Food inflation remains strong
Inflation is falling but buying food can still be expensive. Grocery prices surged 21% in the last three years, surpassing the overall 18% pace of inflation during that same time period, according to the Bureau of Labor Statistics.
The financial woes hitting seafood restaurant chain Red Lobster have prompted it to close dozens of locations and file for Chapter 11 bankruptcy protection, with some of the blame being heaped on the chain's endless shrimp bargain.
In the wake of the pandemic, Red Lobster looked to boost traffic to its restaurants by offering a $20 all-you-can-eat shrimp deal that the company hoped would serve as a loss leader and bring in more customers who would become regulars.
However, the deal itself proved too good for customers to pass up. The Los Angeles Times reported that some patrons took to social media to brag about how many shrimp they were able to scarf down, including one woman who said she ate 108 shrimp during a four-hour meal.
"I think the distinction between something like an Olive Garden with endless breadsticks and Red Lobster with bottomless shrimp is that shrimp is like an entree whereas breadsticks are more of a side," Jim Salera, a research analyst at Stephens focused on restaurants and packaged food and beverages, told Gxstocks. "The goal with any type of deal like that is you bring in consumers, and then you either add incremental purchases to the ticket, whether it's alcohol or, you know, appetizers, things like that expand the ticket."
RED LOBSTER CLOSING DOZENS OF LOCATIONS AS BANKRUPTCY POSSIBILITIES LOOM
Red Lobster's financial challenges were exacerbated by customers' preference for the $20 endless shrimp deal. (Eric Thayer / Bloomberg / File / Getty Images)
"So, you bring them in, and then you convert them to a more regular customer such that maybe they come in for endless shrimp one time, but then the next time they come in they get something else. Unfortunately, in the current environment, I think what you saw happen is they had the $20 all-you-can-eat shrimp – that's a very short price point that attracts consumers," he said.
As customers looked to gorge themselves on shrimp and opted to continue consuming Red Lobster's discounted fare, the company took bigger losses on the promotion.
"You already have a small profit margin," Salera said. "You can very easily go beyond that when you're attracting consumers who are just looking to have that one item or engage with that one offering and not kind of branching out across the menu."
Dozens of Red Lobster locations have been listed as "temporarily closed" as the company considers next steps. (Patrick T. Fallon / AFP / File / Getty Images)
Salera added that the combination of consumers looking to find value in an inflationary environment combined with higher operating costs due to rising interest rates played a role in pushing Red Lobster's finances deeper into the red.
"When you have lease agreements in a rising interest rate environment, your costs go up for running the restaurants," he said. "But then, simultaneously, if you operate a casual diner kind of concept or formal restaurant, you can also see your traffic trends that are pressured during more strained economic times because consumers have to make decisions around what do they do with their budget."
A coconut shrimp dish at Red Lobster (Michael Nagle / Bloomberg / File / Getty Images)
RED LOBSTER'S ULTIMATE ENDLESS SHRIMP DEAL CONTRIBUTED TO 3RD-QUARTER OPERATING LOSS
Thai Union Group CFO Ludovic Garnier, whose firm was a leading financial backer of Red Lobster before it announced plans earlier this year to unload its stake in the chain, spoke to investors and analysts in November 2023 and noted that the deal proved more costly than planned even though it helped bring more customers in.
"The price point was $20, and you can eat as much as you want. For those who have been in the U.S. recently, $20 was a bit cheap. The rationale for this promotion was to say, 'We knew the price was cheap, but the idea was to bring more traffic to the restaurants because Q3 and Q4, it's always a season where we don't have much traffic in our restaurants,'" Garnier said at the time. "And it did work … there was an increase in the traffic."
Red Lobster's Cheddar Bay Biscuits (Deb Lindsey for Washington Post / File / Getty Images)
However, Garnier said that "the proportion of the people selecting this promotion was much higher compared to expectation" as customers sought to capitalize on the deal.
"Bottom line, for the financial performance, it did not deliver what we were expecting, and it is one of the key reasons for the losses we generated in Q3 2023," Garnier said. He added that in the wake of those losses, the company upped the price point to $22 and then to $25 and planned to keep it on the menu because it's an "iconic promotion for Red Lobster" even though the company needed to be "much more careful" in its approach to pricing the seafood deal.
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Red Lobster filed for Chapter 11 bankruptcy protection late Sunday night, saying it will use "the proceedings to drive operational improvements."
"This restructuring is the best path forward for Red Lobster," CEO Jonathan Tibus said in a statement. "It allows us to address several financial and operational challenges and emerge stronger and re-focused on our growth. The support we've received from our lenders and vendors will help ensure that we can complete the sale process quickly and efficiently while remaining focused on our employees and guests."
Red Lobster did not immediately respond to a request for comment.
Gxstocks' Suzanne O'Halloran and Timothy Nerozzi contributed to this report.
