Seafood restaurant chain Red Lobster posted an $11 million loss for the third quarter of 2023. The primary driver of this loss was their Ultimate Endless Shrimp deal. What was usually a temporary deal offered seasonally was made permanent in June of this year. By making the deal permanent, the company was hoping to increase traffic into their restaurants. While the promotion worked (traffic increased by 4 percent over the previous year), the company did not anticipate the share of customers who would order the special and how much they would eat.
Companies routinely run promotions that they expect to lose money in order to get customers into the store in the hopes they purchase other items with higher profit margins. Such items are referred to as “loss leaders.” Red Lobster, for example, was likely expecting to lose money on the Ultimate Endless Shrimp special, planning to make up the difference on appetizers, beverages, and desserts. However, cost-conscious consumers apparently had other plans. To cut the losses, the company raised the price of the shrimp special from $20 to $22, and now $25. Whether the price change ultimately helps or hurts remains to be seen.
Discussion Questions:
- Suppose a consumer has an option to purchase the all-you-can-eat shrimp special or order the servings a la carte and pay $5 per plate. For which option would you expect the consumer to have the higher marginal utility of their last serving? Explain.
- If demand for shrimp dinners is elastic, how will raising prices affect Red Lobster’s total revenue?
Sources| https://www.nbcnews.com/business/business-news/red-lobster-raises-price-unlimited-shrimp-promotion-popular-rcna127381; Unsplash: Photo by Patrik Kay on Unsplash