Crustacean corruption scheme revealed in the wake of Red Lobster bankruptcy

On Sunday, May 19, 2024, the long-running seafood chain known as Red Lobster filed for bankruptcy. According to the filings, a primary cause of the company's financial struggles was the ongoing Endless Shrimp scheme—a seasonal offer which debuted some decades ago, but had recently been elevated to an evergreen menu item. For just $20, restaurantgoers could gorge on all the shrimp they wanted.

Such hubris would of course be their downfall. But perhaps not for the reasons you expect. From CNN:

Endless shrimp was a successful annual limited-time offer for Red Lobster for 20 years. But Red Lobster's latest major shareholder, Thai Union, a Bangkok-based canned seafood company, saw the promotion as a way to sell off the mountains of shrimp it was catching and turned it into an everyday item. (Thai Union became Red Lobster's largest investor in 2020.)

The change cost Red Lobster $11 million.

In other words, a shrimp supplier purchased a majority share of Red Lobster stock, then installed a Puppet CEO that was deep in the pockets of Big Shrimp, and forced that CEO to sign a irresponsible distribution deal with said shrimp supplier, in order to keep the shrimp supplier in business. As a result, Red Lobster was legally obligated to buy Way Too Much Shrimp (from a single supplier, who was also a shareholder), which the company in turn struggled to sell.

Bloomberg described the scandal quite succinctly:

1. You are in the business of producing and selling shrimp.
2. You expand vertically by acquiring a chain of seafood restaurants.
3. The restaurants start to struggle and are heavily indebted, and you worry that your equity investment is losing value and possibly worthless.
4. How to cut your losses?
5. Well, you have two relationships to the restaurant chain: You own the equity, and you also supply the shrimp.
6. Not much you can do with the equity: There's a lot of debt, the creditors rank ahead of you, and they are unlikely to let you take any cash out as a dividend.
7. But, as the equity owner, you also control the board of directors and get to appoint the chief executive officer.
8. The CEO decides how much shrimp to buy.
9. What if he decided to buy a lot of shrimp?
10. Then you'd make money on the shrimp, and extract at least some value out of your equity investment.

There is presumably some tipping point.

And so this is the way the world ends: not with a bang, but a veritable crustacean ponzi scheme.

The Endless Shrimp Investigation [Matt Levine / Bloomberg]

How Red Lobster's misguided endless shrimp promotion drove it into bankruptcy [Nathaniel Meyersohn / CNN]

Previously: Woman doesn`t want to leave Red Lobster