The collapse of Red Lobster is a great lesson on how to destroy a business.

In mid-April, Bloomberg reported that the popular restaurant chain Red Lobster, burdened with debt and known for its cheddar biscuits, is considering filing for Chapter 11 bankruptcy protection. Red Lobster is struggling with rising labor costs and expensive rent for its restaurants. Some observers quickly blamed the company's financial troubles on its decision last year to make its "Endless Shrimp" promotion, which was previously a temporary offer, a permanent one. This move has not turned out to be very successful.

Although Red Lobster has slightly increased traffic, people coming in for the unlimited shrimp lunch have turned out to be a "hole in the budget." The company blamed the "Endless Shrimp" promotion for its $11 million loss in the third quarter of 2023, and the situation worsened in the fourth quarter when the restaurant chain lost $12.5 million. However, the story of what went wrong with Red Lobster is much more complex than just complaints about people flocking to shrimp (and later lobsters) in large numbers. The brand is suffering from various issues — a decline in customer interest, constant leadership changes, and, as has become a common refrain, the interference of private equity in the business.

“If anything, the 'Endless Shrimp' deals are surely a symbol of either desperation, poor management, or both,” said Jonathan Maze, the editor-in-chief of Restaurant Business Magazine.

Red Lobster Brand History

Red Lobster was founded in 1968 in Lakeland, Florida, and was acquired by General Mills in 1970. Later, in 1995, General Mills spun off the chain along with its restaurant division, which included Olive Garden, as Darden Restaurants.

In 2014, facing declining sales and pressure from investors, Darden sold Red Lobster for $2.1 billion to Golden Gate Capital, a private equity firm from San Francisco. Despite all the challenges, Red Lobster experienced a drop in sales and operational losses that brought it to the brink of bankruptcy, although bankruptcy could help Red Lobster get out of its predicament.

Problems and challenges

Eileen Appelbaum, co-founder of the Center for Economic and Policy Research, a progressive think tank, and a long-time critic of private equity, stated in 2014 that private equity would not be the solution to Red Lobster's problems.