ORLANDO, FLA. — Sales-wise, Olive Garden and Red Lobster appear to be in the same boat.
Both chains have suffered slumps in recent quarters, due to downward trends in the casual-dining segment, while other brands of parent company Darden Restaurants, Inc., including LongHorn Steakhouse, relatively have thrived.
Click the infographic for a comparison of U.S. same-restaurant sales of Olive Garden and LongHorn Steakhouse.
A proposed solution from a group of stakeholders suggested spinning Olive Garden and Red Lobster into a separate publicly-traded company from Darden’s higher-growth brands of LongHorn, The Capital Grille, Yard House, Bahama Breeze, Seasons 52 and Eddie V’s Prime Seafood. In a Sept. 23 letter to Darden’s board of directors, Barington Capital Group, L.P., which owns 1.4% of the company’s outstanding common stock, recommended the split, indicating that, amid changing consumer dynamics and intensifying competition for market share, the two brands have “burdened” the company. Over the past three years Darden’s compound annual growth rate of 6.5% compared with 12.7% for its peers. Olive Garden revenues and Red Lobster revenues grew at 2.9% and 1.4%, respectively, for the three-year period ended in August. During the past three calendar years same-store sales at Olive Garden and Red Lobster grew at average rates of 0.02% and 0.54%, respectively.
So, Darden’s Dec. 19 announcement of its decision to spin off or sell Red Lobster had some asking: Why not Olive Garden, too?
Clarence Otis, chairman and chief executive officer for Darden, made a case for the Italian restaurant chain during a Dec. 19 call with financial analysts.
“Olive Garden has always been and is today a significant piece of the Darden story,” Mr. Otis said. “So, that doesn’t change. Olive Garden’s sales and earnings results, though, are much less volatile than Red Lobster’s. And, so, we don’t see the same volatility going forward.”
He added Olive Garden contributes significant cash flow growth and is more relevant than Red Lobster to certain pockets of consumers, particularly younger customers and those with higher incomes.
“At Olive Garden … we had 11% more visits last year, fiscal 2013, from guests with household incomes over $100,000 than we did five years earlier in fiscal 2008,” Mr. Otis said.
Red Lobster, conversely, had flat traffic during the five-year period.
“We’re trying to make sure we maintain relevance to our core consumers, and that we broaden our reach to some other consumers that are in some pockets of strength,” Mr. Otis said. “And we’re seeing Olive Garden be able to do that.”
With a focus on restoring sales momentum in existing units, Darden also plans to suspend unit growth for Olive Garden and LongHorn Steakhouse as part of its Dec. 19-announced comprehensive strategic review to enhance shareholder value.
“I think it’s really that we think the focus at Olive Garden needs to be on regaining same-restaurant momentum, and so this is a suspension, really, that would last the next three years at a minimum,” Mr. Otis said. “In terms of the ultimate unit potential, we think the ultimate unit potential is still much higher than where we are today. And the reason we think that is, as we look at the new units that Olive Garden has opened over the last four years, they exceed, despite the slump at the business overall in the last couple years, those units still exceed our return hurdles from a return on capital investment perspective by a substantial amount. But the key priority right now is to make sure that the base business is as strong as possible. And we think that suspension of new unit growth is appropriate to do that. And we also think that it’s appropriate because it boosts free cash flow and enables us to return more capital to shareholders near term and improve our credit metrics, both of which are very high priorities over the next several years.”
Efforts to stabilize Olive Garden’s sales and restore the chain’s industry-leading position include simplifying processes, innovating the core menu and remodeling units.
The first phase of the “brand renaissance,” redesigning kitchen operations to reduce complexity in food preparation, including the rollout of new flattop grills, already has improved cost savings and food quality, “with a particular emphasis on elevating the quality of our proteins,” said Gene Lee, president and chief operating officer.
Front-of-house operations, too, have been streamlined, with a focus on reducing the number of steps of service at lunch to expedite the meal.
“As a result of what we’ve already done to simplify what we do operationally, Olive Garden has seen great improvement in its overall guest satisfaction scores on both a quarterly sequential basis and compared to prior year,” Mr. Lee said.
The company also is refining Olive Garden’s core menu to add more value offerings as well as differentiated Italian fare at a higher price point.
“From a promotional perspective, we expect to make these compelling new core menu items, both those that target financially constrained guests and that target more financially comfortable guests, the focal point of our promotions,” Mr. Lee said. “In terms of timing, we have multiple tests of new core menu items and platforms in markets now, and we’re very pleased with the initial reactions from our guests. We expect many of these items and platforms to be introduced nationally sometime this fiscal year.”
In addition, approximately 400 restaurant remodels are planned. A new design that incorporates “today’s Italy in a casual dining environment” is being tested over the next few months, with a goal of 50 to 70 units remodeled over the next year.“We’re confident that improving brand relevance will drive sustained same-restaurant guest counts and sales growth well into the future,” Mr. Lee said.