Experimenting with Endless Shrimp
What do Beyoncé, David Bland, Alistair Cockburn and Red Lobster have in common?
I've wanted to write something about this ever since Red Lobster announced its bankruptcy in May. As soon as I read the news, I texted my wife with the requisite crying face emoji. This was a big deal to me because I love shrimp and Red Lobster. How much do I love shrimp? Every time I visit a beach town, I go for buckets of peel-and-eat shrimp. On a three-day trip to Wilmington, NC in March all I ate was shrimp and grits for breakfast, lunch and dinner. After I voted in the 2020 presidential election, I treated myself to a Bar Harbor Lobster Bake at Red Lobster to celebrate the importance of civic duty. Red Lobster is so iconic that even Beyoncé sings about it.
For 20 years now, Red Lobster has had an Endless Shrimp promotion. There were a few rules: you could only order one small plate at a time, you couldn't share it with anyone at your table, and you couldn't take it home. (Full disclosure: I've participated a few times.) The promotion was always a limited-time deal.
There are multiple theories about what precipitated the bankruptcy. Some speculate that decades of corporate raiding by private equity did them in, while others point to a lack of leadership stability and failure to cultivate a younger customer base. One CEO, Kelli Valade, stayed on the job for only eight months before resigning, which was then followed by a year-long vacancy at the top (Seafood Source). While those all have validity, the proximal factors that broke the camel's back make for a Succession-level plot.
"Thai Union, among the largest global seafood conglomerates and a major supplier to Red Lobster, first acquired a 25 percent stake in the company for $575 million in 2016. Then in 2020, it purchased the remaining portion of shares from Golden Gate..." (CNN)
Between 2016 and 2020, as Thai Union acquired a majority ownership stake in Red Lobster, it appointed a friendly CEO who then made Thai Union its sole supplier of shrimp. Purportedly, this was a way for Thai Union, which is in the shrimp-catching business, to offload inventory (CNN). With competition reduced between suppliers, procurement costs ballooned for Red Lobster. Then, mix in pandemic-era inflation, which on its own would have caused enormous challenges for any restaurant.
So, Company A buys Company B, installs a “puppet” CEO, forces Company B to purchase a critical component exclusively from it, and then increases prices on that critical component in order to enrich itself. On the customer-facing side, in an effort to control labor costs, waitstaff were required to serve up to triple the number of tables they used to.
It is against this backdrop that the Endless Shrimp promotion was launched in 2023 with one final, fateful twist: rather than being a limited-time offer, it became permanent.
A version of the promotion had been running for two decades, so what could possibly go wrong? By all indications, the 2023 promotion was working. Foot traffic increased by 40 pct, and Red Lobster experienced 4 pct year-over-year growth in new customers thanks to the deal. How did such a good thing lead to Chapter 11 a year later?
There were in my mind several key assumptions that turned out to be dangerous.
That the procurement cost increases due to pandemic-era inflation and moving to Thai Union as the sole supplier would have a negligible impact on Red Lobster if they went ahead with the permanent promotion and could make up for it through increased foot traffic alone.
That making the promotion permanent would not create large customer disincentives to choose anything else on the menu.
Both proved false. The $20 deal was such a great deal for customers but terrible for Red Lobster that it suffered an $11 million operating loss in Q3 2023 and ended the year with a $22 million loss.
Customers were skipping more expensive items on the menu, and waitstaff reported tips decreasing substantially after the promotion became permanent. Not only that, but customers were staying at tables for extended periods, preventing the restaurants from serving other customers and generating more revenue.
[AI Prompt: A man eating endless plates of shrimp]
“I had a guy come in with his family. It was a family of five. And he did 16 rounds of shrimp scampi,” said James Berke, a 23-year-old in New Jersey, who until very recently worked at a Red Lobster. “He was there for over two hours on a busy Friday night. They had one of my biggest tables. I just had to watch this man eat plates upon plates of the scampi, which isn’t even served over pasta. It’s shrimp in a garlic-wine butter. It was so gross.” (Slate)
There was also the fact that when parties arrived at Red Lobster looking to pig out on a bargeful of shrimp, they simply wouldn’t leave. Berke’s experience serving a man who put away 16 servings over the course of two hours was actually mild compared with some of the other stories I’ve heard. Josie, 19, who also asked to be anonymous, worked at a (now-shuttered) Kansas City Red Lobster, where she watched a solo diner take down 30 orders of fried shrimp within four hours. According to the nutritional information on Red Lobster’s website, that’s something like 14,000 calories.
“He was a skinny guy too,” Josie said. “I was like, Where is it all going? (Slate)”
Now, hindsight is 20/20, but given how large the blast radius of this promotion proved to be—taking down Red Lobster, forcing Thai Union to write off half a billion dollars in investments, and putting thousands of employees out of work—prudence would have worked out well for all parties involved. If Thai Union's ultimate goal was to keep Red Lobster as a captive customer in order to supply shrimp on terms more favorable to it relative to Red Lobster, putting it out of business would have surely torpedoed that strategy.
It may be helpful to think of this in terms of the four dimensions of criticality using a simplified version of the Cockburn Scale (Wikipedia):
Loss of life - someone is going to die if this thing (project/promo/product/whatever) goes south
Loss of essential money - game over, we bet the farm and lost everything
Loss of discretionary money - that wasn’t the wisest investment but we can still keep the lights on
Loss of comfort - this too shall pass
If bankruptcy here is a rough approximation of the loss of essential money, it would have been wiser to set up some preliminary market testing to validate that those assumptions were indeed correct. Companies like Chick-fil-A do this type of testing all the time in controlled, safe-to-fail experiments. What I speculate may have occurred here is that decision-makers relied on two decades of accumulated data, when the terms of those promotions were optimized for a different environment. Combined with management pressure from Thai Union, they dispensed with caution and jumped straight to the permanent Endless Shrimp deal. After all, why bother testing when you are fairly assured in your assumptions? The flip side is what are you willing to pay if you’re wrong? The answer for Red Lobster was nearly going out of business. For all we know, after crunching the numbers, some poor analyst may have tried to sound the alarm, only to be sidelined by management.
It's anticipated that Red Lobster will leave Chapter 11 by the end of the month, hopefully in a much better spot than when they entered it. But it serves as a cautionary tale that there is value in questioning your assumptions and testing them in controlled, safe-to-fail experiments to confirm they are still accurate, even for something you've done over and over again. Familiarity breeds complacency, which is just a short hop from disaster.
As Ken Beck over at Tidy First writes, "the more rounds of the game I can afford to play, the more the game is worth to me... Once your pocket is too empty to play the game, you keep paying for those missed opportunities to play profitable rounds of the game” Game over is expensive. Hopefully, Red Lobster will have a few more rounds to get things right for the sake of shrimp lovers everywhere. But judging by the legal bills (around $11 million) it has accumulated to sort through this mess—money that could have been better spent, for example, on developing a more sustainable growth strategy among younger customers—those remaining rounds are dwindling. Maybe next time, not even Beyoncé can save Red Lobster.
Reference:
https://www.strategyzer.com/library/how-assumptions-mapping-can-focus-your-teams-on-running-experiments-that-matter
Ken Beck, Tidyfirst “Game Over Absorbs Future Earnings”
https://en.wikipedia.org/wiki/Cockburn_Scale
https://www.foodandwine.com/red-lobster-endless-shrimp-deal-losses-8407893
https://www.cnn.com/2024/05/20/business/what-went-wrong-at-red-lobster/index.html
https://slate.com/life/2024/05/red-lobster-restaurant-closing-bankrupt-endless-shrimp.html
https://prospect.org/economy/2024-05-22-raiding-red-lobster/
https://www.seafoodsource.com/news/foodservice-retail/horace-dawson-appointed-as-ceo-of-red-lobster