Red Lobster, Red Ink

By Thursday Review staff | published June 19, 2014 |

The high-end franchise restaurants have taken a bit of a beating lately, and it has come from the hybrid-midmarket restaurants. Just to clarify: those hybrid-midmarket restaurants are sometimes called “fast-casual,” a term meant to describe their melding of speedy food-delivery, a high quality menu made up of even higher-quality—sometimes handpicked or handcrafted—ingredients.

Those restaurants in the fast-casual category—such as Moe’s and Chipotle—also typically have what can only be described as aggressively high standards of customer service and staff interaction. And, they have lower menu prices than the big names. A couple, or a small family, can eat better food and at better value at the hybrids.

The traditional high-end middlebrow franchises (sometimes called slow-casuals), like Red Lobster, Chili’s and Rudy Tuesday, have suffered from a variety of factors, not the least of which has been the kind of long duration recession which has driven some customers to find somewhat better bargains when it comes to eating out. The high-enders also suffer from a perception that service standards are dicey, with long waits for a table, longer waits for food, and uneven customer-to-staff interactions.

Example: despite its high caliber food and diverse menu, O’Charley’s—which operates more than 200 restaurants in the Midwest and South—often receives bad reviews from customers for its surly staff and its slow food arrival.

As if to contrast this problem for the high-enders, fast-casual chains like Moe’s and Chipotle Mexican Grill go out of their way to make sure that their customers feel at home, and that their experience is impeccably well managed.

Red Lobster had fallen into such bad favor—both in pricing and in poor service—that its longtime parent company Darden dumped the entire Red Lobster component for a cool $2 billion and change, selling the chain to investors at Golden Gate Capital. Industry experts believe that Darden can take that cash and use it instead to invest in the expansion of its slightly more lucrative division, Olive Garden. Darden will also pay off part of its debt, and some of that money can go directly toward Darden’s over-budget and past-deadline conversion to an all-digital platform for ordering and point-of-sale, a vast retooling which was supposed to have been completed a year ago.

Darden is one of the largest restaurant conglomerates in the United States, with roughly 2100 locations under a variety of flags and brands: The Capital Grille, Longhorn Steakhouse, Olive Garden, Eddie V’s Seafood, Seasons 52, Wildfish Seafood, Bahama Breeze, and Yard House, among others. Darden also operates several divisions devoted to hospitality management and food distribution—all from its Orlando, Florida headquarters.

Olive Garden had been the jewel-in-the-crown for Darden for more than a decade. Started in Orlando in 1982, the concept restaurant was considered edgy and even risky. Nevertheless, that one Central Florida location worked so well, more were opened in other cities and towns. It was still risky: what works in Orlando, where the crush of heavy tourism and vacationing families means any restaurant of even moderate quality will be filled with diners, may not work in a town like Atlanta, or San Diego, or New York. Upper-crust food critics and high-end reviewers panned the restaurants quasi-authentic Italian menu and the strange fusion of fern-bar with Romanesque kitsch. But customers loved it, and the franchise took off.

But Red Lobster was no experiment. It too was founded in Central Florida (in Lakeland, near Orlando) by Bill Darden and Charley Woodsby. The first location opened in 1968. The chain expanded quickly, first in the lower southeast, then into more southern states, then into the rest of the U.S. and into Canada. Red Lobster’s Canadian expansion was simplified when Darden, and his partners at the time at General Mills, bought up dozens of recently-shuttered Ponderosa Steakhouse locations. The old steak houses were retooled and remodeled, and quickly became seafood restaurants instead. Over the decades, Red Lobster locations have opened in Japan, Brazil, Saudi Arabia and the United Arab Emirates.

Restaurant and hospitality industry experts believe that Darden has been successful largely because it has maintained a highly diverse portfolio. Its brands range from low-end, to middle-of-the-road, to pricey, and its food and menu diversity helps cushion it from specific problems or seasonal issues.

However, Darden had begun falling on hard times the last 18 months. Now, its decision to dump the Lobster may meet with anger and even rebellion among its stockholders and partners—like Starboard Inc, which owns a 5.5% stake in Darden. Investors and stockholders say that selling off Red Lobster was not only the wrong move at the wrong time, but also a poor value. Another major shareholder is Barington Capital, and today Barington’s CEO called the Red Lobster selloff “a fire sale price.” Barington’s team had been advising Darden to spinoff Red Lobster into a separate company.

But Darden had been facing multiple financial issues, and Olive Garden—once Darden’s most profitable component—has been facing red ink as well as internal problems. For that reason, Darden felt it was the right time to divest itself of Red Lobster. Furthermore, despite the complaints about the selloff, Darden spokespersons say that the deal was not subject to stockholder or investor approval, and was the discretion of management.

Still, critics of the move—and those critics include plenty of angry stockholders—say that the worst part of the selloff was the loss of real estate. Restaurant analysts say that even an underperforming set of locations still represent valuable real estate, and in the case of Red Lobster, Darden could have attempted to put other brands or lines inside those same spaces—swapping, say, the 50 worst performing Red Lobsters for 25 Longhorn locations and 25 Eddie V’s.

Nevertheless, it will now fall upon new owners Golden Gate Capital to turn Red Lobster’s tank of red ink and into savory profits.


Related Thursday Review articles:

Cheers to Chipotle; Krista Tani; Thursday Review; April 18, 2014.

Step Aside, Colonel Sanders; Thursday Review; March 29, 2014.