What Killed Red Lobster? | Caught in the Net | 1

0:07It's 2024 and across the United States of America, people are rising to a new challenge. The challenge laid down by Red Lobster, the nation's largest chain of seafood seafood restaurants. It's a challenge that's out to revive its ailing fortunes And that challenge is Endless shrimp For just$25 Endless shrimp? All the shrimp I can eat for just$25? Let me get my hat I'm Katie and I think that I can eat 15 to 20 shrimp I'm Alex I'm going to say I think I can eat 20 shrimp I'm Jasper and I know that I can eat Like 30 to 50 shrimp I just eat more shrimp and I eat shrimp and then more shrimp and more shrimp.

0:51And now I'm paying the price because my belly hurts and I'm ready for a nap. Red Lobster started its endless shrimp promotions in 2004. Once a year, it would offer never-ending shellfish at a bargain price for a limited time. Then in June 2023, Red Lobster made it permanent to lure people back through its doors, even if that meant losing money. Well, now it's May 2024, and for 11 months, America's been demolishing Red Lobster shrimp like a horde of hungry, hungry hippos. And the chain is flat broke. Red Lobster has filed for Chapter 11 bankruptcy protection. The chain has struggled recently, losing millions, saying that its endless shrimp deal was partly to blame.

1:36The greatest restaurant in the world, Red Lobster, is going out of business. No! Yeah, I know what you're thinking. When this story hit the news, everyone talked about how the all-you-can-eat deal sank red lobster. You know, the math seems relatively straightforward. Sell lots of shrimp at a loss, and one day you'll go bust. But there's more to this fishy tale than just that. Sure, it wounded them, but it wasn't the fatal blow. The fall of this whale of the restaurant industry has a lot of layers, and it offers a veritable feast of business lessons. And that's why in this season, we're going to find out what really went down and ask, what killed Red Lobster?

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4:29From Wondery, I'm David Brown, and this is Business Wars.

4:55Red Lobster was founded in 1968, introducing a new generation to fresh seafood, pioneering the casual dining restaurant. In its 90s heyday, it had more than 700 restaurants in the U.S. and Canada, an annual sales of around$2 billion. That's a lot of lobster. But in May 2024, after 56 years in business, Red Lobster entered Chapter 11 bankruptcy protection. Now, to many, the fall of Red Lobster was an open and shut case. After years of decline, it tried to lure customers back by making its annual all-you-can-eat shrimp deal permanent. But instead of saving the chain, the promotion KO'd the business.

5:35Well, that's probably the story you've heard. But there's a whole lot more to it. In fact, it's almost like a murder mystery. And like any great detective story, there's plenty of suspects in this frame, including that infamous offer of endless shrimp, for sure. But you know what the craziest thing is? That wasn't the first time that an all-you-can-eat giveaway broke Red Lobster. This is Episode 1, Caught in the Net.

6:09It's 2003, 21 years before the endless shrimp debacle. And in a Red Lobster restaurant in the Midwest, a young server rushes to a table where a customer's waving her over. Hey there, what else can I get for you guys? I'll get another round of the snow crab, please. The waitress tries not to roll her eyes. There are four plates piled with broken crab shells on the table already. Both the man and his date are wearing plastic bibs splattered with grease. They've been here for an hour already, chewing and crunching their way through plate after plate of crab and they're not the only ones. Every table in the restaurant is piled high with crab shells and the line of waiting customers stretches out the door.

6:52Red Lobster is running an endless crab promotion, all the snow crab you can manage for less than 25 bucks. And just as head office hopes, this offer's proving enormously popular. The restaurant's packed. The server forces a smile at the request for more crab. Oh, yep, sure thing. Can I get you anything else with that? Maybe some more Cheddar Bay biscuits? The server thinks that if she can tempt this couple with Red Lobster's signature side order, they'll get full faster. And she wants them full. The endless crab promotion might get folks through the door, but now they're chowing down huge meals and spending less than$25 a head.

7:29And that means no matter how hard she works, her tips aren't getting any bigger. The man glances up at her. Hmm. I do like those biscuits, but no thanks. We'll stick to the crab. The woman at the table cracks open her last crab leg, sucks out the meat, then wipes her fingers on her bib and pushes the plate away. The man looks up at the waitress once more. I guess you better make that two more plates of crab. The server walks away, wondering how she'll make ends meet. She's not the only one worrying either, because Red Lobster's executives are also counting the cost of this promotion.

8:11It's September 2003, and at Darden Restaurant's head office in Orlando, Florida, Edna Morris is under pressure. She's the president of Red Lobster, Darden's biggest brand. but her position in the company is far from secure. And now she's been summoned to the office of the company's CEO. Morris joined Red Lobster the previous year, fresh from running the Quincy's family steakhouse chain. Her mission was to maximize Red Lobster's profits. Annual sales are rising, but growth is stalled. And if the chain's going to endure, she's got to fix that. So Morris deploys a sales tactic from her past, those all-you-can-eat promotions.

8:52These limited-time giveaways always performed well when she worked at Quincy's, but they are risky business. The all-you-can-eat promotions aim is to entice customers with a splashy value proposition. Come on into the restaurant and eat as much as you want for a flat fee. So a meal that might be valued at over$100 winds up costing the customer$25. But for the restaurant, the hope is the customer doesn't have the stomach for more than a couple of plates. And that's because when you deeply discount your food like that, well, you're making little profit or maybe even a loss on every meal you sell.

9:26They call this the loss leader for a reason. The hope is you can make up those lost profits by selling more beverages, sides, and desserts, while also turning new visitors into regular customers. The initial financial analysis looked good for Red Lobster's Endless Crab deal. Industry wisdom is that few diners can eat more than two and a quarter pounds of crab meat in a single sitting. And in 2002, a pound of snow crab costs less than$1.40 when it comes off the boat. So, even with the customary markup from seafood wholesalers, this promotion could actually deliver a profit. But then, the cost of snow crabs starts to rocket.

10:05New fishing quotas in U.S. waters and a disappointing harvest in Canada cause a crab supply shortage. And that forces up prices. By the time Red Lobster officially rolls out its endless crab promotion in July 2003, wholesalers are charging nearly$5 a pound. That's enough to wipe out the slim profit Red Lobster expected to make. And then comes another shock. Red Lobster executives realize they woefully underestimated the appetite of American diners. Back when Edna Morris did those all-you-can-eat steak deals at Quincy's, the heaviness of beef created a natural ceiling on consumption few people could push through.

10:47But crab? Well, crab is way lighter on the stomach. Instead of topping out at two pounds of crab meat, people just keep eating, ordering three, even four plates of crab per sitting, deepening Red Lobster's losses. The seven-week promotion finishes in September 2003, but by then Red Lobster's lost more than$3 million on its crab giveaway. Even worse, the misjudgment shatters stockholder confidence. Investors pull their money out of Darden, crashing the stock price and wiping$400 million off the company's value. Three weeks after the end of the crab promotion, Edna Lewis resigns. Her exit calms investors, but it doesn't fix Red Lobster's problems.

11:35See, the chain might be big and profitable, but its slowing growth means it's slipping behind. Sales at Darden's other big brand, the Italian eatery Olive Garden, are growing much faster. But Darden's CEO, Joe Lee, isn't about to neglect Red Lobster. It's Darden's biggest brand, and it's where his own career started. When Bill Darden co-founded Red Lobster, he actually hired Lee to run its first location in Lakeland, Florida. Lee was an Air Force veteran from rural Georgia, and he would prove crucial to building it into a nationwide chain. Back when the first Red Lobster opened in January 1968, fresh seafood just wasn't easy to find in restaurants located far from the coast.

12:18You know, there's this old joke that folks who live inland far from the ocean used to say about going to a seafood restaurant. They'd ask you, you going for sushi or bait? Well, Red Lobster's never been a sushi place, of course, but you get the point. Away from the ocean, don't expect fresh seafood. Today, many of us may take the availability of fresh fish and shellfish for granted. But things were way different back in the late 1960s. Transporting ocean-fresh fish to the plates of diners in landlocked states was hard and expensive. So, Lee used refrigerated trucking and airplanes to build a supply chain that could get fish from port to plate and fast.

12:57Crucially, he also bypassed the wholesalers and bought fish straight off the boats at port. Red Lobster then passed on those savings to its customers, and that gave millions of landlocked Americans the chance to eat fresh seafood without busting the household budget. Big deal! By tackling this price and distribution problem, Red Lobster transformed the seafood restaurant industry. But that was only the start, because Red Lobster didn't just change how we ate fish. It also helped power the rise of what the restaurant trade calls casual dining. As the 1970s began, America's lower middle class was expanding in number and wealth.

13:37They now had money to spare and a desire for eating out experiences that went a bit further than a hearty meal at a roadside diner. But they didn't want the prices or stuffy formality of upscale restaurants either. They wanted informal restaurants where they could kick back and relax. And so, the casual dining restaurant was born. These sit-down restaurants still had table service, but without servers and suits and ties and intimidatingly expensive wine lists. They were supposed to be like relaxing, no-fuss places for everyday folks that offered better meals than diners and fast food joints. And it was exactly what the new middle class wanted.

14:15it. During the 1970s and 80s, Red Lobster and other casual restaurants like TGI Fridays and Pizza Hut took America by storm. You saw what happened there. Well, as the 90s began, Red Lobster had more than 400 restaurants across the continental U.S., making it the nation's largest seafood restaurant chain. It was also buying around 2 % of all the seafood consumed in the country. And in 1992, it introduced the ultimate free side dish, Cheddar Bay Biscuits. Now, I've got to take a moment to talk about these babies. Speaking as someone who grew up on homemade biscuits and gravy, my own personal bar is set pretty high when it comes to biscuit cravings.

14:56But these Cheddar Bays, they meet that bar, and then some. Texture, the sharp cheddar, herby garlic, great combo. They're a Red Lobster fan favorite for good reason. Kind of underscores the emphasis on quality there. Anyway, bottom line is Red Lobster hit it out of the park in the late 20th century. But by the early 2000s, the excitement around the chain had faded. The novelty was gone. Young adults didn't want to eat at the chains their parents ate at. They wanted fresh ingredients, a variety, chef-inspired dishes, not the same old predictable choices from decades-old chain restaurants. But there was another, more intractable problem.

15:39Americans aren't really that big on seafood. The average American eats four or five times as much chicken as fish and a whole lot more beef and pork. If Red Lobster was going to turn things around. It had to overcome these major headwinds.

16:00It's May 2004, and nine months have passed since Edna Morris resigned over the endless crab debacle. Darden Chief Joe Lee has just found a new president for the chain, Kim Lopdrop. Lopdrop almost sounds like some obscure nautical term, doesn't it? Almost like he was destined for this gig. So, let's talk Loptrop. He's a lean 46-year-old with short-clipped hair and a serious demeanor, something of a sharp contrast from Darden's larger-than-life CEO, Joe Lee. But Lee doesn't need a mini-me. He wants someone who can take the helmet Red Lobster and navigate it out of troubled waters. And Loptrop's got a track record that suggests he can.

16:39He built his rep as a restaurant executive, turning around international franchises like Dunkin' Donuts and Baskin Robbins. After that, he became chief operating officer of Burger King. Look, he knows this is going to be tough. Large restaurant chains are like super tankers. They're hard, slow to change. But Lopdrop knows this will be his greatest challenge yet, and perhaps his greatest victory. Because if Red Lobster is to change its ways to appeal to a new generation, well, we've got to overcome this obstacle. There's the risk that its existing loyal fan base might not be on board with the change.

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20:19It's 2006, and in North Olmstead, Ohio, a new Red Lobster restaurant's just opened. But this location isn't like any other in the chain, and that's because it's the test bed for Red Lobster 2.0. Customers can see the difference before they even step inside. The building doesn't even look like a standard Red Lobster. It certainly doesn't look like it belongs in this Midwest town on the outskirts of the Cleveland Airport. With its stone tower, gable roof and clapboard features, it looks like it belongs on the main coastline. And you go inside, the differences continue. Gone are those campy fishing nets and nautical trinkets that used to adorn the walls, and in their place, dark wood paneling, lighthouse-inspired lanterns, softer lighting.

21:05Red Lobster calls it the Bar Harbor look, or Bahaba look, as they might say up there. It's meant to conjure up visions of upscale northeastern American towns like Kennebunkport, even though this is actually the parking lot of a shopping mall hundreds of miles from the sea. But if the new look goes down well in Ohio, Red Lobster president Kim Lopthrop plans to remake all its restaurants in its image. It's a transformation that'll cost an estimated$350 million, dollars, and it's vital to Lopdrop's grand plan to reinvigorate the chain. Since Lopdrop took charge two years ago, the chain's been doing a lot of research into who eats at Red Lobster and why, and that research found that customers imagined that Red Lobster actually hails from Maine instead of its real birthplace down in Florida, but instead of correcting them, the plan is to lean into the misunderstanding and create a new look that further reinforces the fantasy.

22:00The research also find something really interesting that there are three kinds of core customers at Red Lobster. The researchers call the first kind the indulgence. These are people who want to get as much food as they can for as little money as they can. These are the folks looking for the value proposition, the kind of value that the chain's limited-time deals like the annual endless shrimp promotion deliver. The second kind of customer is the traditionalist. Now these are folks who always stick to what they know. They like the fact that wherever they travel, they can eat at Red Lobster and get the same experience.

22:34They find comfort in the routine and predictability of what a chain restaurant offers. And then you got the third kind of Red Lobster guest. They're called the experientials. They make up around a quarter of the customer base, and according to the market research, Red Lobster's been neglecting them. See, for experientials, eating out is all about, well, you can fill in the blank, right? The experience. It's about sharing a special moment with friends or family. What these customers really care about is quality. And when it comes to seafood, they measure quality and freshness. You remember when we talked about Red Lobster making it big from bringing fresh fish to the inland states?

23:13Well, that's all true still is in 2006. Trouble is, not many people think what Red Lobster serves is fresh. For Lopdrop and the rest of his crew, this research finding in particular came as a shock. The brand's long prided itself on bringing the fresh taste of the sea to the wider nation, but it seems the message just isn't getting through to the dining public. So the company explored the problem more deeply and discovered something really counterintuitive. You know, most folks can't actually tell if the seafood on their plate is fresh or frozen. Instead, what are they judging freshness on? Well, they're looking around.

23:54The surroundings, the decor of the restaurant, the pictures of the food on the menu, the other guests, the music playing in the background. The perception of freshness isn't down to the food, but the vibe. To make customers believe the food is fresh, the entire restaurant needs to work in harmony to sell that idea. But when people visited their local Red Lobster, they saw these tired interiors and just assumed the food was, too. The new Bar Harbor layout is only part of the answer. Lopdrops also ordered a menu refresh. More than 20 menu items, gone. No more photos of fried fish on the menu. No more hamburgers because they undermine the all-about seafood image Red Lobster wants.

24:35And the kitchens? They're changing too. Wood-fire grills are getting installed in every restaurant. Chefs are being retrained as grill masters. The menus will be updated twice a day to highlight the fresh fish option of the day and to include the name of the grill master on duty in the kitchen all of these changes put together should signal to customers that red lobster means fresh and so the chain introduces the new menu in late 2006 and the following year launches a new tv ad campaign to get the word out how about grilled red snapper or maybe fresh blackened tilapia or pan seared lightly seasoned fresh rainbow trout or you You can try the latest creation from our chefs, fresh Atlantic salmon and shrimp with a sweet maple and cherry glaze.

25:25It's Red Lobster's daily fresh fish menu, your favorite fresh fish every day and every way you like it. Come see what's fresh today at Red Lobster. The daily fresh fish menu goes down real well. Customer satisfaction rises to a record high. After years of stagnation, Lopdrup's brand refresh seems to be working. The only problem is, that's not the whole picture. And that's the problem many businesses face, getting that whole picture. You know, if you're trying to ride a ship that you fear is at risk of sinking, well, what do you do? You take in the data, you chart out the course. But that assumes that conditions are going to be the same.

26:07But as we know, in business, just as in life, the times, they are always a-changing, especially in the restaurant industry. In fact, according to a study that lots of people talk about from 2005, nearly 60 % of restaurants go out of business after three to five years. That's incredible. And many of these restaurants never see the big unexpected problems before it's too late to do anything about them. For Red Lobster, that problem was right around the corner. The 2008 credit crunch, the Great Recession, the financial crisis, whatever you call it. Who among us can honestly say, I saw it coming? Well, let me tell you, Red Lobster did not.