Key takeaways from Barington Group's 84-page Darden proposal (Part 5 of 9)
Diversification to replace growth
When the Olive Garden and Red Lobster brands started to show slower growth, Darden’s CEO used diversification to promote growth over the past six years. These acquisitions have led to the eight brands Darden has today.
Too much diversification is bad
However, Darden’s complex structure and diverse range of brands make it difficult to be nimble enough to compete in the industry. These brands target different customers, market needs, average check sizes, average alcohol consumption, customer experiences, and competitors (see above). Barington believes the company has “centralized too much of its restaurant brand management and that the resulting internal complexity and diminished brand-level focus are responsible for the company’s declining financial performance and eroding competitive position.”
Recent organizational changes
While the company recently made changes to its organizational structure to become more responsive to changes in consumer expectations, particularly for the Red Lobster and Olive Garden brands, the activist hedge fund is concerned that the additional layers of management will further hinder Darden’s competitive edge.
The Italiano Burger
As an example of the company’s lack of brand focus, Olive Garden recently started selling an “Italiano Burger” in December 2013.
Rotating presidents around
In terms of organizational structure, Barington Capital Group also believes that the company’s practice of rotating presidents through various brands limits managers’ ability to come up with differentiated ideas and to remain competitive in the industry.
Investors should note that these examples only draw upon three or four of the last presidents. To an extent, the data could be skewed as presidents may be rotated due to poor performance at Olive Garden and Red Lobster. Nonetheless, it doesn’t take away Darden’s need for “a consistent, focused and dedicated leadership team that would be held accountable for the performance of its respective brand.”
Browse this series on Market Realist:
- Part 1 - Cheat sheet: Barington Capital’s 84-page Darden reccommendation
- Part 2 - Why Darden underperformed its peers by about 100% over 3 years
- Part 3 - Darden’s poor margins show divergence from management’s expectation
- Consumer Discretionary
- Olive Garden
- Red Lobster