trouble is, not many people think what Red Lobster serves is fresh. For Lopdrup and the rest of his crew, this research finding in particular came as a shock. The brand's long prided itself on bringing the fresh taste of the sea to the wider nation. But it seems the message just isn't getting through to the dining public. So the company explored the problem more deeply and discovered something really counterintuitive. You know, most folks can't actually tell if the seafood on their plate is fresh or frozen. Instead, what are they judging freshness on? Well, they're looking around the surroundings, the decor of the restaurant, the pictures of the food on the menu, the other guests, the music playing in the background. The perception of freshness isn't down to the food, but the vibe. To make customers believe the food is fresh, the entire restaurant needs to work in harmony to sell that idea. But when people visited their local Red Lobster, they saw these tired interiors and just assumed the food was too. The new bar harbor layout is only part of the answer. Lapdrup's also ordered a menu refresh. More than 20 menu items gone. No more photos of fried fish on the menu. No more hamburgers. Because they undermine the all about seafood image Red Lobster wants. And the kitchens, they're changing too. Wood fired grills are getting installed in every restaurant. Chefs are being retrained as grill masters. The menus will be updated twice a day to highlight the fresh fish option of the day and to include the name of the grill master on duty in the kitchen. All of these changes put together should signal to customers that Red Lobster means fresh. And so the chain introduces the new menu in late 2006, and the following year launches a new TV ad campaign to get the word out.
- [24:20]
Katie
How about grilled red snapper? Or maybe fresh blackened tilapia or pan seared, lightly seasoned fresh rainbow trout. Or you could try the latest creation from our chefs. Fresh Atlantic salmon and shrimp with a sweet maple and cherry glaze. It's Red Lobster's daily fresh fish menu. Your favorite fresh fish every day and every way you like it. Come see what's fresh today.
- [24:47]
David Brown
At Red Lobster, the daily fresh fish menu goes down real well. Customer satisfaction rises to a record high after years of stagnation. Lock Drop's brand refresh seems to be working. Only problem is that's not the whole picture. And that's the problem Many businesses face getting that whole picture. You know, if you're trying to ride a ship that you fear is at risk of sinking, well, what do you do? You take in the data, you chart out the course, but that assumes that conditions are going to be the same. But as we know, in business, just as in life, the times, they are always a changing, especially in the restaurant industry. In fact, according to a study that lots of people talk about, from 2005, nearly 60% of restaurants go out of business after three to five years. That's incredible. And many of these restaurants never see the big, unexpected problems before it's too late to do anything about them. For Red Lobster, that problem was right around the corner. The 2008 credit crunch, the Great Recession, the financial crisis, whatever you call it. Who among us can honestly say I saw it coming? Well, let me tell you, Red Lobster did not. And that makes this economic disaster the first suspect in the hunt for answers about the chain's demise. Oh, sure, Red Lobster had its struggles, but up until then, it seemed ready to bounce back. But the crash, well, that stomped on that dream, and fast. In 2009, the chain sales dropped 2% as customers dialed back on spending. The next year, sales dived 5%. In just two years, the brand lost $140 million in annual sales. But instead of changing course, well, lot Drup held firm with the plan to remodel the restaurants. His assumption, it'll pay off once the hard times are over. Four years later, it's 2014, and Clarence Otis, the CEO of Darden Restaurants, is facing a crisis. Otis joined Darden in its mid-90s heyday, but those days, they are long gone. The lingering effects of the financial crisis have played into the hands of a new kind of restaurant chain. They call it Fast Casual. Talking about restaurants like Chipotle, Panera Bread, Baja Fresh, Panda Express. You know the ones. These places fill the gap between fast food joints and the relaxed table service of casual restaurants like Red Lobster. They offer the speedy counter service like fast food chains, but with food closer in quality to sit down restaurants and prices that sit somewhere in between. And that's made him especially popular among recession hit 1834 year olds who want more nutritious meals but lack the time and money for a Red Lobster sit down meal. This shift in the dining habits of young adults is hitting all of Darden's restaurants, including Olive Garden and Longhorn Steakhouse. But Red Lobster is suffering the most. And its expensive remodeling hasn't managed to counteract that trend. It's another suspect to add to our detective notebook. The upstart fast casual chains that prove far more adept at grabbing the dollars of the next generation of restaurant guests gotta be a prime suspect, don't you think? But the economic downturn and the rise of fast casual restaurants also leads us to the next suspect in this mystery. And this suspect resides in Manhattan. Its name is Barrington Capital, and it's a hedge fund. Big investor in Red Lobster's parent company, Darden Restaurants. In fact, in 2014, Barrington owns 5% of Darden. But Darden's not delivering the return on investment that Barrington wants. And that in turn makes the investors who entrusted Barrington with their money unhappy. So Barrington decides to up the pressure on Darden. It proposes a major reshaping of Darden, one that will deliver a quick win for its shareholders. Alright, let's break for a quick huddle here, because Barrington's homed in on an important detail about Darden's business. It's a detail that lurks deep in the balance sheet under the assets heading. Now, as you probably know, an asset's anything a company owns that could potentially be sold for cash or perhaps more importantly, borrowed against. And what Barrington's realized is that Darden's most valuable asset isn't actually its restaurants. Oh, no, it's the real estate those restaurants sit on. You see, Darden owns most of its restaurant buildings and the land under them. Its property holdings worth billions and include hundreds of Red Lobster locations. And the value of all that real estate is rising way faster than the sales at the restaurants. You see where this is going. Barrington's plan is to turn those real estate gains into profits for their investors. And to do that, it's got one of those fancy financial conjuring tricks that Wall street loves to try to pull off. The trick is to move Darden's real estate into a new separate business, specifically what's called a real estate investment trust, or reit. You might have heard of those. All that doesn't really matter. What matters is that now Barrington and others can invest just in the property, not so much the restaurant. That means they can profit from the property without having those gains reduced by the performance of Darden's restaurants. But this magic trick's not done yet because Red Lobster and Darden's other restaurants still need the land and buildings, right? They gotta work out of somewhere. So the REIT will now become the landlord that rents back to Darden all that property Darden used to own, which means even more money for those who invest in the reit. Of course, that does mean something else. That Darden's restaurants are going to have to pay rent from now on. And that's why Darden CEO Clarence Otis is dead set against Barrington's plan. He thinks it'll saddle the restaurants with rent bills. It'll make it harder to stay competitive on price. He's right. But Otis has to play this carefully. He needs to convince stockholders to reject Barrington's proposal. But there's only one way to do that. He's got to promise them a better alternative. And he comes up with something. Selling Red Lobster Now, Red Lobster might have started the Darden empire, but now it's its slowest growing brand, the chain's unique selling point of bringing fresh seafood to the inland state masses. Well, that's pretty much gone, too, these days, thanks to the supply chains Red Lobster itself helped establish back in the day, any restaurant anywhere in America can get fresh seafood for its customers. And that means fresh seafood is no longer the novelty it once was. So Otis proposes that the company sells Red Lobster and use the money to help grow its other brands instead, including Olive Garden. In other words, Otis is betting on breadsticks over Cheddar Bay biscuits. That move prompts a bigger investor, Starboard Value, to wade into the fight. Starboard owns 5% of Darden, and it also wants to see all the company's property moved into a reit. So a battle for the future of Darden kicks off as Otis and the activist hedge funds try to get other stockholders to back their rival plans. With Starboard and Barrington refusing to back off, Otis and the Darden board changed the company bylaws to make it easier for them to sell Red Lobster without needing to get backing from the shareholders. And that attack on shareholder democracy turns the whole conflict nuclear. Starboard and its allies sue to try and block the sale. Both sides start badmouthing each other in the financial pages of the newspapers. But it's too late. In spring 2014, Darden agrees to sell Red Lobster for $2.1 billion. The buyer is Golden Gate Capital, a private equity firm based in San Francisco. Now, Golden Gate's got history in the restaurant biz. Before Red Lobster, it bought California Pizza Kitchen and Romano's Macaroni Grill. You might have heard of them. But Otis victory over Starboard is short lived. The move to sell without consulting stockholders sparks fury. And a few months later, under pressure from Starboard and other investors, Otis steps down. Then Starboard engineers the ousting of the entire Darden board. The cull shocks corporate America. It's almost unheard of for a group of rebel shareholders to remove the entire board at a public company this size. But it's too late for Darden to claw back Red Lobster. The deal with Golden Gate? That one's done. Red Lobster and its CEO Kim Loftrup are under new management. Golden Gate and Red Lobster put out statements hyping the bright new future the seafood chain can now expect. But Golden Gate is already measuring up Red Lobster's real estate. Yeah, it's seen the value in all those properties, and it's going to use it to deliver a rapid return for its investors, even if that leaves Red Lobster a shell of what it once was. Need care for ed, hair loss, skin care or other common health concerns? Amazon One medical pay per visit lets you quickly connect with a provider right from home. No insurance needed, no scheduling hassles, just straightforward, affordable health care when you want it. Start a virtual visit anytime 24 7. Their providers will create a personalized treatment plan and if medication is right for you, get fast free delivery through Amazon Pharmacy prime members can even save up to 92% on ED medications compared to competitors. Quality care shouldn't be complicated or expensive. That's why they offer transparent pricing with a simple flat fee per visit. This is the kind of new thinking many folks have been hoping for. 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- [35:11]
Jasper
Imagine getting a message from your favorite brand that feels like it was created just for you. Chances are they're using Attentive, the SMS and email marketing platform designed to help brands build and connect with their ideal audience. See, Attentive helps marketers create unique messages for every subscriber, transforming the consumer shopping experience and maximizing marketing performance.
- [35:35]
David Brown
But how does it work?
- [35:36]
Jasper
Well, you see, Attentive's AI learns what subscribers actually want based on their real time interactions with your brand. That means it customizes the content, tone and timing of every message so they always resonate. Are you ready to take customers on a journey created just for them? Visit attentive.combusinesswars to learn more.
- [36:05]
David Brown
Foreign It's July 2014, just two months after private equity firm Golden Gate Capital bought Red lobster, and the chain's new owner is already moving to recoup its $2.1 billion investment. Just like Starboard, Golden Gate knows Red Lobster's most valuable asset is its real estate. The chain owns around 500 or so of the plots its restaurants Occupy. That's a lot of land to cash in. So Golden Gate's first move is to sell all that property to another company in what's known as a sale leaseback deal. The deal is Red Lobster sells its property and immediately agrees to lease it back from the new owner. Just like selling your home so you can rent it from the person you sold it to. Sure, you lose control of the place, but you do get a cash lump sum. And that's what Goldengate's doing here, just on a bigger scale. Because Golden Gate sells Red Lobster's real estate for $1.5 billion, what that means is that Golden Gate has now essentially bought red lobster for $600 million. Once you do the math, that's a bargain price for a restaurant brand that delivers annual sales of $2.6 billion. And while this is a quick win for investors who've entrusted Goldengate with their money, to many it also feels like asset stripping. Under this controversial business strategy, large financial institutions buy companies on the cheap. Then, instead of focusing on long term improvement, they sell off its parts for short term gains. But while Golden Gates recouped most of its investment in Red Lobster, the restaurant chain now has an extra expense to worry about. We talked about it before, and that's monthly rent. Under its leaseback deal, the chain's agreed to keep paying rent for up to 25 years, which means Red Lobster will be on the hook until 2039. But the deal also includes a provision that will see the chain's rent payments rise 2% every year, no matter what. And that's going to cause some very big headaches later on down the line. But not everything's going bad for Red Lobster, because it's about to get an unexpected boost from the world's biggest pop star. It's February 6, 2016, and Beyonce's just put out a surprise new track called Formation. And it comes with a name check to Red Lobster baked in the next day. She performs part of the song live at the NFL Super Bowl 50 halftime show before a TV audience of more than 100 million people. And Beyonce's intervention delivers a massive 33% bump to red Lobster's sales in the days that follow. And while that's a much needed boost for the brand, CEO Kim Loptrup knows the Beyonce bounce won't last. Since losing its real estate, Red Lobster continued remodeling its restaurants and revamping its menu. But Golden Gate's already working on a plan to wash its hands of Red Lobster. And right about that time, that's when a new player enters the frame. Its name, Thai Union. Tye Union started as a tuna canning company back in 1977, and now, thanks to a bunch of acquisitions, it's the third biggest seafood supplier in the world and the owner of something you might have heard of before, a canned tuna company called Chicken of the Sea. Ask any mermaid you happen to see what's the best tuna chicken of the sea. Now that Thai Union's become one of the seafood industry's biggest behind the scenes power players, it's looking to increase its presence on the consumer side of the market. And owning a chunk of Red Lobster sounds ideal. After all, Thai Union's already one of Red Lobster's main suppliers. So in October 2016, it agrees to buy a 25% stake in Red Lobster from Golden Gate for $575 million. Now think of that. Golden Gate has made back most of what it paid for for Red Lobster in the first place. It still owns the majority of the company. From here on out, almost everything the chain makes for Goldengate should be pure profit. But while Goldengate's busy making deals, Red Lobster boss Loptrup is still trying to get the chain back on track. And as the 2020s approach, the problems are stacking up. The Beyonce boost is long gone, the rental payments are rising, and its customer base is aging. And now here comes another iceberg, and it's got Covid written all over it. It's 2020, and in Central Florida, Red Lobster boss Kim Loptrup is exhausted. For the past year, he's worked day and night trying to guide the chain through a pandemic that's laid waste to the restaurants worldwide. At one point, he had to close the doors of many of Red Lobster's 700 plus restaurants. As COVID lockdowns came into force across North America, chains also had to rapidly expand the availability of delivery and introduce curbside pickups and family feast deals. But now, with lockdowns beginning to lift, Loptrup is preparing for a very different kind of meeting. Torapang Chancery, the head of Thai Union, wants to check in on how his chain is doing now that the COVID restrictions are easing. As the bald headed Chancery listens, Lapdrop reveals the biggest headache the chain now faces. The rents on our locations are killing us. Even though the restaurants haven't even been open, we've still had to pay our leases the whole way through. Laptrup runs Chancery through the numbers. Ever since Golden Gate sold off Red Lobster's real estate, its rent payments have kept rising. And those rent demands didn't stop just because of the pandemic either. Chancery nods sympathetically.
- [42:20]
Torapang Chancery
This is no way for restaurants to run. It's disgraceful for the landlords not to give you some consideration here.
- [42:27]
David Brown
Chancery pauses to think, then leans forward in his chair with an almost mischievous twinkle in his eyes.
- [42:34]
Torapang Chancery
Maybe we can help. When we first invested in Red Lobster, we also got an option to increase our stake to 49%. We still believe the business has a future. We could exercise our option and bring in other investors to take control of the business.
- [42:53]
David Brown
Loptrup is surprised few want to invest in restaurants right now, especially one carrying a 380 million dollar loan that'll come due next year. But then again, maybe Thai Union sees these financial troubles as a chance to buy Red Lobster at a bargain price. Now Lobtrup knows there are wrinkles to iron out. Being owned by one of your biggest suppliers, well, it that could be awkward. But the way Chancery just responded to his concerns about the rents Red Lobster is having to pay sounded so supportive. And having an owner that's committed to the seafood business, well, that might be better than being owned by a private equity firm looking for a fast exit. Chancery catches Laptrup's uncertainty and smiles.
- [43:36]
Torapang Chancery
Kim, don't worry. We don't want to come in and tell you how to run the restaurants. That's your job. We just want to do what we can to support you and help your business and the entire seafood business grow.
- [43:49]
David Brown
Loftrup just hopes being owned by a major supplier won't put Red Lobster in harm's way. In August 2020, Thai Union allies with a group of co investors to form something called the Seafood alliance and buy Golden Gate Capital's remaining stake in Red Lobster for an undisclosed sum. This deal puts the seafood alliance, backed by Thai Union, in control of the business, and Loptrup leaves soon after. After 14 years, two changes of ownership, a major recession and a pandemic, well, Laptrup feels it's time to move on. And so, as the world edges out of lockdown, Red Lobster prepares for a new chapter in its story. And its executives hope that its new deep pocketed backer will help it finally rediscover its mojo. But they also know that this alliance with Thai Union could be an uneasy one. It comes with the risk that despite all the assurances, Thai Union just might force Red Lobster to buy more of its seafood at an inflated price. It's already lost control of its land and buildings. Now it could lose control of its purchasing decisions and with it, the ability to stay afloat. On the next episode, tensions flare between Red Lobster and its new owners. America goes wild for endless shrimp, and hip hop legend Flavor Flav brings on the noise to save Red Lobster. If you like business wars, you can binge all episodes early and ad free right now by joining Wondery plus in the Wondery app or on Apple Podcasts. Prime members can listen ad free on Amazon Music.
- [45:39]
Jasper
Before you go, tell us about yourself.
- [45:41]
David Brown
By filling out a short survey@wondery.com survey from Wondery this is episode one of what Killed Red Lobster for Business Scores. A quick note about the recreations that you've been hearing. In most cases, we can't know exactly what was said. These scenes are dramatizations, but they're based on historical research. I'm your host David Brown. J.S. raffaelli of Yellow Ant wrote this story, researched by David Wolinski Sound design by Ryan Fattesta Fact checking by Gabrielle Joliet Voice acting by Chloe Elmore and Theodore Chin. Our managing producer is Desi Blaylock. Our senior senior managing producers Callum Plews produced by Tristan Donovan of Yellowant and Grant Rutter. Our senior producers are Emily Frost and Dave Schilling. Karen Lowe is our producer emeritus. Our executive producers are Jenny Lauer Beckman and Marsha Louie for wondering.
- [46:47]
Alex
And now a next level moment from ATT Business. Say you've sent out a gigantic shipment of pillows and they need to be there in time for International Sleep day. You've got AT and T5G so you're fully confident, but the vendor isn't responding and International Sleep Day is tomorrow. Luckily, AT&T 5G lets you deal with any issues with ease, so the pillows will get delivered and everyone can sleep soundly, especially you. AT&T5G requires a compatible plan and device coverage not available everywhere. Learn more@att.com 5G Network.