In a move that came as little surprise, the long-struggling Red Lobster chain filed for bankruptcy protection over the weekend, just a week after closing nearly 100 restaurants across the country, including one location in San Diego County.
The voluntary Chapter 11 petition filed in bankruptcy court Sunday in Florida states that there are more than 100,000 creditors, with assets and liabilities each totaling between $1 billion and $10 billion.
Court documents paint a portrait of a troubled company, saddled with nearly $300 million in debt, costly leases, poorly performing restaurants, and a 30 percent decline in customers over the past five years. To quickly stem still more losses, Red Lobster recently closed 93 “financially burdensome” locations, among them a Red Lobster on Mira Mesa Boulevard. Still open locally are restaurants in Chula Vista and the Sports Arena area. Two other Red Lobster locations — in Oceanside and La Mesa — went out of business last year and were not part of the most recent wave of closures.
While much has been made of an ill-advised decision last year to make permanent a $20 “endless shrimp” promotion that would ultimately cost the company $11 million, it is a fraction of the $76 million net loss Red Lobster suffered in the 2023 fiscal year alone.
“It was immediately clear that Red Lobster’s performance was deteriorating and had been doing so for several years,” said Jonathan Tibus, CEO of Red Lobster Management and a veteran restructuring adviser. “For example, Red Lobster’s annual guest count has declined by approximately 30 percent since 2019 and has only marginally improved from pandemic levels seen during 2020 and 2021. Although Red Lobster’s net sales increased by approximately 25 percent from 2021 to 2023 (which itself represents modest recoveries following the COVID-19 pandemic), net sales have begun to show material decline during the last 12 months.”
Despite the financial issues weighing on what is the single largest casual seafood chain in the U.S., the current plan is to continue operating still open restaurants, pay employees and vendors, and take steps to potentially sell off the company. Tibus indicated that the restaurant chain’s lender, Fortress Investment Group, would provide $100 million in financing so that restaurants could continue operating through the bankruptcy. The company announced Sunday that Red Lobster had entered into a stalking horse purchase agreement that will allow the company to sell its business to an entity controlled by its existing lenders.
In the interest of keeping the remaining restaurants running and workers employed until a buyer can be found, the management team is seeking to continue paying the company’s 36,000 employees and vendors owed money.
“Any delay in paying the employees’ compensation, deductions, or benefits will fundamentally harm the Debtors’ relationships with their employees and irreparably impair employee morale at the very time when dedication, confidence, and cooperation are most critical,” Tibus pointed out in a filing supporting the Chapter 11 bankruptcy. He noted that employees at shuttered stores were relocated to nearby locations where possible.
On Monday, a U.S. Bankruptcy judge granted permission to continue operating the Red Lobster business. Less than a week ago, the company completed an auction to sell all the kitchen equipment and furnishings housed in the shuttered restaurants. Everything from lobster thanks to microwave ovens were sold. In San Diego, the entire contents of the Mira Mesa restaurant $15,000 by the closing date of the auction.
For the time being, San Diego’s remaining Red Lobster locations are open, although it’s hard to know how much more cost-cutting is ahead as bankruptcy proceedings approach a possible sale, said San Diego restaurant analyst John Gordon. A Red Lobster filing states that there are 551 locations in the U.S.
“In my opinion, they have done a broad-based review already. It seems who is left open is stronger to begin with,” Gordon said. “Our remaining two city units — Sports Arena and H Street in Chula Vista — have survived the scrub. In markets where there are closings, surviving units of the same brand often pick up some guests from the closed unit area so this bodes well for our San Diego units.”
If there is any more cost-cutting to be done, it will likely be accomplished before a sale, he added.
“It would be to the advantage of the workout firm to identify all the cutting now so that the maximum price can be secured in the auction period coming up,” Gordon explained. “Second, when you go through multiple waves of cuts in a restaurant company, it decreases morale in the company this is a people company. So you want to get all your bad news out early so that you can rebuild for the future.”
He noted, however, that it was not a good sign that the company so far had failed to find an interested buyer beyond the lenders, despite having initiated an “extensive marketing effort” in March with the help of an investment banker.
Gordon also was struck by revelations in Tibus’ declaration suggesting suspect business practices by Red Lobster’s former CEO, Paul Kenny, as it related to the endless shrimp promotion and the role of the owner, Thai Union, as both majority investor and key supplier of its shrimp. In one instance, it led to higher costs to Red Lobster, Tibus said.
“The Debtors are exploring the impact of the control Thai Union exerted, in concert with Mr. Kenny and other Thai Union-affiliated entities and individuals, and whether actions taken in light of these parties’ varying interests were appropriate and consistent with applicable duties and obligations to Red Lobster,” Tibus wrote.
Said Gordon, “That’s new news. It’s also shocking and disappointing.”
