Aging clientele, pricey shrimp doomed Red Lobster

Darden has been trying to get rid of the chain for months after executives concluded it was a drag on its finances.

By MSN Money Partner May 19, 2014 1:47PM
By Justin Bachman, Businessweek

Red Lobster is headed into a private equity turnaround. 

Darden Restaurants (DRI) said it would sell the seafood chain for $2.1 billion, jettisoning a dented brand that was beset by high costs and an early-bird special demographic -- not the kind of casual diners who eat out often and spend heavily on cocktails.


Darden has spent the past six months trying either to sell or to spin off Red Lobster to shareholders after company executives concluded last year that the chain was a financial albatross dragging down its more successful Olive Garden, LongHorn Steakhouse, and Bahama Breeze restaurants. 

Red Lobster sales have been far more volatile that its corporate siblings. The seafood chain has higher food expenses than Darden's flagship Olive Garden, which accounts for more than 40 percent of revenue.

Darden has been working furiously to revive sales at Olive Garden, which has more than 800 stores and made its name on all-you-can-eat salad and breadsticks served beside enormous plates of pasta-based dishes -- most of them large enough to feed two diners. The company has been experimenting with new menu options and smaller portions, both of which could boost financial results. Credit: © James A. Finley/AP

Caption: A Red Lobster Restaurant in Fairview Heights, Ill.

With the $1.6 billion it will clear by selling Red Lobster to Golden Gate Capital, Darden plans to pay off $1 billion in debt and use the rest to fund a share repurchase program of as much as $700 million.

Red Lobster isn't alone in feeling the pinch of rising prices. Seafood sellers have been whacked over the past year by the surging cost of shrimp due to acute hepatopancreatic necrosis syndrome

Billions of young shrimp have died from the disease, which was first detected in farm-raised populations in Asia. Shrimp prices hit a 14-year high earlier this year

Adding insult to injury, Red Lobster was widely known for its $15.99 "Endless Shrimp" promotions designed to get people into the restaurant. The promo prompted The Huffington Post to offer a few repulsive tips on how to maximize one's shrimp gluttony at the chain.

Beyond the expenses of procuring shrimp, Red Lobster also attracts an oversize share of older diners who don't eat out frequently, while younger and spendier patrons eat their fish at more upscale restaurants -- places that can cover rising costs better. Casual-dining chains like Red Lobster also have been hurt by the massive growth of such fast-casual options as Chipotle Mexican Grill (CMG) and Potbelly (PBPB).

Two activist funds, Starboard Value and Barington Capital Group, had pressed Darden to keep Red Lobster and monetize its real estate, and both expressed outrage over the proposed deal. In an e-mailed statement, Starboard CEO Jeffrey Smith said the sale "woefully undervalues Red Lobster and its real estate assets."

Barington's chairman and CEO, James Mitarotonda, agreed that Darden's transaction "amounts to a 'fire sale' price after shareholders clearly indicated that they did not want the company to enter into any transaction unless it was subject to their approval." 

Golden Gate has already made plans to sell 500 Red Lobster locations for $1.5 billion and lease back the stores; the fund Gate also owns California Pizza Kitchen, Eddie Bauer Holdings, and the parent of Payless ShoeSource.

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May 19, 2014 2:34PM
I really don't believe it has anything to do with seafood prices. The problems extend back way before the price of seafood skyrocketed.

I used to LOVE red Lobster, but I've only set foot in one over the past 5-7 years because my parents insist on going when they visit. The declining service and quality has spanned over a decade now.

The staff at most Red Lobsters is also a real problem, consisting mainly of very young managers and a distracted. college age waitstaff. At the restaurants on the college strip that's fine (and expected), but If I'm going to spend $120 for a four person dinner I expect more that that.

May 19, 2014 2:49PM
Over-salted, over-breaded, rubbery, greasy seafood that all tastes about the same, that's why this chain is going down in flames.
May 19, 2014 2:59PM
1. Service.
2. Quality. 
3. Portions. 
4. Prices.

That's why people here don't go to the Red Lobster in town. 
May 19, 2014 3:05PM
What doomed Red Lobster?  Bad food.
May 19, 2014 2:59PM
Inferior food. I would rather eat at our local seafood place any day. I haven't been to a Red Lobster in years. The last time I went there the portions were small and the food did not measure up.
May 19, 2014 3:29PM
Here in New England there are tons of excellent mom and pop type places that do seafood a heck of a lot better than Red Lobster ever could. It's same reason I don't go to Olive Garden. My Italian grandma would roll over in her grave.
May 19, 2014 2:31PM
I think Red Lobster's problem is that they don't sell enough lobster and that is the key word in the title. They have lobster fest once a year. That doesn't make sense for a place that is supposed to specialize in lobster.
May 19, 2014 3:22PM
May i suggest that any and i will repeat any chain that belongs to a publicly traded conglomerate is not worth stepping in the door of.  The concern over profit for shareholders always beats out the customer.  I love the local 1 or 2 of a kind restaurants. Give me a diner or dive any day.
May 19, 2014 2:58PM
Let's be real. One of the MAJOR issues with Red Lobster is the clientele. My wife and I enjoy Red Lobster about once a month and every time there is someone sitting near us who is scamming on how to get a free meal. It's amazing as to how many of these people can eat almost the entire meal only to find a hair in the last bite or two, or how they didn't get what they ordered (after they've eaten it) and so on. Giving away high priced food at a discount or offering gift cards to placate these people is one of the main reasons why "The Lob" is going down.
May 19, 2014 3:25PM
tiny portions and vastly over priced is what did them in
May 19, 2014 3:26PM

I thought it was because of the Applebee's-type micro-waved and boil-in-bag foods they were using instead of prepared in house it used to be?


If I want to eat micro-waved food, I am not going out and pay big money for that.

I would just fix a tv dinner.


May 19, 2014 3:20PM
I love the place and we eat there once a year. Of course that's the problem, we only eat there once a year. We love the food, and their drink menu is awesome, but after 2 people eat there, drink a few cocktails, of course you're going to get an appetizer....Now you're sitting at a hundred bucks min and you haven't left a tip yet. While we love the food, the economy can only handle so many $100 a meal dining establishments, and let's be honest, if you're going to spend a hundy on dinner (pre tip), most people aren't going to Red Lobster.
May 19, 2014 3:26PM
When Olive Garden comes out ahead of Red Lobster there is something wrong.  Both are horrible and nothing more than fast-food types of "resturaunts". 
May 19, 2014 2:37PM
I always got a laugh when the poor waitstaff had to approach the table and introduce themselves thus:
"Hi,  I'm Jennie and I'll be your seafood expert tonight'.
Wow,  we have a seafood expert to advise us.  Now that's really something.

May 19, 2014 2:48PM
High prices and flavor-less food...endless shrimp had no flavor what so ever.  Haven't been back since and that was 4 years ago. Crab stuffed mushrooms way over the recipe on line and I've been making them ever since...recipe makes about 30 or so for about $10-$15 bucks.  Red Lobster's have gone up to $8.95 for 6. Not worth it and also you can make the cheddar bay biscuits at home too.  The best thing on the menu is the Cajun Shrimp Pasta with extra sauce...cause it too can be kinda dry.
May 19, 2014 2:57PM
Red Lobster is in the same category as harvest gold appliances, popcorn ceilings, and rust-colored plush carpeting with powder-blue velvet couch and love seat.
For anyone that grew up with great seafood (thing the Pacific NW) this has always been a very average seafood place at best. That said, Red Lobster isn't really going away just yet. They will no doubt close the unprofitable units and move on..The company was sold not closed for now...
May 19, 2014 3:07PM
And what are places like "Outback" going to do when the drought quadruples beef costs. And this coffee bean fungus? What if it gets out of hand? What will Starbucks do? And what about McDonalds? Soybean cost are skyrocketing because of the drought? Can they remain in business if things keep getting more and more expensive?
May 19, 2014 2:25PM
My employer frequently uses both Red Lobster and Olive Garden as venues for company events and luncheons, and I must say that of the two OG is by far preferable.  Service is good, the restaurant itself is well-lighted, and the food is better.  Red Lobster makes me feel that I've stepped back in time into the 1980's or earlier and at times getting service is a challenge although when you do you often wish you hadn't when the food finally arrives.
May 19, 2014 2:47PM
i think part of the problem is the menu. it seems to never change. and they do seem old and out of date. but at the price they got them they should be able to fix them up. the real estate alone if worth more than half of the price paid
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