If the real Wolf of Wall Street wanted some high financial drama, he could do worse than follow the recent storyline for Red Lobster and Olive Garden. There’s no skullduggery involved, but the mix of sharp criticism, brash demands and outright arm-twisting, brought against an aged champion, makes for a doozey of a boardroom tale.
By the time it’s over, dozens of lawyers and people with Gordon Gekko lifestyles will enjoy a lottery-scale payday. Yet the situation is no different than the rite of passage that confronts a landmark deli, a fine-dining institution, or the inheritors of a family run favorite. Indeed, it’s the make-or-break point for any long-running restaurant success, regardless of its size or segment.
Sooner or later, a hit place has to find a way of appealing to new customers without alienating the loyal fans who kept it successful for such a long stretch. How do you extend a concept’s appeal without blurring what made it special to die-hard regulars?
If Red Lobster and Olive Garden had cracked the code, their story would have remained a Disney movie.
Instead, parent Darden Restaurants is the star of a Jerry Bruckheimer adventure thriller, an abrupt departure from the company’s genteel history. A powerful, seemingly heartless capitalist, Barington Capital Group, is demanding a spin-off of Red Lobster and Olive Garden. They’d be the core of a company separate from Darden’s younger, small restaurant chains, including Seasons 52, Yard House, Eddie V’s, and Wildfish Seafood Grille.
Barington, which owns about 2 percent of Darden, has crafted a polished presentation to woo other investors to its camp. Essentially it’s publicly challenging the management wisdom of Darden CEO Clarence Otis, undoubtedly one of the smarter restaurant leaders in the business, along with esteemed lieutenants like Kim Lopdrup, Gene Lee and David George. They built and today run the industry’s largest and most successful casual-dining company, a $8.7-billion-a-year behemoth.
But Barington believes a split company would be stronger financially than the sum of its parts. The firm wants one of the most esteemed companies in the restaurant business to restructure and rethink its very DNA.
Here again, the situation could have involved an operator of any size. If a hot dog vendor had outside investors, and sales or customer counts slipped, the same plot line could have applied. The money people insist they know how to run the operation better than the restaurant people do.
We may ultimately see if Barington is right; Darden has already announced that it will spin off or sell Red Lobster early in its next fiscal year. Barington has indicated that the change is insufficient to ease its thinking.
Beyond a doubt, the hedge fund has some legitimate gripes about the recent handling of Darden’s stalwart brands, particularly Olive Garden. Among the remedies being tried for weakness in the Italian chain’s sales is a burger and fries platter. How does that jibe with the concept’s reputation as the place for bargain-priced, no-surprises pasta, salad and soft breadsticks? It’s a move squarely into what marketers call the muddled middle.
Darden’s brands have suffered rudder-control issues before. Years ago, Red Lobster moved into pricier waters with the sort of menu items a consumer might see on the specials board outside a chef-run independent restaurant. When the up-scaling backfired, the concept shifted focus again to value and comfort. Enter challengers like Bonefish Grill, with promises of experience rooted more in the food-centric 21st century than the 1970s.
Then Red Lobster shifted up-market again, with every restaurant outfitted with a wood-fired grill and a grill master. It was a prelude to Darden’s current difficulties, with management currently convinced that value is the key.
That’s why it will be divested into more of a value-based company, Otis told investors right before Christmas. He explained that the widely held perception of Red Lobster doesn’t resonate with two key growth targets for casual dining: Households with an income in six figures, and younger consumers.
In other words, Darden is throwing in the napkin on expanding the market of casual dining’s granddaddy concept.
And for its other brands? “Now all of our brands have been focused on two things: maintaining relevance to guests who fit their core profile; and increasing relevance in pockets of consumer strength that are outside their core,” Otis said.
Those pockets will include the two consumer groups that weren’t wooed by Red Lobster’s clientele-expansion efforts, Otis told Barington and other investors.
He did not say how a burger and fries fits the effort underway at Olive Garden.
Barington, meanwhile, has said it wants to see more change. It has slammed Darden’s response to demands as “incomplete and inadequate.”