With Darden Restaurants' (DRI) announcement that a remodel for its Olive Garden division has started, the main takeaway is a simple one — it's nowhere near to giving up on the Italian-themed chain. The other takeaway is that this latest attempt to spur customers to take a seat at its tables may well mean activist investors, who've been vocally at odds with management, received another reason to complain.
Olive Garden has been struggling badly to retain guests, an issue weighing down numerous casual-dining operators who've seen customers opting for fast-casual names such as Chipotle (CMG). To try and reverse that, Olive Garden has been seeking buzz. It's been given a logo makeover, and it introduced new menu items to join its standard fettuccine and breadsticks fare, including an olive and cheese small plate, salmon with bruschetta, crab-topped chicken and a burger.
Now it's adding new-look restaurants. Among other changes, some of the restaurant's walls will be removed, the lobby and bar will be modernized, meals will be served on all-white plates and seating will allow for larger groups. But much of this is folly. Olive Garden needs to keep its attention on what truly matters, and that's the menu.
On the surface, Olive Garden can be seen as a formidable restaurant chain. It ended the latest fiscal year with 837 stores, and revenue was $3.6 billion, both impressive numbers. Yet it also has serious reasons to worry about maintaining and getting new customers. Year-over-year guest traffic has fallen in 23 of the past 31 months, weighing down same-store sales. Because of competitive stress and Americans' continuing uncertainty about the economy, it's had only a slight ability to raise prices. Overall revenue has flattened, putting the pressure for growth on the expansion of its store count — not the best indicator of consumer demand. Expenses have climbed.
With all that being the case, allocating new money to the appearance of existing restaurants deserves to be questioned, even if it will cover just 9% of the U.S. total over the next year. The menu side of the restructuring trumps the cosmetics and should be the single point on which to fixate. Doing so is the stronger way to minimize the sense of being a chain, while at the same time limiting its detractors' ability to deride its lack of "authentic" Italian fare.
Darden's thinking is the remodeled shops, when combined with the new logo and foods, will have diners seeing Olive Garden in a new light. Maybe. But more likely is this: If Olive Garden is to keep its dining rooms full, what's on the plate is the key part. Atmosphere certainly has a role in where we choose to eat, but the larger part of the choice tends to be about the food. That's where Olive Garden must stay steady right now.
Olive Garden has been central to a battle between its parent company Darden, which has said it will keep the brand, and a group of investors who wanted it spun off, saying it devalues its owner. Orlando-based Darden has already agreed to part ways with Red Lobster, its other large traffic-losing restaurant that activists wanted separated, but the company is convinced Olive Garden can win in an arena where the likes of Chili's, Applebee's and Romano's also hold ground.
To opponents of this view, Olive Garden is a stagnant brand, lumbering along at a time when Darden should be more concerned with other, faster-growth properties such as The Capital Grille. They'll not be impressed with a reminder that yet more investment capital is going toward Olive Garden, especially when new dinnerware is among the selling points. Here, it's less about the total amount than the principle. In fiscal 2013, the average capital investment to open a new Olive Garden was about $4.1 million, not a tremendous sum to a company the size of Darden. However, investors want any amount spent to be done so wisely, generating a return to make it worth it. Why not give the menu changes an opportunity to take hold, instead of providing doubters further reason to gripe if the store remodeling doesn't work quickly?
On Tuesday, after the company issued a statement discussing these plans, shares of Darden fell 1.6% to $45.35, taking its year-to-date loss to 16.5%. That makes it the fifth-worst stock of 42 restaurants surveyed by Yahoo Finance in 2014.
Affordability clearly matters to some, especially those in small American towns where wages are modest, but higher prices can work if diners crave the food, even if that means they can't visit frequently. And that, in turn, means Olive Garden, whose average check is above $16 per person, shouldn't have to be overly reliant on low prices, provided it's striving for in-demand food above the other distractions.
It's true that companies can't stand still for all time. Evolution is required in business, and remodels are in fact taking place on a large scale at the likes of McDonald's (MCD) and Wendy's (WEN). But that evolution has to be done with the proper timing. Unique food is a much more powerful force these days when diners are eager to escape monotony. And just as they aren't going to Chipotle to admire the art on the wall, they're not avoiding Olive Garden because they find the window treatments lacking in character.