Strategic analysis: Should Darden spin off its brands?

Part 15
Strategic analysis: Should Darden spin off its brands? (Part 15 of 25)

Darden analysis: Why Darden has the wrong culture and strategy

Darden focuses on brand building

Based on the analysis and thoughts laid out in the last article, it makes the most sense for Darden Restaurants Inc. (DRI) to push Olive Garden and Red Lobster towards a lower average check and higher guest turnover model. This is different from simply cutting prices and offering lighter meals. But there’s one hurdle: culture. Darden’s business strategy is based on brand building. While brands are built around lower-priced items—think Chili’s under Brinker International Inc. (EAT)—brand building at Darden more or less focuses on higher-check services where customers can spend hours in the restaurant—at least that’s how we interpret it since the company built its specialty group brands.

Darden's StrategyEnlarge Graph

Darden’s organization and culture

At Darden, each brand is headed by a president, which gives each division some ability to take actions tailored to the specific brand. However, Darden’s company strategy and multi-roles are walls to success.

In its annual filings, the company notes: “We believe that capable operators of strong multi-unit brands have the opportunity to increase their share of the full-service segment. We believe… that the breadth and depth of our experience and expertise set us apart. We are modifying our organizational structure so we can better leverage our existing experience and expertise.” CEO Clarence Otis also said in third quarter fiscal year 2013′s call, “We think we’re well positioned as an organization, given the… collective experience and expertise we have.” (Emphasis mine.)

The downside of specific experience and expertise

Experience and expertise are valuable resources when it comes to operating a business. But too much of them can trap managers in a box. Reliance on experience across several brands becomes negative if the brands aren’t positioned in the same market, have similar pricing and guest traffic strategy, and target similar customer demographics. The market today isn’t the same as it was before 2008.

Management needs to shift its perspective or change

Brands under the Specialty Group focus on product differentiation and high prices—which is what Darden doesn’t need for its Olive Garden or Red Lobster brands. To make Olive Garden and Red Lobster more successful, Darden’s attention must turn to lower menu prices and costs while increasing turnovers.

These points aren’t key points that the company talked about in its latest filing. In fiscal 2014, the company plans to continue cutting costs by automating its supply chain, reducing its use of restaurant resources, and optimizing restaurant labor costs. But that’s all it says. Besides, costs aren’t the biggest concern—the important problem is the brands’ strategies and concepts.

Darden is seeing guests leave, but it needs to do more work

As the respected restaurant analyst Howard Penney (managing director and restaurant analyst at Hedgeye Risk Management) noted earlier this year, menu prices must come down. The average check per guest at Red Lobster did fall in fiscal year 2013, but something like -1.8% isn’t quite enough compared to alternatives out there. Menu prices lowered via lighter meals and more affordable options. It’s a start, but not enough. Darden needs to do more work.

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