Red Lobster, a popular seafood restaurant chain, has filed for bankruptcy due to rising costs and the recent closure of several of its outlets. The company voluntarily filed for Chapter 11 bankruptcy at the United States Bankruptcy Court for the Middle District of Florida. Red Lobster plans to use the proceedings to drive operational improvements, simplify the business by reducing locations, and pursue a sale of its assets. Despite the bankruptcy, Red Lobster’s restaurants will remain open and operating.
CEO Jonathan Tibus believes that the Chapter 11 bankruptcy restructuring is the best path forward for the business. He sees it as an opportunity to address financial and operational challenges and emerge stronger. Tibus expressed gratitude for the support received from lenders and vendors, which will help ensure a smooth sale process while prioritizing employees and guests.
Red Lobster currently operates 700 restaurants across the United States and Canada, employing 58,000 people. However, the company has been struggling with rising lease and labor costs in recent years. Additionally, promotional deals like the iconic all-you-can-eat shrimp offer have backfired, leading to significant losses. One such promotion overwhelmed restaurants, resulting in millions of dollars in losses.
In its bankruptcy petition, Red Lobster estimated its assets to be between $1 and $10 billion, with liabilities in the same range. The company has more than 100,000 creditors. To fund its operations during the bankruptcy process, Red Lobster has secured $100 million in debtor-in-possession financing from its existing lenders. This financing allows the company to continue operating while giving priority to lenders over other creditors.
Red Lobster has also entered into a “stalking horse purchase agreement” with existing term lenders. This agreement means that Red Lobster will sell its business to an entity formed and controlled by these lenders. A stalking horse bid sets the minimum price for a bidding process.
The recent closure of over 50 Red Lobster locations has led to the auctioning off of their equipment by restaurant liquidator TAGeX Brands. These closures have reduced Red Lobster’s presence in cities like Denver, San Antonio, Indianapolis, and Sacramento.
Earlier this year, Red Lobster’s co-owner Thai Union Group announced its intention to exit its minority investment in the restaurant chain. Thai Union cited the negative financial impact caused by the COVID-19 pandemic, industry headwinds, and rising operating costs as reasons for divesting from Red Lobster.
Red Lobster’s bankruptcy filing is part of a larger trend of businesses facing financial challenges. In the first quarter of 2024, commercial bankruptcies in the United States rose by 22 percent compared to the same period in 2023. Chapter 11 bankruptcies specifically saw a 43 percent increase during this time. Factors contributing to this trend include higher costs of funds and interest rates, reduced consumer discretionary spending, and higher housing costs.
According to a report by S&P Global, U.S. corporate bankruptcy filings reached their highest level in a year in April. While the number of filings in the first four months of 2024 is slightly lower than in 2023, the pace of bankruptcies has accelerated. The fading hopes of lower interest rates may be contributing to the increase in filings as companies come to terms with the reality of higher rates for longer.
Overall, Red Lobster’s bankruptcy filing reflects the challenges faced by businesses in the current economic climate. By taking proactive steps through Chapter 11 bankruptcy, the company aims to address its financial and operational issues and emerge stronger. The support from lenders and vendors, along with the continuation of restaurant operations, provides hope for Red Lobster’s future success.
