Barbs immediately began to fly after Red Lobster filed for bankruptcy last month.

Its new chief executive blamed the owners. The owners blamed prior owners. Covid-19, corporate greed and a now-infamous US$20, all-you-can-eat shrimp deal all took their hits.

Onlookers also pointed to changing tastes — perhaps American diners simply no longer want to eat Walt’s Favorite Shrimp in a wood-paneled restaurant their grandparents may have frequented.

The real story is a combination of factors that slowly drove an iconic American chain into financial despair over more than a decade. Finally unable to pay rent, offer unlimited shrimp or hold onto a zeitgeist around the brand after it appeared in Beyoncé lyrics, Red Lobster had to legally call it quits.

Now, the company faces choices that aren’t easy and may not turn its fortunes around. Its most likely saviour is Fortress Investment Group, a Wall Street firm that manages $48 billion and scouts opportunities in distressed companies.

Fortress already holds a large portion of Red Lobster’s debt and is so far the only entity to express serious interest in escorting it out of bankruptcy, people involved with the process told Bloomberg News.

As Fortress examines Red Lobster’s prospects, it is drilling down on how each restaurant performs and why, some of the people said. The firm is trying to identify the regions and demographics that would best support a comeback.

Above all, Fortress wants to cut Red Lobster loose from burdensome lease agreements that have dragged down the company’s results, said the people, who were granted anonymity to discuss non-public information.

Representatives for Red Lobster and Fortress declined to comment for this story.

A bankruptcy court hearing on Friday will help determine the fate of America’s largest seafood chain.

“They can slowly rebuild — if they can get enough money in and recruit a decent CEO,” said John A. Gordon, who advises restaurants on strategy as principal of Pacific Management Consulting Group.

Embedded Image

The outcome matters because Red Lobster reflects not just what is happening with an individual company in distress, but how the U.S. economy is changing as prices for consumers and businesses soar. Its typical patrons have become more selective about where and how often they dine out, while the cost of goods and labour have squeezed margins across the restaurant industry.

First location

Restaurant entrepreneur Bill Darden opened the first Red Lobster in 1968 in Lakeland, Florida. His idea was simple: fresh seafood that could feed a family of four for $20.

General Mills Inc. acquired the company two years later and embarked on a huge expansion across the U.S. It introduced seafood to land-locked patrons who usually ate it far less than their coastal peers.

By 1995, Red Lobster had over 700 locations. That year, General Mills spun off its restaurant businesses into a standalone, publicly traded company called Darden Restaurants Inc.

Red Lobster had already become the first chain to reach national scale and helped reshape cultural trends around dining out — giving it a special place in the hearts of generations of Americans. But that sentimental aura was not enough to save it from financial difficulties.

Red Lobster’s sales slumped in the early 2000s. It installed wood-fired grills to upscale the menus, closed some restaurants and redesigned others — more Bar Harbor, less Bahamas, as one former executive put it.

But Darden’s casual-dining chains cannibalized one another’s revenue, and activist investors agitated for change. The company identified Red Lobster as an underperformer and sold the business to private equity firm Golden Gate Capital for $2.1 billion in 2014.

In concert with that sale, Darden made a move that has become familiar among distressed companies with real estate: sell the buildings for quick cash, lease back the locations, exit the investment for a profit. In this sale-leaseback playbook, most of the cash generated often goes to investors, leaving companies struggling with the same business problems, along with new, fixed real estate costs that afford little room for errors or unforeseen challenges.

“Since real estate is usually the primary hard asset in this business, companies have to use it if they want to raise capital,” said Jay Weinberger, a managing director in investment bank Houlihan Lokey Inc.’s restructuring group.

Thai Union missteps

In 2016, Thai Union Group Pcl, an Asian seafood producer that was already a major supplier of Red Lobster’s ingredients, paid Golden Gate $575 million for a 25 per cent stake and the right to later obtain another 24 per cent of the equity at no additional cost.

Founded in 1977 as a processor of canned tuna, Thai Union had grown into the world’s largest seafood distributor. From its headquarters on the western fringe of Bangkok, the company already owned seafood brands including Chicken of the Sea, King Oscar and John West, generating $3.6 billion in annual revenue. Red Lobster was a way to further expand its presence in the U.S.

At the time, it seemed like an attractive investment. Red Lobster was about two years into a turnaround: sales were up, a loyalty program was taking off and Beyoncé had just released a song with risqué lyrics about rewarding a lover with a meal there.

But in 2020, the Covid-19 pandemic caused devastating lockdowns and reduced-capacity restrictions that crippled the restaurant business.

Golden Gate had already wanted to exit its remaining investment, but that became more urgent as Red Lobster’s sales tanked and a debt maturity fast approached.

Thai Union, having a vested interest, partnered with an investment company called Seafood Alliance and members of the management team to buy the rest of Golden Gate’s stake. Under new owners, Red Lobster refinanced its debt in early 2021, just as insolvency beckoned. One former lender called it an out-of-court restructuring, meaning it resembled a formal bankruptcy. New management came in, prices went up, costs were cut, and the chain sought rent concessions.

Yet Red Lobster was still barely keeping its head above water. The ownership group put its faith behind Paul Kenny to figure out a path forward.

Kenny had run Minor Food, which operates more than 2,000 franchised restaurants — mainly cafes and fast-food venues — in Southeast Asia and elsewhere, for a long time. But he had never run a U.S.-based casual-dining business, which is far more complex.

The menus require staff with deeper skills and training, plus a broader supply chain that can be difficult to maintain. Restaurants also have an emphasis on ambiance and service that fast-food joints do not, as well as a different kind of advertising.

Appointed in 2022 as chief executive officer, Kenny decided to make Red Lobster’s $20 endless shrimp deal a permanent fixture to sustain revenue. He also dropped two of Red Lobster’s suppliers in favor of Thai Union.

Those decisions led Red Lobster’s current CEO, Jonathan Tibus, to allege that part of the chain’s perils stemmed from supply-chain decisions made in bad faith. 

In a statement, Thai Union said the accusations were meritless. “Thai Union has been a supplier to Red Lobster for more than 30 years, and we intend for that relationship to continue,” it said. The bankruptcy “will allow Red Lobster to restructure its financial obligations and realize its long-term potential in a more favorable operating environment.”

Between 2019 and the time Red Lobster filed for bankruptcy, the number of customers visiting annually had fallen by about 30 per cent, according to court papers. The chain’s combined losses for the period exceeded $300 million, according to financial and court records. Around $11 million of those came from the endless shrimp deal after it became a permanent menu item in May 2023.

Path forward

Red Lobster is now in a sale process it expects to complete by early August.

The chain has already closed about 100 of its roughly 650 restaurants and is targeting another 120 for possible closing. More pain could follow as Red Lobster negotiates rent decreases and further concessions with landlords.

“We’ve been there for your celebrations, big and small,” the company said on X after filing for bankruptcy. “Red Lobster is determined to be there for these moments for generations to come.”

Fortress is not new to managing struggling restaurants. It also owns Logan’s Roadhouse, Old Chicago and several other brands after taking over their parent company in a 2023 bankruptcy. It just got permission to be part of a lending group that acquired Alamo Drafthouse after helping it survive the pandemic. 

But not all of Fortress’s pursuits have ended well. Steak ’n Shake Inc., for example, sued the firm in 2021, accusing it of buying up the restaurant’s debt to force it into bankruptcy and take over its assets. Fortress denied wrongdoing. 

The firm is part of a lending group that holds $256 million worth of Red Lobster debt. The group agreed to provide another $100 million of debtor-in-possession funding, $40 million of which was already approved by the court.

Whoever becomes Red Lobster’s new owner will have an unenviable challenge. It is contending against not just peers like Applebee’s, which is owned by Darden, but also fast-casual chains like Chipotle Mexican Grill Inc., all of them fighting for the same dollars from affluent diners.

Red Lobster is in a particularly tough spot because of its history, including underinvestment in its restaurants, said Aaron Allen, a global restaurant consultant.

“They do these sale-leasebacks and other schemes, and they don’t have capital down the line to actually spruce the house up,” Allen said. “They just spray it with some Febreze and hope nobody notices the carpet is 20 years old.”

In the meantime, Red Lobster fans are out en force online, sharing fond memories and proclaiming their love for Cheddar Bay biscuits.

After its bankruptcy, Rapper Flavor Flav pitched his services and bought the entire menu in an effort to promote business. On Monday, Red Lobster featured him in a new advertisement.

“When the internet said Red Lobster is going away, boy, Flavor Flav said not today,” he said in a voiceover, calling it “the most bona fide comeback yet.”