Strategic analysis: Should Darden spin off its brands? (Part 16 of 25)
A split into two checks: Lower and upper prices
This means Darden should split itself into at least two parts, like Barington Capital Group recommends. One part would hold Darden’s Olive Garden and Red Lobster brands, focusing on lower prices and finding ways to cut costs and increase efficiency. The other part will comprise LongHorn Steakhouse and several other specialty brands. A split would better align organizational structure and culture with what the brands need.
Penney’s more dramatic Darden split
Howard Penney proposed a more dramatic change, splitting the restaurants into Italian (Olive Garden and Season 52), seafood (Red Lobster and Eddie V’s), and steak (LongHorn Steakhouse and Capital Grille). Yard House, which he mentioned is quite an outlier to the collection of Darden’s portfolio, could spin off as an IPO, while Bahama Breeze would be sold.
Splitting brands into specific cuisines makes sense if the move is to lift all brands towards a similar business model. It would be difficult, though, because the price differential between Olive Garden and Season 52 is just too wide, as it is with Red Lobster and Eddie V’s.
Companies with a wide difference in average check are uncommon
Some peers do have brands with slightly different average checks, like Bravo Brio Restaurants Group Inc. (BBRG) and the CheeseCake Factory Inc. (CAKE)—but nothing so drastic. Brinker International Inc. (EAT), which primarily operates Chili’s and a little of Maggiano on the side, is an exception, as is Bloomin’ Brands’ (BLMN), a conglomerate similar to Darden.
Firstly, Maggiano is a fairly small part of Brinker, and the company focuses on lowering costs, raising efficiency, and increasing profitability through initiatives like integrated point of sale and back office software systems as well as installing new kitchen system. Secondly, Bloomin’ Brand’s restaurant names haven’t done particularly well, except for Outback Steakhouse.
It’s not all over for Olive Garden and Red Lobster
Darden knows its Olive Garden and Red Lobster businesses are saturated. That’s one reason they’ve been using strong cash flows from Olive Garden and Red Lobster to fund capital growth for higher-growth restaurants. But now, its core brands are in jeopardy—although it isn’t like Olive Garden and Red Lobster will be replaced by a disruptive business model, as is often the case with tech companies. The market has just shrunken. Based on above-average revenue per square foot, the two brands do have brand value.
Browse this series on Market Realist:
- Part 1 - Darden analysis: Assessing the success of a Darden brand spinoff
- Part 2 - Darden analysis: Must-know background on Barington Capital Group
- Part 3 - Darden analysis: Why spinoffs outperform the market by 10%
- Consumer Discretionary
- Red Lobster
- Olive Garden
- LongHorn Steakhouse