There are lots of stories you can tell about why Red Lobster declared bankruptcy this week. You can point to the impact of the COVID pandemic, which put a dent in the full-service dining market that Red Lobster never recovered from. (According to its bankruptcy filing, Red Lobster’s guest count is down 30% from 2019.) You can cite the impact of inflation and higher wages for restaurant workers, which has raised the cost of dining out and made cheaper fast-casual restaurants more appealing to consumers. And you can enumerate the chain’s marketing missteps, including its introduction of the now-infamous Ultimate Endless Shrimp for $20 promotion in May 2023, which cost Red Lobster $11 million in losses in less than a year. But the biggest reason Red Lobster went under is pretty simple: Its owners sank it. 

The private equity playbook

The first of the owners in question was a private-equity firm called Golden Gate Capital, which bought Red Lobster in 2014 from Darden Restaurants, which owns a number of different restaurant brands, including Olive Garden and LongHorn Steakhouse. Typically, when a private-equity firm takes over a company, it finances the acquisition by loading the company down with debt, which makes the deal cheaper for the PE firm but also makes it harder for the company to thrive. In Red Lobster’s case, though, the problems went beyond that. While Golden Gate Capital did add debt to Red Lobster’s balance sheet, it also made another move, selling off Red Lobster’s real-estate assets for $1.5 billion, forcing Red Lobster to lease those locations back.

These kinds of sale-leaseback deals are not unusual in retail or the restaurant business. And for Golden Gate, it was a great arrangement, since the deal covered most of what it had paid for Red Lobster. For Red Lobster itself, though, the arrangement was less than ideal. These were long-term leases, with rent increases written into the contract. And the leases were what are called “triple-net” leases, which meant that Red Lobster was responsible for all the operating expenses, property taxes, and insurance at the locations. As Restaurant Finance Monitor wrote at the time, the deal gave Red Lobster “little room for error” at a moment when it was struggling with falling sales and a weak brand.  

The rents on many of these properties are also, according to the bankruptcy filing, priced above market rates. The result is that last year, the company spent almost $200 million leasing locations, a full third of which it spent on locations for what it calls underperforming stores. (Golden Gate did not respond to a request for comment.)

Death by endless shrimp

That wasn’t the only time a Red Lobster owner helped itself while hurting the company. In 2016, Golden Gate sold a 25% stake in the company for $575 million to a seafood company called Thai Union, which was (and is) one of Red Lobster’s biggest suppliers. And four years later, in the middle of the pandemic, Golden Gate sold off its remaining stake to Thai Union and a consortium of other investors. That was a good move by Golden Gate. But it meant that Red Lobster was being controlled by owners without much restaurant experience at a moment when the chain was confronting some of the biggest challenges in its history. And this problem was compounded by the fact that the company’s longtime CEO Kim Lopdrup stepped down the following year. Over the next three years, the company would have four different CEOs.

Thai Union’s acquisition of Red Lobster also created an odd set of incentives. Thai Union, as one of Red Lobster’s biggest suppliers of shrimp, had a clear incentive to increase the amount of shrimp Red Lobster bought from it, as well as the prices it paid for that shrimp. And Red Lobster’s CEOs had an incentive to keep the owners happy. So perhaps it was no coincidence that in 2023, Red Lobster’s former CEO Paul Kenny made the Ultimate Endless Shrimp deal, which had previously been only a short-lived promotion, a permanent part of the menu—even though, according to the bankruptcy filing, there was “significant pushback” against the idea from other members of the management team.

Red Lobster stores also did an unusual amount of in-store promotion of the endless-shrimp deal, which led to so much demand for shrimp that stores literally ran out of certain kinds of it. This was bad for Red Lobster’s bottom line, but it was obviously good for Thai Union’s. In a sworn statement included in the bankruptcy filing, Red Lobster’s current CEO Jonathan Tibus also suggests that Thai Union “exercised an outsized influence on the Company’s shrimp purchasing” generally, and points to the fact that Red Lobster eliminated two of the company’s suppliers of breaded shrimp, leaving Thai Union as the exclusive provider, which led to higher costs for the restaurant chain. In a statement read at the company’s first bankruptcy court hearing on Tuesday, Thai Union said it disputed all of these allegations regarding its relationship to Red Lobster. (It did not respond to a request for comment.)  

Now, even with all these moves, Thai Union almost certainly has not come out ahead on its acquisition of Red Lobster, since it’s already written down $535 million of its investment. And it’s certainly true that Red Lobster had been facing economic and operational headwinds that have nothing to do with who its owners were. 

But it’s easy to see how the conflicting incentives created by Red Lobster being owned by one of its biggest suppliers might have led to the company making poor decisions. And Red Lobster’s demise points more generally to the problem that’s created when company owners have, in effect, divided loyalties, and can reap economic benefits for themselves from decisions that may not be in the best interest of the company: like selling off all its real estate, or offering people endless shrimp for $20.