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Changing tastes at heart of Red Lobster's financial skid

What will become of the Cheddar Bay biscuits? And where is Cheddar Bay, exactly? These were the burning questions that plagued diners after Orlando-based Darden Restaurants recently announced it would sell Red Lobster and its accompanying real estate for $2.1 billion to Golden Gate Capital.

Since then, Darden execs have been embroiled in a pitched battle with shareholders who worry this "fire sale" will weaken Darden's competitive position. That remains to be seen, but what is known is that the seafood chain has struggled in recent years.

With 700 locations in the United States and Canada, it's a mid-priced sit-down restaurant that hasn't managed to cultivate a new audience. The customer base has skewed older as millennials and younger diners have failed to be enticed. Despite its original "splurgy" reputation, its lower price point hasn't attracted affluent customers.

And, perhaps most importantly, in most places it's no longer the only game in town to find lobster and other shellfish.

Consider the lobster

Founder Bill Darden opened the first Red Lobster on U.S. 92 on the shores of Lake Parker in Lakeland in 1968. Former Gov. Lawton Chiles, a Lakeland native, was an early investor in the chain. According to Red Lobster spokesperson Erica Ettori, Minneapolis-based General Mills acquired the concept in 1970 and began national expansion, primarily in Florida and the Southeast. In 1995, the company spun off Red Lobster, Olive Garden and a few other chains to form Darden (named for Bill, who died in 1994), an independent, publicly traded corporation.

When Red Lobster debuted, there were essentially two kinds of restaurants — dress-up fancy ones and everyday places including lunch counters, diners and such. The mid-priced sit-down restaurant — Applebee's, TGI Fridays and Ruby Tuesdays — is a much more recent phenomenon, a byproduct of more people going out more often. In recent years, the average American eats out five times per week, including breakfast, lunch and dinner.

General Mills successfully positioned Red Lobster as a suburban "special occasion" spot, many customers sporting corsages and boutonnieres or even tiny velvet boxes stashed in pockets. Rapidly expanding in the 1980s, it became the world's largest seafood chain, inventing items like popcorn shrimp and promoting itself with the motto "For the seafood lover in you."

More recently, Red Lobster had struggled to find its place in the busy and competitive world of chain restaurants. These days the average Red Lobster diner spends $20, much less than at higher-end chains. For instance, at Capital Grille, one of Darden's upscale concepts along with Eddie V's and Seasons 52, they spend $70.

Sit-down restaurants as a category have lost ground in recent years to fast food (McDonald's and the like), fast-casual (such as Panera) and grab-and-go (Starbucks) concepts. Why? When times are tough, table service — and paying a gratuity — are easy to forgo.

This may partially explain why Red Lobster reported a sales decline of 5.2 percent over the past fiscal year but not why Darden has chosen to jettison the chain. In that same time, Olive Garden reported a sales decline of 4 percent, but the parent company has dug in, redesigning Olive Garden interiors and revamping menus.

It's not that Olive Garden's unlimited breadsticks are somehow more au courant than those fabled cheddar biscuits (Red Lobster sells 395 million of them annually). But some of Red Lobster's flagging appeal may have to do with the food itself.

Feeling the pinch

In the late 1960s, fresh seafood was exotic in much of the country and whole lobster was a luxury item available only on the coast. Even at top restaurants, overnighting fresh seafood was a costly, even impossible endeavor (FedEx wasn't founded until 1971). A trip to Red Lobster represented the first time many diners donned a plastic bib and got busy with the shellfish crackers.

The Lakeland Red Lobster, which moved from its original Lake Parker location 17 years ago, gets in lobster three or four times a week.

The rub is, so do lots of restaurants. The past two years have had insanely large lobster catches in New England, and the savings have been passed along to wholesalers elsewhere in the country. According to manager Matt Kenward, tiny Lobster Haven in Tampa cycles through more than 2,000 pounds of lobster per week. Now multiply that by the thousands of restaurants across the country that traffic in the celebrated crustacean and it's obvious that Red Lobster was up against increasingly stiff competition.

Red Lobster's bottom line also took a hit in the past year from a surge in the cost of its most popular menu item, shrimp, thanks to a shellfish disease called acute hepatopancreatic necrosis syndrome. The highest wholesale price in a decade, combined with the consumer pressure to keep menu prices low, may partially explain why food costs are significantly higher at Red Lobster than some of Darden's other concepts.

Changing tastes

Red Lobster contributed about 30 percent of parent company Darden Restaurants' revenue in 2013. Still, sales have fallen in five of the past six quarters. Newcomers like Chipotle have given it the squeeze because of its greater affordability, but also perhaps because consumers are looking for more robust flavors.

In 2008, Red Lobster installed wood-fired grills to appeal to contemporary tastes, but it may have been too little, too late. In a country where Sriracha is making gains on ketchup as a top condiment, zest is at a premium.

It's not known what the ultimate fate of the seafood chain will be, but at this time Golden Gate Capital says it does not plan to close locations.

But the trials of what was once the most popular restaurant in North America is clear evidence that change is always on the menu.

Laura Reiley can be reached at lreiley@tampabay.com or (727) 892-2293. Follow her on Twitter @lreiley.

Sluggish sales

Red Lobster's sales have fallen in five of the past six quarters. It's one of Darden's "mature" brands, along with Olive Garden, which also has struggled recently.

Unflattering comparisons

Revenue growth has lagged far behind Darden's newer chains including Longhorn Steakhouse, Capital Grille and Eddie V's.

Little potential

The brand also has limited growth potential because many of its customers are elderly and don't go out to eat very often.

The lobster problem

Red Lobster used to be the place for the masses to munch on the crustacean. Now it shows up on menus all around the country.

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Changing tastes at heart of Red Lobster's financial skid 05/30/14 [Last modified: Friday, May 30, 2014 6:17pm]

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