Despite displeased investors, Darden may have made the best decision (Part 3 of 10)
Hope for a turnaround
Darden’s management decision not to spin off Olive Garden possibly reflects, in part, management’s hope that it can turn one of its core brands around.
Olive Garden’s same-store sales
During the quarter, Eugene I. Lee showed that the brand’s same-restaurant sales results for the quarter had trailed the industry a bit, but same-restaurant guest count was better than the industry’s. In plain terms, more customers are visiting Olive Garden, but not all have opened up their pockets—likely a sharp reversal of first quarter fiscal year 2014′s 3.8% guest count decline.
Focusing on operations and cost reduction
The company sees the recent improvement as a reflection of the successful implementation that Dave George and his team put in place in January 2013 after he became president of Olive Garden. Some of the key points within that plan include simplifying operation systems and processes. These initiatives include redesigning the kitchen process to reduce complexity in food preparation and on the line, which cuts down labor costs—a significant portion of Darden and other restaurants’ expenses.
Some of these labor cost savings are said to be benefiting earnings, but the company is also using the extra savings to fund other improvements in guest experience like driving the quality of the brand’s protein products. Other initiatives like the roll-out of the new Piastra grills allow the company to grill more simply and significantly enhance grilling capabilities.
A quicker lunch at Olive Garden?
On the more front-of-the-house operation, the company has taken a stab at increasing traffic during lunch. Lee said that if the customer wants a quicker lunch experience at Olive Garden, they may have it. No further details were provided, so for those who live near an Olive Garden, it may be worth asking whether you can have a quicker meal or not.
Quicker lunches are important because the restaurant’s dinner market is quite saturated and mature. So for companies to earn higher revenues, they’ll have to expand their business into lunch. But for most workers, lunch time is tight. This means for full-service restaurants to compete against the rapidly growing fast-casual restaurants like Chipotle Mexican Grill (CMG), Panera Bread Co. (PNRA), and Potbelly Corp. (PBPB), lunch has to be speedy. But it will have to play the game slightly differently because no matter what you do, a sit-down option isn’t going to beat those fast-casuals that produce a product within three to four minutes.
Browse this series on Market Realist:
- Part 1 - Why Darden’s Red Lobster spinoff may still be a great opportunity
- Part 2 - Why Darden’s 2Q14 earnings fell below management’s expectations
- Part 4 - Darden updates Olive Garden’s menu to target low and high checks
- Consumer Discretionary
- Professional Services
- Olive Garden