Chains’ owner cooks up growth ideas - East Valley Tribune: Business

Chains’ owner cooks up growth ideas

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Posted: Sunday, July 8, 2007 7:14 am | Updated: 5:58 pm, Fri Oct 7, 2011.

ORLANDO, FLA. - Pineapple upside down cake is nearing perfection. Cooks are simmering citrus-rum scallops and whipping up a brown sugar rib glaze.

The test oven rarely goes off at Darden Restaurants Inc., which runs the Olive Garden, Red Lobster and three other chains. The company has 1,400 restaurants, making it the world’s biggest casual dining operator.

But times are lean in the industry, and Darden will have to grow if it wants to stay that way. It plans aggressive expansion of its already-ubiquitous Italian eatery, and might even buy another restaurant chain. The changes come as Darden tries to move past its failed Smokey Bones operation, a more than nine-year investment in American barbecue that never caught on.

In May, the company closed nearly half its 129 Bones locations and put the other 73 on the sales block because stores weren’t selling enough. Fullyear earnings dropped about 40 percent last fiscal year largely because of charges related to the Smokey Bones moves.

Wall Street applauded the decision to drop the chain. Darden share prices hit an all-time high of $47.60 in the next few weeks, although have fallen to around $45 recently.

Darden has about 1,400 restaurants, with Olive Garden and Red Lobster each accounting for more than 600. The company also has Bahama Breeze, a Caribbean-themed restaurant and bar, and Seasons 52 — an upscale dining experiment close to maturing past the test phase. Breezes has 23 restaurants and Seasons has just seven locations — two in Atlanta and the rest in Florida — but more are planned in 2009.

But Darden’s focus is still on Olive Garden. This year it plans 40 new restaurants, up from 32 last year and 19 the year before, as it nears a goal of 800 to 900. Olive Garden began in Orlando’s tourist corridor in 1982 and has posted 51 straight quarters of same-store growth, nearly unheard of in the industry.

“They’ve put together this great track record. They’re really connected with mainstream America,” said Joe Buckley, an analyst at Bear Stearns who follows Darden.

Darden helped turn its Italian chain into an industry leader with its “When you’re here, you’re family” campaign in the late ’90s. A brand refreshening associated Olive Garden with family togetherness and a culinary institute in Tuscany, Italy, where the company sends cooks and gets recipes.

The chain and its pasta-heavy menu also made it through the low-carb diet craze, and now serves packed houses of families, birthday parties and double dates just about everywhere in America.

Wall Street has also speculated that Darden’s next brand could be someone else’s. Analysts have mentioned high-end seafood eatery Bonefish Grill, which might be available as OSI Restaurant Partners Inc., the company that owns it and Outback Steakhouse, goes private.

Darden chairman and chief executive officer Clarence Otis would only say any new chain would have to be well-established, with a lot of room for growth.

“We have venture concepts already — we’ve got Seasons 52 and we have Bahama Breeze,” Otis said. “We think that if we’re going to acquire something, that next something ought to be more proven.”

Darden has stayed mostly steady despite tough times in dining, with high mortgage interest rates, skyrocketing gas prices and even increased competition from fast-food restaurants possibly crimping profits.

For the fiscal year which ended in June, Darden sales were up 4 percent to $5.57 billion.

“They take things pretty slow and conservative for the most part,” said Steve West, an analyst with AG Edwards & Sons. “They’re not too concerned about getting a fast growth model out there. That’s one of the things I like about them.”

Smokey Bones launched in 1999, in Orlando, but just never caught on. Otis said he thinks the company misbranded.

“As we look back, we really did a lot of things to define it as a barbecue restaurant,” Otis said. “We could have defined it as a restaurant that’s really steak, chicken, ribs. Great barbecue, but a broad menu.”

Otis said Smokey Bones didn’t earn the same customer loyalty as Darden’s other brands. People just didn’t eat it often enough to drive sales.

“Core guests at a Red Lobster, Olive Garden, might come at least once a quarter. A lot of people come once a week,” Otis said. “At Smokey Bones that number is below that for a quarter, and nobody comes in once a week.”

Darden had seen trouble before. The company had to close 49 restaurants — 34 of them Red Lobsters, the rest Olive Gardens — in the 1990s after it expanded too far. Those years were golden for restaurants, and many overestimated demand.

Red Lobster is doing much better, but hasn’t increased the number of restaurants. That will change in the next few years as the company ramps up to 10 openings a year, Otis said.

The chain has also begun printing separate lunch and dinner menus to reinforce to diners the fish is fresh, and restaurants are due for a remodeling in the next year or two.

Red Lobster and Olive Garden’s customers cut a broad swath, typically earning between $45,000 and $75,000 a year.

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