Strategic analysis: Should Darden spin off its brands?

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Part 11
Strategic analysis: Should Darden spin off its brands? PART 11 OF 25

Darden analysis: Fast casuals are devouring casual restaurants

A significant performance difference

Comparing Chipotle and Panera’s stock performance to full-service casual dining stocks like Darden Restaurants, Bravo Brio Restaurant Group Inc. (BBRG), and the Consumer Discretionary SPDR ETF (XLY) shows a stark contrast in performance. While Darden Restaurants Inc. hasn’t done too badly compared to Bravo Brio Restaurant Group Inc., it has significantly underperformed the Consumer Discretionary SPDR ETF’s 80% as well as the averages of Panera Bread Co. and Chipotle Mexican Grill Inc. This suggests fast casuals, like Chipotle and Panera, are gaining market share in the US restaurant business.

Darden analysis: Fast casuals are devouring casual restaurants

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Takeaway 1: Casual dining is too slow for busy people

Three main factors are driving customers to trade down to fast-casual restaurants. First, fast-casual restaurants are speedier than sit-down restaurants. For employed people, work hours have risen back to what they were before the recession. As work gets busier, consumers are switching to speedier alternatives. This is a major disadvantage for casual dining restaurants during the lunch day.

Takeaway 2: Casual dining food isn’t that healthy

Fast casual restaurants like Chipotle and Panera are generally healthier than food at casual full-service restaurants. This brings us to the second point: casual dining is often known for providing hearty meals and larger portions that are generally high in calories, sugar, and salt. As this trend continues, people are choosing to eating less and consume healthier alternatives.

Takeaway 3: Slow labor market recovery is a drag

Third, the slow labor force recovery from the depth of economic recession means more people are trading down to fast casuals, which can cost less than $10 per meal, or spending more time cooking at home. While the unemployment rate has fallen, the labor employment rate (which is a measure of the share of people in the labor force that are employed) is still far from the 2008 peak. As more attractive fast-casual restaurants pop up across the United States, consumers are pursuing more small luxuries instead of big splurges.

Result: Lower guest turnout

Consumers continue to visit casual restaurants—but less frequently. When they do, they often treat themselves on a nice day or on discounts and promotions. Brands like Texas Roadhouse (TXRH) or Outback Steakhouse, held under Bloomin’ Brands (BLMN), which focus on steak, have held up better. This is likely because trading down on steak isn’t an option. People can trade down to gourmet burgers, like the ones Red Robin (RRGB) offers, but steak is steak. Besides, steak is generally pricier than alternative meats, like pork and chicken.

The trend is likely to stay. Fast-casual concepts aren’t just stealing business from casual full-service restaurants—they’re also taking guests away from fast-food stores. That means Darden needs to change its strategy. But how?


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