Opinion | What the Downfall of Red Lobster Tells Us About America

[ad_1]

The great economist George Stigler wrote a paper called “The Cost of Subsistence” that calculated the minimum cost of food that would satisfy the nutritional requirements of “an active economist” who “lives in a large city.”

He calculated the nutritional value of 77 foods, including yummy ones like chocolate, strawberry preserves, bananas and leg of lamb, but concluded that they were all too expensive. In his article for a 1945 issue of The Journal of Farm Economics, he settled on just five foods based on their August 1939 prices, in these quantities per year: 370 pounds of wheat flour, 57 cans of evaporated milk, 111 pounds of cabbage, 23 pounds of spinach and 285 pounds of dried navy beans.

Stigler hastened to say that this was purely an academic exercise, not a diet recommendation. “It would be the height of absurdity to practice extreme economy at the dinner table in order to have an excess of housing or recreation or leisure,” he wrote.

Still, I thought of the Stigler diet this week when the news came out that Red Lobster, the seafood restaurant chain, had cracked under pressure and filed for Chapter 11 bankruptcy protection. One source of its problems — not the biggest, but the easiest for customers to grasp — was an every-day-all-you-can-eat shrimp promotion last year that got too popular and was a key reason for an $11 million quarterly operating loss.

The connection, of course, is that Red Lobster’s offer was taken advantage of by diners who thought like Stigler. Once they paid $20 for the special (later bumped to $22 and then $25), the marginal cost of every shrimp they popped into their mouths was zero. That probably attracted some economizing types who weren’t even regular customers of Red Lobster.

I’m going to speculate a bit here. I wonder if changes in the economy and society have made people more prone to exploiting all-you-can-eat deals to the max. Trust in big business is the lowest on record, according to Gallup polling. So diners may feel less compunction about taking advantage of a big business’s marketing slip-up. At the same time, people are feeling economically stressed, so “free” is even more enticing than usual.

On Reddit, one anonymous poster wrote that “it’s almost impossible to find a deal for any and all things,” so when there is a good deal, “People are gonna hammer you on the thing because we are all desperate for value right now.”

I realize that’s just one person, but it rings true. Red Lobster “should have known this was coming,” John Gordon, a San Diego-based restaurant consultant, told me.

All-you-can-eat offers press all the wrong buttons. Some diners eat more than they really want, figuring they need to earn back the cost of the special. (That’s the sunk cost fallacy.) People watching them are either revolted or tempted to join in so they don’t feel as if they’re indirectly subsidizing the glutton.

The worst type of diner for a restaurant with an all-you-can-eat offer is the performative type, usually accompanied by someone with a camera, who will eat to bursting out of some combination of showmanship and defiance.

“Publicity around a specific all-you-can-eat event is going to pull out of the woodwork those who enjoy eating large amounts and demonstrating that they have this ability,” David Just, a behavioral economist at Cornell’s Dyson School of Applied Economics and Management, told me. “You’re sort of putting this target on yourself.”

There’s a bigger group of people — call them Stiglerites — who are simply responding rationally to the change in incentives. “My perception from unit visits to Red Lobster is that they are typically older customers,” Gordon said. “I don’t know that they harbor ill will toward Red Lobster, but when they see a deal they would tend to vote with their feet and run toward.”

Buffet-style restaurants confront this problem all the time, so they have strategies for dealing with it. The self-serve feature saves them money on labor, compensating for the occasional overeater. They seek customers who choose buffet restaurants because they can sample lots of different foods and get firsts and seconds without waiting for a waiter or waitress. These ideal customers appreciate the low prices, but don’t see any reason to gorge themselves. The buffets put cheap, filling foods such as mac and cheese up front. They use small plates. They may be a bit slow to restock the more expensive items.

Buffet restaurants were shut down or shunned during the pandemic because of fears of disease transmission, and have only partly recovered their lost volumes since, according to data compiled by Statista. What they continue to have going for them is a low price per pound of food, which is a big selling point at the moment. Diners have been switching to cheaper types of restaurants, Andy Smith, the chief marketing officer of Dallas-based Black Box Intelligence, told me.

What buffet chains don’t do is make “free” the key selling point. Red Lobster made precisely that mistake. One promotion even said, “Insider tip: Avoid grabbing the extra biscuit to leave room for endless amounts of shrimp.”

I’m not a huge fan of shrimp, but if I’m trying to fill my stomach cheaply, I’ll take platefuls of shrimp over 285 pounds of dried navy beans.

The Readers Write

You wrote about Mary Kay Henry’s “Fight for $15 and a Union.” Try living on $15 an hour, even assuming that your employer hires you for a full 40-hour week!

John Porter
Stouffville, Ontario, Canada

Regarding your newsletter on artificial intelligence in education: Models make wonderful servants, yet terrible masters, and warrant a healthy dose of skepticism.

Arun Sarna
Alexandria, Va.