Red Lobster sold too many unlimited shrimp and went bankrupt
Rock Lobster
We talked a little bit, a while ago, about how offering unlimited shrimp as a business plan is probably a bad idea. I mean, if your business plan is “We will offer unlimited shrimp in order to entice more customers”…it’s kind of a bad plan? Maybe your plan is slightly better. Maybe it is “we will offer UNLIMITED SHRIMP in order to get customers to buy high ticket items”. This is known as a “loss leader” i.e. what Leo Molloy does at HQ when he offers cheap Bluff oysters (versus the fortune Onslow will charge you…on the other hand, you probably won’t get a half-cut punter walking up to you at Onslow…maybe). This — I mean — this sometimes works but it does not work if your customers just buy unlimited shrimp. That works less. And I mean, if your plan is — we will buy lots of shrimp and then give away lots of shrimp — I mean, maybe that isn’t a good business plan. We discussed this. I think I said something like how hilarious it would be if Red Lobster, the chain in question, actually went bankrupt because they gave away too much shrimp.
My favourite failed business is probably Movie Pass, which had the spectacularly bad idea of MaaS (movies as a service) — i.e. pay for one subscription and then go see all the movies you would like (remember, lol, that Movie Pass actually realised this was a bad idea and ended up trying to log users out and change their passwords when movie-goers went to too many movies). There’s also the slew of “unlimited lifetime passes to x airline” that ended up being cancelled as well. In general, offering unlimited quantities of a thing is Not Great Business. Anyway — this is what happened at Red Lobster — they gave away too many shrimp! Now they are filing for bankruptcy! But it is ok — about 560 locations will stay open! (Presumably without unlimited shrimp).
This is a little deceptive: in America companies filing for bankruptcy does not mean that it is the end of the world — I have the impression in America people file for bankruptcy all the time. I have the impression companies are constantly Michael Scott-ing and being like:
Red Lobster already has a “stalking horse” bid from its lenders, who can then buy out the company and presumably make it profitable (tip: don’t have unlimited shrimp). Maybe somebody else could buy it too. I don’t know — Darden, which owns Olive Garden, owned Red Lobster until 2014 — they could buy it back. I imagine it like this:
Darden: Hello, you are bankrupt. We sold it for $1.2bn. We’ll buy it back — but for, I don’t know, like a few hundred million?
Red Lobster: Idk OK dude? Just don’t try endless shrimp, OK??
I mean — maybe this will be a Harvard Business School case study one day — “how endless shrimp ended in catastrophe”. Nobody should be surprised about this; but maybe it is surprising that this still happens in 2024.
Earnings
Infratil reported and honestly — not that exciting? Data centres go brr. Maybe the CDC business is a little slow (still double digits!) and I don’t know if I really understand the acquisition of “One” NZ, though as one fren said to me today “the only way is up after Vodafone”. Amen. Michael Hill had a fairly bad trading update but is anybody that surprised? I am sure Michael is happy enough playing golf in Queenstown. Pacific Edge is still burning cash and pinning hopes on ‘Murica (I am more optimistic about Avita Medical, which is due to be granted FDA approval end of the month). I’m not excited about much. Comvita has an NBIO from CVC, the PE firm — I don’t have any dogs in that fight but noting that Nestle is looking to offload its Egmont honey brand — Rothschild, Cameron Partners advising. Duratec ebbed up a bit.
Dimon Retirement
Jamie Dimon made some rumblings about retiring. He’s 68, probably should. Again — this is not that interesting news, mostly because Dimon was incredibly smart about how he built JP Morgan for the long term. Obviously we are going into a recession. If you don’t think so, get out of your 10,000-count Egyptian cotton sheets and go to a poorer part of town and tell me you don’t see it. Or go to somewhere that isn’t Soul bar and note how quiet the restaurant trade is. Dimon’s been through a few cycles now — can’t blame him for wanting to get out. JPM feels at fair value … don’t love buying the banks at this stage in the cycle. Nor does Dimon, who isn’t enthusiastic about JPM buybacks.
Capital (mis)allocation
You may think I make it my hobby to see the exit of CEOs and chairpeople. This is untrue. Yes, Ross Taylor at Fletchers has left the building and now so has Grayston at The Warehouse. The truth is both bosses, in their own way, built their own fate (as Munger sez “to get what you want, you have to deserve what you want”). Taylor did inherit a bit of a nightmare but under his reign the nightmare continued. Grayston … well, Grayston spent millions on McKinsey, TheMarket and so on and the result was…??? (Joking — the result was millions of dollars of misallocated capital). I have said it before and will say it again: the SOLE job of a CEO is capital allocation. Quoth the Raven Buffett:
Once they become CEOs, they face new responsibilities. They now must make capital allocation decisions, a critical job that they may have never tackled and that is not easily mastered. To stretch the point, it's as if the final step for a highly-talented musician was not to perform at Carnegie Hall but, instead, to be named Chairman of the Federal Reserve.
The lack of skill that many CEOs have at capital allocation is no small matter: After ten years on the job, a CEO whose company annually retains earnings equal to 10% of net worth will have been responsible for the deployment of more than 60% of all the capital at work in the business.
CEOs who recognize their lack of capital-allocation skills (which not all do) will often try to compensate by turning to their staffs, management consultants, or investment bankers. Charlie and I have frequently observed the consequences of such "help." On balance, we feel it is more likely to accentuate the capital-allocation problem than to solve it.
In the end, plenty of unintelligent capital allocation takes place in corporate America. (That's why you hear so much about "restructuring.") Berkshire, however, has been fortunate. At the companies that are our major non-controlled holdings, capital has generally been well-deployed and, in some cases, brilliantly so.[]
Over time, the skill with which a company's managers allocate capital has an enormous impact on the enterprise's value.
To wit: Grayston or Taylor may have been great at their previous jobs (I don’t know!) but at the end of the day they had one job … and they did poorly at it.
Charts of interest
