Why I’ll Pass on Endless Shrimp: Red Lobster, Sales Mix, and Profit Margin
If something is free, will you use more of it?
Well- sure!
A great example is MoviePass, which I wrote about here.
We used MoviePass several years ago. For a monthly fee, you could see up to one movie a day. My whole family joined and saw lots of movies. If fact, too many people took advantage of the offer- and MoviePass lost money.
Here’s a problem:
There’s a difference between customers not paying for a product or service, and buyers taking advantage of an unprofitable business model.
How content creators make money (or try to)
Writers, bloggers, YouTube and TikTok creators give away the vast majority (maybe 95%?) of what they create.
They try and sell the other 5%.
In this scenario, giving a great deal of “product” (content) away is a part of a well-planned strategy. Think about the podcasts you subscribe to, the newsletter you purchase, or other content.
The seller is very aware of how much free content they must provide to keep you as a customer. This strategy can be profitable
Free food isn’t working for Red Lobster.
Too many seafood lovers
In April of ’24, Bloomberg reported that Red Lobster was considering a bankruptcy filing. As Business Insider reports:
“Red Lobster is being bogged down by increased labor costs and expensive leases on its restaurants.
Some observers were quick to blame the financial woes on its decision last year to make its ‘Endless Shrimp’ promotion, which used to be an occasional, limited-time offering, permanent.”
Red Lobster’s messaging for years was “For the seafood lover in you”, as you’ll see in this 1981 commercial.
Permanent Endless Shrimp brought in too many seafood lovers.
“While Red Lobster increased traffic somewhat, people coming in to chow down on all-you-can-eat shrimp was a money bleeder. The company blamed Endless Shrimp for its $11 million losses in the third quarter of 2023, and in the fourth quarter, the picture got even worse, with the restaurant chain seeing $12.5 million in operating losses.”
Ouch!
A better approach is to find out what customers and prospects value- and sell more of that.
Paying for value
Every business- even companies that give away lots of products and services- must generate enough revenue from sales to cover all costs.
The content creator who spends time and money to post 15 pieces of content a month can recover that cost.
Maybe it’s an expensive online course. Maybe the creator sells enough courses each month to cover all content production costs and generate a profit.
The only way that works is if customers see the value in the course.
I’m willing to pay for value- and I’m sure you do, too.
A business like Red Lobster needs to take a hard look at sales mix.
Analyzing sales mix to improve profitability
Hubspot has a nice definition of sales mix:
“Sales mix is the proportion of each type of product sold in a business compared to the business's total sales. The purpose of calculating sales mix is to understand how the sales of different types of products impact profits.”
Red Lobster needs to measure the profitability of each menu item and consider how many of those menu items are sold each month. Here are two items from the menu, and I added some price, profit, and profit margin examples to explain sales mix.
Profit margin is (profit / sale price) and you can think of profit margin as the profit per each dollar of sales. Profit margin allows you to make an apples-to-apples comparison of products with different prices.
Lobster Lover’s Dream $14 sale price $2 profit (14.2% profit margin)
Admiral’s Feast $16 sale price $1.50 profit (9.4% profit margin)
Note that the Admiral’s Feast has a higher price but generates less in profit margin. Don’t fall into the trap of thinking that the product with the higher price is always more profitable.
That’s not always true.
Red Lobster computes profit margin for every item they sell, then analyzes how much of each menu item is sold. The goal is to market items that generate more profit margin. The company may also raise prices on some popular food choices that customers value.
Diners may be willing to pay the higher price.
Finally, consider whether or not Endless Shrimp should be ended- I’m certainly not interested.
I think the Endless Shrimp was the scapegoat for The Lobster's downfall. I think its private equity ownership and real estate leases are the bigger reason for the downfall. But blaming their failure on gluttonous Americans is a better headline grabber.