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Darden Sees Olive-Garden-Red Lobster Making New Revenue: Retail

July 02, 2012

Darden Sees Olive-Garden-Red Lobster Making New Revenue

A Red Lobster restaurant in New York. Photographer: Robert Caplin/Bloomberg

Brunswick, Georgia, has a new two- for-one deal: an Olive Garden-Red Lobster combo store.

This is Darden Restaurants Inc.’s (DRI:US) third such location as the world’s largest casual-dining chain seeks to cash in on smaller U.S. cities such as Brunswick, an industrial port town of about 16,000.

If the strategy works, Darden will have created a new revenue stream and action plan for expansion, allowing it to move into markets that would not have previously been economically viable. For the past three years, the company’s average sales growth has trailed that of BJ’S Restaurants (BJRI:US) Inc., Texas Roadhouse Inc. (TXRH:US) and Bravo Brio Restaurant Group Inc. (BBRG:US), according to data compiled by Bloomberg.

Still, the combo strategy, which has been tried with mixed results by fast-food chains, won’t necessarily turn things around, said Sara Senatore, an analyst at Sanford C. Bernstein.

“This is really the first casual diner, full-service restaurant that I’ve seen do this,” said Senatore, who is based in New York. “You have to ask: ‘Why has nobody else done it?’ Sometimes it’s because it’s not a great idea.”

Darden has advanced 11 percent this year, compared with a 17 percent rise in the Bloomberg U.S. Casual Dining Restaurant Index. And Senatore asks if the combo-store strategy is “the right use of capital or could they be doing something else?”

Darden’s origins go back to 1938 when Bill Darden opened a 25-seat luncheonette in Waycross, Georgia, called The Green Frog. Thirty years later, the first Red Lobster opened in Lakeland, Florida; Olive Garden in 1982.

LongHorn Steakhouse

In 1970 General Mills Inc. (GIS:US) acquired Darden, spinning it off as a public company in 1995. The Darden empire comprises Olive Garden and Red Lobster -- its two biggest brands -- along with such smaller chains as LongHorn Steakhouse, The Capital Grille and Eddie V’s.

After the downturn, Americans began eating out less, and comparable-store sales dipped at Olive Garden and Red Lobster. Efforts since to woo diners with cheap eats, including a Taste of Tuscany meal for $10.95 and a $12.99 Festival of Shrimp, didn’t goose sales. Revenue trailed analysts’ estimates in the quarter ended May 27, the company said on June 22.

The company hit on the small-town strategy because there aren’t “a lot of sites in major metropolitan and suburban areas that we’re not in already,” John Caron, president of Olive Garden, said in a telephone interview.

Shared Bar

The first combination store opened in March 2011 in Flagler County, Florida. The locations, which are typically about the same size as a single Darden restaurant, have a separate entrance and dining room for each brand while sharing bathrooms, the bar area and the kitchen.

While the combo stores are a test, sales at the Flagler County restaurant are “up to expectations,” Caron said. “We think there’s opportunity there.”

Still, even as Darden embraces the strategy, other chains are reversing course. Until the late 2000s, putting two brands under one roof was Yum! Brands Inc. (YUM:US)’s key strategy to boost U.S. sales. No longer, according to Virginia Ferguson, a spokeswoman for the Louisville, Kentucky-based company.

Yum expected one plus one to equal three, Senatore said. “It was more like one plus one maybe equals two.”

While Darden says its restaurants create 170 jobs on average, not everyone is keen on the company moving into their town -- especially since Darden extracted property tax breaks to do so. The Brunswick combo store, for example, is worrying some mom-and-pops, according to Nathan Sparks, executive director at the Brunswick and Glynn County Development Authority.

The community as a whole has been “ecstatic” about the store, he said. Still, “there have been some concerns expressed by local restaurateurs who see a competitor coming in to the market and one that has tremendous resources.”

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net


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Companies Mentioned

  • DRI
    (Darden Restaurants Inc)
    • $46.29 USD
    • 1.37
    • 2.96%
  • BJRI
    (BJ's Restaurants Inc)
    • $34.51 USD
    • 0.01
    • 0.03%
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