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Schadenfreude Fridays: Red Lobster Underestimates Everything, Loses Millions

Red Lobster doesn't make many mistakes, but underestimating the appetite of the average American was one of their biggest.

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Red Lobster is one of two pillars of fine dining in America - the other, of course, is the Olive Garden. The multinational chain has grown exponentially since its founding in 1968. Since then, 698 restaurants have opened their doors under the familiar sign of a happy lobster slowly ambling his way to a steamy death. Their cheddar biscuits and affordable entrees have made the eatery a favorite of casual diners and Shooter McGavin's henchmen alike.

However, there may have been even more of these seafood chains popping up if not for a disastrous promotion back in 2003. The company lost an average of $1.1 million per month over a short span that year, and it had one crustacean to blame for their losses - the snow crab.

Red Lobster waded into the deep waters of schadenfreude with an all-you-can-eat deal so bad that it made Homer Simpson's trip to the Frying Dutchman look like shrewd business. For around $20, customers were treated to a bottomless plate of snow crab legs; long spindly shells stuffed with tender, buttery meat. For seafood lovers and remorseless eating machines alike, this was an unexpected boon. For America's biggest seafood chain, it was a huge mistake.

Several problems stood in the way of the promotion's success. At the time, market price for the crab was just under $5 per pound. That meant that on raw ingredients alone, the restaurant was taking a hit once customers hit their third plate. With overhead costs and side dishes built in, franchisees were cringing every time a patron ordered the Endless dish. For any crab promotion to be successful, local managers argued, that base price would have to be closer to $3 per pound.

"But come on," Red Lobster executives surely thought, "who is gonna eat three plates of crab at this chain restaurant we've created that has locations across the midwest?" The answer, clearly, was 'Mericans, and the question, clearly, should have started with five plates. The overwhelming success of the promotion had franchises bleeding cash as snow crab only got more expensive as weeks rolled on. While other restaurants were hiking up their prices for the entree, Red Lobster was undercutting them at their own expense. The combination led to record receipts and all-time losses at the same time for the company.

It was a tough pill to swallow, but those are the breaks with the fishing industry. I mean, who can predict market prices on something as volatile as the seafood market?

As it turns out, just about everyone else who has ever worked with seafood.

These high prices for snow crabs weren't a surprise to anyone that actually paid attention to fishing - something the Red Lobster executives apparently overlooked. The species is tightly regulated by the U.S. government, which places a strict cap on how many of the crabs can be hauled from the ocean in a certain year. This wouldn't have been a problem in say, 1998, when 253 million pounds of the animal were okayed for fishing. Unfortunately for the restaurant chain, 2002's cap was much lower - only 172 million pounds.

That put a crunch on the snow crab supply, which in turn led to higher costs for the crustacean. All this could have come as a surprise for the executives at Red Lobster had it not been 2003. These trends had been going on for at least two years preceding the chain's money vortex of a promotion. That's something that the company even acknowledged after the fact, according to a USA Today article: "What we've seen in last couple years is there's an increase in demand for crab at a time when there's reduced supply, so prices have gone up," quoted Red Lobster's Wendy Spirduso from her 11th grade economics textbook.

Still, the company could have survived, or even thrived, if they hadn't underestimated the American spirit of buffet slaughter. Red Lobster hoped that the high price of their deal and the length of time that it took to crack open and de-shell these crab would deter all but the richest gluttons. It turns out that things went in the exact opposite direction.

While the price tag was enough to scare some customers off, it was more than cheap enough to lure in seafood fans who otherwise would have gone to higher profile establishments. This expanded the company's marketing base temporarily, but the chain was unable to do much with a clientele that only came to Red Lobster if the restaurant was hemorrhaging money. Like a Groupon for organic cupcakes, the deal brought in customers that would show up once and then vanish into the wind like Keyser Soze.

More importantly, their presence helped turn away some of the company's loyal devotees. These all-you-can-eat tables turned into time drains for diners and servers alike. Tables ordering plate after plate of crab legs and slowly shucking them often made dining at Red Lobster an hours-long experience. This clogged up tables for regular customers and choked out business that would have gone towards meals that actually turned a profit. Not only did this endless crab deal cost the company money with each plate, it also prevented franchises from cutting their losses thanks to terrible turnover rates at peak hours.

Even with all these terrible factors at play, Red Lobster could absorb the hit from a customer's second plate of snow crab legs. They could even handle their third helping in some cases. However, in defiance of belt buckles everywhere, these patrons trundled through plate after plate with an apparent vendetta against the restaurant itself. One party of five boasted about putting down 18 pounds of the stuff on the internet. Another birthday party gloated about 30 fresh plates of crab going down smoothly, presumably while simultaneously complaining about their restaurant's lack of Hoverround-accessible seating. Red Lobster had thrown down the all-you-can-eat gauntlet and Americans refused to back down. Their customers made it clear that they'd be willing to hunt the species to extinction if it only cost them $20 per meal.

When the losses started piling up, the chain authorized local franchises to raise the price by up to five dollars. When even that wasn't enough to squelch Lobsterites' hunger for snow crab, the promotion was shelved altogether. When the company's quarterly earnings came out, the extent of the damage became clear; the company had lost $3.3 million on a seven-week promotion. Around this time, Red Lobster president Edna Morris mysteriously left her post to "pursue other interests." That's widely regarded as company code for "was left on an ice floe and floated out to sea by the Board of Directors."

The company eventually recovered, but Endless Crab left an indelible mark on Red Lobster's reputation as well as their ledgers. It left servers overworked and underpaid, left managers angry and bleeding money, and left executives with one hell of a lot of explaining to do. The promotion's popularity raised snow crab prices for other restaurants across the country and cost the franchise nearly $500,000 each week that it ran.

But, for seven glorious weeks, it gave crab lovers an excuse to set up base camp in a booth at their local Red Lobster. Not bad for a venture that The Simpsons proved was a failing business model only ten years earlier.