Court filings cite corporate mismanagement and possible shady dealings with main shareholder Thai Union
In January of this year, seafood supplier Thai Union, Red Lobster’s largest shareholder, said the casual-dining restaurant chain’s “Ultimate Endless Shrimp” deal caused an $11 million loss. It declared that it would stop funding the Orlando-based chain and was looking to sell its stake in the company.
But the $20 all-you-can-eat deal, which has been reworked as a budget-friendly but not unlimited option, was just part of Red Lobster’s financial woes, and Thai Union itself might have had a key role in the chain’s difficulties, according to statements by recently appointed CEO Jonathan Tibus in court documents supporting its Chapter 11 bankruptcy filing on Sunday.
Tibus, a restructuring expert who oversaw the bankruptcies of chains including Kona Grill, Krystal, and Quiznos, said Red Lobster first hired him in January as part of a team from management consulting firm Alvarez Marsal, where he has been managing director for 22 years, to assess the chain’s situation.
He ultimately became CEO in March when then-CEO Horace Dawson announced his retirement.
“It was immediately clear that Red Lobster’s performance was deteriorating and had been doing so for several years,” Tibus said in the court documents.
He said guest count had declined by 30% since 2019, recovering “only marginally” as the pandemic subsided.
While sales increased by around 25% from 2021 to 2023, they began to fall over the past 12 months, and the company’s consolidated EBIDTA has fallen by more than 60% over the past year, “which all but erased any ground Red Lobster recovered following the pandemic,” he said. “The latest symptom of this decline is Red Lobster’s $76 million net loss during fiscal year 2023.”
Of course, many casual dining chains were hit hard by the pandemic and the entire segment has long been coping with consumer shifts either up in price to fine dining or, more frequently, down to fast-casual and quick-service chains.
Beyond that, inflation and rising minimum wages in many states have affected restaurants nationally. Tibus said as much in the court filings.
Unfavorable leases have also proven to be challenging for Red Lobster, and in the days preceding the bankruptcy filing the chain closed dozens of locations (the court documents said a total of 93 restaurants had been shuttered), leaving the chain that once had more than 700 restaurants with 551 left in the United States, all company-owned.
Another 27 company-owned restaurants are in Canada and 27 are franchised abroad in countries including Mexico, Ecuador, Thailand, and Japan.
But Tibus said Paul Kenny, a principal in Seafood Alliance, which was part of the consortium, along with Thai Union, that bought Red Lobster in in 2020, made matters worse in May of 2023 when he made Ultimate Endless Shrimp a permanent offer “despite significant pushback from other members of the Company’s management team.”
Kenny had been made acting interim CEO following the resignation in April of 2022 of CEO Kelli Valade, according to the court documents “[a]t the direction of Thai Union”.
Tibus said Kenny’s move “created both operational and financial issues” for Red Lobster, “saddling the Company with burdensome supply obligations, particularly with its equity sponsor, Thai Union.”
He added that Red Lobster is “currently investigating the circumstances around these decisions [as well as] whether Thai Union and Mr. Kenny encouraged excessive merchandising of the [Ultimate Endless Shrimp] promotion in-store (including heavy in-store promotion), which was atypical for the Company. The excessive merchandising decision led to supply issues resulting in major shortages of shrimp with restaurants often going days or weeks without certain types of shrimp.”
Tibus added that he and his team were also investigating whether Kenny “circumvented the Company’s normal supply chain and demand planning processes.”
He added that Red Lobster’s relationship with Thai Union, as its equity sponsor and major supplier, might have made matters worse.
“I understand that Thai Union exercised an outsized influence on the Company’s shrimp purchasing, as indicated by, for example, Mr. Kenny’s April 2023 purported direction to Thai Union to continue producing shrimp for Red Lobster that did not flow through the traditional supply process or bid cycle or adhere to the Company’s demand projections,” Tibus said.
“I also understand that in apparent coordination with Thai Union and under the guise of a ‘quality review,’ Mr. Kenny made a series of decisions that eliminated two of the Company’s breaded shrimp suppliers, leaving Thai Union with an exclusive deal that led to higher costs to Red Lobster,” Tibus added.
He said he and his team were also “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.”
Negotiations are currently underway to sell Red Lobster to RL Parent Holdings LLC, a newly formed company controlled by some of the chain’s largest creditors, with a goal of completing the sale by August 2.
In the meantime, Tibus said he and his team are working to improve store operations to foster consistency for employees and customers, including information technology upgrades and greater efforts “to cultivate and sustain a culture of reward and recognition. This will include modernizing hiring processes and developing individualized plans for Red Lobster’s directors and senior directors of operations,” he said.
The company is also working to simplify Red Lobster’s menu and “implement a sensible promotional calendar with fewer ‘limited time offers.’”
Contact Bret Thorn at [email protected]
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