Why did it fail? Pricing and Red Lobster | The Pricing Weekly

We’ve taken some time to summarize the discussion if you prefer to read rather than watch.

Today, we’re diving into the financial turmoil at Red Lobster, a beloved seafood chain that recently filed for bankruptcy. Red Lobster is certainly in financial difficulties, and many believe their pricing strategy played a significant role.

The Endless Shrimp Dilemma

A lot of the discussion revolves around their endless shrimp promotion. The cost of shrimp has risen significantly, but Red Lobster kept their prices steady. However, that’s likely not the core issue. It’s more about deeper, fundamental mismanagement within the company.

Mismanagement and Short-Term Thinking

Endless shrimp is a perfect example of a company focusing on one or two metrics without considering the bigger picture. Originally a once-a-year event, they made it an everyday promotion last year. During this period, shrimp prices surged by over 10%. You can imagine customers indulging in 10-15 plates of shrimp with no margin left for the restaurant.

Red Lobster tried to pass some of these costs on to customers, but fundamentally altering customer behavior like this backfired. The promotion, in place for over 20 years, became outdated and irrelevant to today’s consumers. The 4% uplift in sales it provided couldn’t offset the increased costs and likely cannibalized other sales within the restaurant. This led to a significant amount of red ink flowing through their finances.

A Broader Issue: Pricing Management

Beyond the endless shrimp, the real question is about the internal pricing management. How could they continue to rely on small incremental price increases? Why wasn’t there a discussion about other pricing strategies? Were they considering their menu assortment, price points, or understanding why their traffic was decreasing? Identifying where they were losing customers and to what competitors could have provided more insight.

The Macro Trend and Family-Style Dining

This isn’t just about Red Lobster. Family-style restaurants have seen a significant decline in volume, especially post-COVID. Thinking that price promotions would magically draw customers back was a flawed strategy. It’s reminiscent of the CPG sector, where frequent promotions erode value and train consumers to expect discounts. This degrades the market value and loses the initial impact.

COVID's Impact

COVID fundamentally shifted consumer behavior. Red Lobster’s response was to extend the duration of endless shrimp. It’s almost laughable. A more strategic response was needed, leveraging core revenue management principles rather than relying on outdated promotions.

Final Thoughts

Despite the criticism, we both love Red Lobster and their seafood. Their biscuits are phenomenal. However, it’s clear they left significant opportunities on the table. By applying sound revenue management principles, Red Lobster could harness its potential and navigate through these tough times.

Author
Editorial Team
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