Lessons From A Lobster That Is In The Red

If I had to pinpoint something in my day that I would say I cherish, it’s my birthday calls. It gives me an opportunity to speak to our agents and staff on another level. We try and keep it light and about their milestone in the year, but it inevitably comes around to our business. I learn so much from these the moments in time—what price points are selling, is there a cool listing they are working on, or what’s happening on the front lines with their buyers and sellers. These conversations fuel my mind and my soul, and for that I am extremely grateful.

Back when my daughter was 4 years old I decided to call our agents on their birthday. Alessandra is now 20 years old and a junior at Syracuse University. Currently she is studying abroad in Florence and called me last Saturday at 4 pm Florence time, and I did not answer her. So at about 10:45 am our time I called her back. No, “Hello Papa”, or “how is your day going”, etc. Instead she snarled, “Doing your birthday calls?” Growing up my daughter would hear my side of the conversation when I was making these birthday calls. After I got off the phone she would always ask me, “Where are they going for their birthday?” I would tell her and she would often ask if we could go there. We made it a game and would plan a lunch or dinner the next weekend at one of the birthday venues. When people were away on an exotic trip like Vegas or the Caribbean I had a lot of fast talking to do.

Of course on the call she asked me, “So where is everyone going for their birthday today? The Keg, Red Lobster, Nashville etc?” (BTW The Keg, Red Lobster and the Niagara Casino are the three top destinations). I told her that Red Lobster is going off the list, and she asked why. I told her that they filed for bankruptcy in May and have closed nearly 150 restaurants so far.

It made me wonder why such a North American institution crumbled under $1.5 billion dollars of debt. The chain opened in 1968 and was touted as a restaurant in landlocked communities serving up seafood at an affordable price. Ironically, lobster was not on the original menu due to their high cost. I remember eating my first lobster there when a grade school friend had a birthday party there. In the 80’s after being purchased by General Mills (Cheerios and Betty Crocker) it became the largest table-dining chain in the US. Later it was sold again for $1.5 billion to a private equity firm who proceeded to do the unthinkable. They sold the land under the restaurants for $2.1 billion and called it a saleleaseback. So they went from owning their own properties (like McDonalds does), to becoming tenants. As rents rose and sales decreased it became evident something dramatic needed to happen to turn around sales.

Success Leaves Clues

I believe that success leaves clues, and so did the management at Red Lobster. In their wisdom, they looked back to see when they had success in bringing in volumes of diners. It was when they did their Ultimate Endless Shrimp, which they only did seasonally in September, to capture the back-toschool crowd, and Monday is usually the slowest day of the week.

It was reported that their customer base dropped by 30% from 2019, and the brain trust at RL announced Endless Shrimp all day and all week. Shrimp-addicted consumers stormed the place; people camped out all day and all night in booths to gorge on shrimp. Shrimp marathoners flooded TikTok, declaring their goals to eat 100 shrimp or talking about how they were going to spend their entire day eating shrimp. The restaurant’s clientele changed overnight. The restaurants were loud and chaotic, and their regular customer base fled to other restaurants.

So what happened to Red Lobster? Their staff was pushed to the limit; their facilities were worn to the bone; and their profits turned to loses, and the company was bought under bankruptcy for $375 million. When you think of the landscape of restaurant chains, Red Lobster had a niche with a seafood offering. It was the only casual dining chain of its kind in a sea of beef and chicken joints. So what can we learn from this iconic restaurant’s debacle?

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Is Having A Niche Risky? 

It is undeniable that Red Lobster scaled the seafood concept, and filled a niche which wasn’t being filled in the food service landscape. You live and die by a niche. Consumers’ tastes change. Specialized ingredients like seafood are subject to market pricing. Did you ever notice that restaurants with fish or lobster dishes on the menu, they are usually subject to ‘Market Price’? Seafood costs are a moving target. So when you adopt the concept of ‘Riches in Niches: How to Make it BIG in a Small Market’ by author Susan Friedmann, you run the risk of the market changing course in your specialization. For instance, if your primary focus was on residential real estate investors, with the sudden increase in mortgage rates, many investors were experiencing negative cash flow. If all your sales activity was in this one basket, then you would have experienced a challenging 18 months as rates increased, and landlords were feeling the pinch. To add insult to industry, landlords with long-term tenancies at lower than market rent began to ‘renovict’ their current tenants to take advantage of rising rents. Tenants dug their heals in and refused to move, adding further stress to the landlord, making this investment category undesirable along with your niche expertise.

The Quick Buck Has Short Legs

As far as I am concerned, Red Lobster committed the cardinal sin when it comes to appreciating assets… they sold them. So much has been written about how McDonald’s isn’t really in the food business, but is in the real estate business. According to former McDonald’s CFO, Harry J. Sonneborn, “The only reason we sell fifteen-cent hamburgers is because they are the greatest producer of revenue, from which our tenants can pay us our rent.” No truer words have been uttered, especially since McDonald’s real estate holdings are worth over $40 billion. They are the #1 non-real estate company with significant real estate holdings in front of Walmart, Costco, Amazon, Apple, and Walt Disney. McDonald’s strategy of collecting rents insulates them from the ups and downs of consumer demand, and when real estate values plummeted in 2008, they used their cash reserves to snap up more land and buildings. Using cash flow assets to help smooth the edges of a slow market, and/or leveraging equity to grow your business is always a smart strategy. 

A Desperate Decision Has Dire Consequences

The $20 all-you-can-eat shrimp deal brought about the demise of Red Lobster due in part to significant losses due to rising shrimp prices, increased client traffic, higher labour costs, greater wear and tear, and the loss of their loyal customer base. A perfect storm, so to speak. When we introduce a significant price cut (reduced commission), promise of more services (unlimited staging), the market slows down (holding more listings longer), and reducing marketing like video or drone photography, we set ourselves up for failure and frustration. Sound familiar? When you become hungry for positive cash flow and cost-cutting initiatives, we tend to make decisions that could negatively impact our businesses and set the stage for long-term dissatisfaction. 

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We are finally seeing a glimmer of light at the end of this challenging market tunnel. This past year and a half of a transitional market feels more like a decade. Those of us who stayed true to our business model of offering a professional and value- added service to help consumers buy and sell properties will come out the other side stronger and with more credibility. Those who made frequent changes, strategic missteps, adopted side hustles, and went away from the core of what we do as real estate practitioners will emerge weakened. As a result, their core customers will become confused by the new and emerging role some real estate agents have adopted around recruitment, which fails the consumer sniff test of, “What’s in it for me?” No matter the market conditions, consumers will always look to us to be experts in evaluating, marketing, and negotiating on their behalf. This goes to the core of who we are, and the value of what we bring to the consumer. How we deliver this service may evolve with new technologies and tools, but when we change course as a result of the ups and downs of the market, we set the table for a focused competitor to devour your lunch.