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Strategic analysis: Should Darden spin off its brands?

Part 14
Strategic analysis: Should Darden spin off its brands? (Part 14 of 25)

Darden analysis: Why guest traffic varies between restaurant brands

Guest traffic varies significantly

While we saw a rather similar revenue per square foot across most casual dining brands, customer traffic varies more significantly across major brands. We estimated customer or guest traffic by taking the average revenue or sales per square foot and dividing it by the average check per guest. This essentially gives us the guests per square foot.

Casual Dining Guest TrafficEnlarge Graph

By understanding the mix of average check per guest and guest traffic, investors and managers can get a better sense of whether Olive Garden, Red Lobster, and LongHorn Steakhouse should take the premium or lower check approach.

Olive Garden: Lower average check, higher traffic

Bravo Cucina Italiana and Brio Tuscan Grille, held under Bravo Brio Restaurant Group Inc. (BBRG), are upscale restaurants with higher alcohol sales. So either traffic is slower or there are just fewer people. Carrabba’s Italian Grill, owned by Bloomin’ Brands (BLMN), isn’t described as an upscale restaurant, but the average check per guest reaches $21 per guest—above Olive Garden’s $16.50 per guest. Naturally, Olive Garden is turning guests per square foot a year at a higher rate of 34.62.

Red Lobster’s guest traffic is in the middle

The average check per guest at Red Lobster is $20.30, so it’s normal to see guest traffic at Red Lobster less than Olive Garden. However, Red Lobster’s guest traffic count doesn’t heavily lean towards higher check and lower volume or low check and higher volume. That means we must consider other factors that would play important roles.

Longhorn Steakhouse: Higher-price strategy

Although Longhorn Steakhouse isn’t as expensive as Darden’s prime steakhouse, the Capital Grille brand, its guest traffic count is closer to the more expensive brands like Carrabba, Outback Steakhouse, Bonefish Grill, and Bravo Brio, as opposed to Texas Roadhouse, which generates lower average check per guest and much higher guest traffic. As we discussed in a previous article, though, LongHorn Steakhouse could use more traffic or a better price-to-value mix.

Estimated US Restaurant Square Feet 2013-10-25Enlarge Graph

Upper menu prices aren’t impossible, but Red Lobster is too big

Converting Red Lobster into a premium brand isn’t impossible, as Darden does manage a group of specialty brands that pulls in average checks above $23 per guest. But how much does Darden have to raise the standard of its services and goods, as well as average guest check? Brands like Carrabba Italiana Grill, Bravo Cucina Italiana, Bonefish, and Brio Tuscan Grille are all priced near Red Lobster or above, but they haven’t been performing as well. What chance of success is there?

Besides, Red Lobster is one of the largest chains in the United States (although Chili’s and Olive Garden are larger). There probably isn’t enough market if all those restaurants are redesigned towards higher average check per guest. As several credit rating firms recently dropped Darden’s rating, the lower cash flow used to renovate Red Lobster could lead investors to sell off the stock. It’s a risky move. So it leaves us with the option for Darden to move towards a lower average check per guest business model.

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