Diversifying The Menu

While seafood, in some ways, is going strong, diversifying, in general, is a good strategy. Don’t just put all your eggs in one basket or your fish in one bucket. Even better, make sure that in addition to eggs or fish, you’ve got other products. As part of its Corporate Strategy 2030 plan, Thai Union said it will focus on its core business, centered around Ambient Seafood, Frozen, and PetCare. Restaurants did not make that list. The idea of a seafood supplier running a seafood restaurant sounds great. But you also have to understand the restaurant business. While you could say running a seafood restaurant is a perfect fit for a seafood company, it’s also a different industry with very different fixed overhead including rent.

So after a promotion that produced growth in everything except profits and margins, here we are as Red Lobster announces the closures of many dozens of locations in what TagEx, the auction company managing the auctions for at least nearly 50 locations, called “the largest restaurant equipment auction ever.”

For a company that believes in going big, this wasn’t the kind of “big” announcement you’d want to hear. TagEx said it is running these as “winner-take-all auctions,” including all the contents of the Lobster locations. Auctions will be held on Thursday, May 16, and a countdown has begun for some big sales that, like the shrimp deal, will likely be at big discounts. While consumers are routinely told how to find a location near them, possible bidders were told how to “find a Red Lobster auction near you.” Despite this downsizing, Red Lobster remains a giant, even after the closings.

Factors such as high costs may also be in play here, impacting the restaurant industry in general. It’s nice to own real estate when you have multiple locations, although rent remains more typical and can fuel trouble, including huge costs. While ownership requires a larger capital investment, it makes costs more controllable. Rental costs became a big problem for Red Lobster and contributed to their losses.

Owners often struggled to lift Red Lobster out of the red. Private Equity companies provide not only capital but legitimate know-how and operational excellence. They study the markets and are specialists in a particular industry and, even then, aren’t necessarily in it for the long haul. However, it can be a different story when they go outside their specialization, even if they have some restaurants in their portfolio. Golden Gate Capital, which bought and operated Red Lobster, failed to turn it around before Thai Union came in. Their portfolio includes Bob Evans Restaurant and California Pizza Kitchen, along with many companies in other sectors.

Owners coming from outside the restaurant business can also have big blind spots. Thai Union does not specialize in restaurants, even if it’s a king in the seafood business with brands such as Chicken of the Sea. This sad story of naivete, too-deep cost-cutting, and executive turnover cautions us to pick the right partners who know the game. Red Lobster’s management, while not on a merry-go-round, has been changed repeatedly as the company sought a solution. Its latest leaders may be able to right the ship and boost profits.

While many factors contributed to the margin pressure, most importantly, Red Lobster, an early pioneer, did not evolve with the times. They neglected to follow customer preferences and tried to buy customers with free or deeply discounted food. We love to hear the stories of the pioneers, the entrepreneurs who make it big, and who have the vision and passion to achieve their goals. Red Lobster grew from one family-owned restaurant in Lakeland, Fl., to a giant based in Orlando, Fl.

Red Lobster trademarked its “Endless Shrimp events” in 2006 and saw them as a “huge success.” Growth is a big part of every company’s goals, and big winning bets can begin with big discounts. But big discounts can sometimes be too big and successful and fail to address underlying issues. Especially amid growing reliance on takeout, where delivery eats into margins, minding your margins may matter as much as minding your garden. Red Lobster works with DoorDash on delivery, which also can grow revenue, even if margins may thin. Endless shrimp, it turns out, was not enough to finish the endless financial pressure.

Link to Article: https://www.forbes.com/sites/louisbiscotti/2024/05/15/what-we-can-learn-from-red-lobsters-closures-and-looming-bankruptcy/