Olive Garden On the Rebound
A little more than a year ago, the criticism of Olive Garden was coming as fast and steady as the all-you-can-eat breadsticks at its restaurants.
Amid a long stretch of sluggish or declining sales at the casual Italian chain, an activist investor, Starboard Value, put together a nearly 300-page report that outlined everything it believed was ailing Olive Garden and its parent company, Darden Restaurants: It wasn’t cooking its pasta in salted water. Servers were going overboard in doling out salad and breadsticks and thus unnecessarily running up food costs. The menu had swelled to 96 items, confusing customers who saw more tightly edited selections at rivals such as Romano’s Macaroni Grill.
And it didn’t help that the casual dining category generally faced intensifying competition from the likes of fast-casual chains such as Chipotle, Noodles & Co., and Panera Bread, offering similar prices.
Starboard proposed dumping Darden’s entire board of directors, and despite resistance from corporate leaders, investors voted last October to install all 12 of its candidates. Shortly before that, Darden chief executive Clarence Otis announced his resignation as investors questioned his decision to sell off the struggling Red Lobster chain.
That left the company with an entirely new leadership team. Now, it appears the changes the new managers are putting in place is actually helping to turn the business around.
Darden reported Friday that Olive Garden saw a 1 percent increase in sales this quarter at restaurants open more than a year — the fifth straight quarter of sales growth. Profit rose 12 percent in the Olive Garden segment, which executives said came thanks to higher total sales as well as cost-cutting measures. (Cheaper seafood prices helped, too, they said.) Darden, which also owns Longhorn Steakhouse and The Capital Grille, bumped up its earnings guidance for the year, believing its flagship brand has momentum for continued improvement. Investors sent the stock up nearly 7 percent after the upbeat outlook and better-than-expected earnings results.
Among the improvements, Olive Garden has been investing in expanding its carryout business, known as “OG to go,” in a bid to better compete with the fast-casual chains for diners who are in a hurry. Carryout sales were up 17 percent compared to the same quarter last year. Chief executive Gene Lee also gave indications that the company is looking seriously at how to do a bigger delivery business, moving to something more robust than the hodgepodge of services such as Postmates that it currently uses to cart meals in certain local markets.
“We believe there is going to some sort of massive change in third-party delivery,” Lee said on a conference call with investors, citing players such as Uber and Google that are dabbling in this space. “There are a lot of people that are playing in that environment today and we’re looking for the partner who we think is going to be a clear winner.”
Olive Garden also has had success finding cheap ways to spruce up its restaurants, and in turn, pull down more sales. In about 40 of its 844 restaurants, the company remodeled the bar area only, which is less costly than redesigning that whole restaurant. Executives found that this has made the bar area more productive on busy nights, and sales bumped up 1 percent in the restaurants where it has been implemented.
The addition of tabletop tablet computers also appears to be helping Olive Garden. The chain is now turning over tables about six or seven minutes faster than it was previously, meaning it can cram in more customers. (And more of those diners might be leaving happy if they didn’t have to wait around to pay their tab.)
It appears Lee is planning on still more changes more Olive Garden.
“I believe, over time, our menus and process and procedures have just become too complex,” Lee told investors Friday.
He hinted that the menu could be pared down and that the company would develop recipes going forward that could be prepared simply.