Red Lobster has filed for Chapter 11 bankruptcy protection, largely due to burdensome leases, escalating labor costs, and an ill-fated unlimited shrimp promotion costing $20 per customer.

As per Bloomberg, the seafood chain restaurant filed on Sunday, May 19, listed assets and liabilities ranging from $1 billion to $10 billion. This filing permits Red Lobster to continue operations while formulating a plan to repay its creditors.

Why Red Lobster Went Bankrupt

Since 2020, Thai Union Group Plc has owned Red Lobster, which serves 64 million customers annually and purchases 20% of North American lobster tails and 16% of rock lobsters worldwide. However, according to VCPost, this owner's transfer has caused major mismanagement since.

The seafood chain has struggled for several years, with customer numbers dropping by approximately 30% since 2019. Despite some post-pandemic recovery signs, sales plummeted in the last 12 months, leading to a $76 million loss in the 2023 fiscal year.

Inflation and high labor costs have deterred customers from dining out, worsening the financial strain on Red Lobster. 

Additionally, many of the company's leases are above market rates. In May 2023, the chain made its $20 "Ultimate Endless Shrimp" promotion permanent, resulting in an $11 million loss as diners flocked to enjoy the costly offering.

Efforts to reach an out-of-court agreement that would have given lenders 80% of the company fell through. While there were an additional $20 million in loans from lenders in February, further financial support was withheld without backing from the Thai Union.

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How Red Lobster Will Operate

Now, Red Lobster will transfer control to its lenders, led by Fortress Investment Group, which has pledged $100 million in financing to help the chain navigate bankruptcy. This arrangement serves as a stalking horse bid, establishing a baseline price for Red Lobster's assets, subject to higher offers in the upcoming weeks.

The seafood chain is also looking to probe the shrimp deal, examining its in-restaurant marketing and Thai Union's influence on shrimp purchases. Should the bankruptcy be finalized, it will affect its current 34,000 employees in the US and 2,000 in Canada.

It recently closed 93 underperforming stores worldwide and 48 in the US, VCPost noted.

The bankruptcy case is Red Lobster Management LLC, 24-02486, US Bankruptcy Court for the Middle District of Florida.

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