An activist investor has outlined a plan to improve results at Olive Garden: go easy on the breadsticks, salt the water, and sell more alcohol.
In a very-detailed nearly 300-page slide presentation disclosed ahead of the restaurant-operator’s earnings report, which was issued on Friday morning, investor Starboard Value LP gave details of a potential turnaround plan for Darden’s (DRI) Olive Garden chain, where customers “have fond memories, but where we believe execution has recently failed to live up to the brand image.”
Olive Garden’s famous all-you-can-eat breadsticks were one area of concern, with Starboard saying that the lower quality refined flour breadsticks served today are “filled with more air and have less flavor.” The breadsticks were an important driver of traffic in the 1990s, Starboard said, but have since lost their luster.
Starboard also has an issue with how the breadsticks are served. 10 years ago, the investor said five breadsticks would be served to a table of four and if guests wanted more, a server would oblige. With fewer breadsticks on the table, guests consumed less and ordered more appetizers and desserts, Starboard said. But today, more breadsticks are served, leading to waste and hurting profitability. Starboard estimates Olive Garden uses up to 700 million breadsticks a year, with an average of about three per customer–too many in the activist investor’s view.
“We believe food waste significantly contributes to Darden’s high food costs, especially food waste at Olive Garden,” Starboard said, adding that given the chain’s pasta focus, food costs should be among the best in the industry.
Salads are also reportedly overfilled and dressed with too much dressing, Starboard claimed, and only 8% of sales come from alcoholic beverages, while other Italian chains average more than twice that amount.
Even the pasta could use some improvement, according to Starboard, which claims Darden doesn’t salt the water used to cook the pasta to get an extended warranty on their pots.
“If you Google ‘how to cook pasta,’ the first step of Pasta 101 is to salt the water,” Starboard wrote. “How does the latest Italian dining concept in the world not salt the water for pasta?”
Since owner Darden sold off Red Lobster earlier this year, the restaurant company is more reliant on Olive Garden. The company says it is focused on serving faster lunch and training waiters to give advice on wine pairings, and Darden also generated some headlines recently with its “Never Ending Pasta Pass”–a promotion that offers unlimited pasta and soft drinks to 1,000 individuals. Challenges clearly remain, with Darden on Friday reporting U.S. same-store sales slid 1.3% at Olive Garden in the latest quarter, trailing all other formats (which include LongHorn Steakhouse and The Capital Grille).
Starboard, which is the second-largest investor in Darden with a 8.8% stake, is aiming to overthrow the entire 12-director Darden board with a slate of its own. Starboard said if its plans were implemented, it believes Darden could be worth between $67-$86 per share (up from roughly the $48 level it is trading at today), even before traffic improvements at Olive Garden. One potential area of growth: international expansion, as Darden has few locations abroad compared to major chains like Friday’s and Applebee’s.
Though Olive Garden’s fiscal first-quarter sales slid 0.5% to $913.5 million, Darden said it has implemented core menu changes, a new approach to advertising and other initiatives that have helped reignite traffic growth. Overall sales dipped, but Darden said take-out orders rose 13% in the first quarter. Darden continued to advocate for its own slate of board director nominees–which includes four candidates proposed by Starboard–at an annual shareholder meeting that is being held on October 10.
