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It was a 25-foot by 30-foot lunch counter called the Green Frog that featured "Service With a Hop." While Darden Restaurant Inc.’s tactics for attaining success have continued to evolve, its emphasis on customer service has remained constant. One example of this is the Olive Garden restaurant. Olive Garden is the dominant leader in the highly competitive full-service Italian segment, with a market share of 18 percent. The restaurant’s sales, which have increased for 19 consecutive quarters, were up 9.0 percent for 1999, which outpaced the casual dining industry. The Olive Garden’s outstanding performance is due to the company’s emphasis on Hospitaliano!, which according to its management and marketing team is defined as “ Our Passion for 100% Guest Delight.” (www.olivegarden.com). Another example of Darden evolving while staying true to its founding principles is the physical layout of Olive Garden. Darden recognized that customers needed more space at a table and that its restaurant’s floor plan needed to be flexible. Darden improved upon its original design and responded to customer needs by giving them additional dining space. This was more accommodating to families and demonstrated Darden’s willingness to do whatever necessary to better each customer’s experience. A dedication to quality can be seen in the way Darden has emphasized its organizational culture, where culture refers to the complex set of ideologies, symbols, and core values shared throughout the firm that influence the way it conducts business (www.darden.com). One important value shared throughout Darden is an emphasis on employees. "I am convinced that the only edge we have on our competition is the quality of our employees as reflected each day by the job they do." - Bill Darden From encouraging diversity to supporting employees, Darden spends considerable time and energy on keeping its employees happy and its culture intact. For example, Darden has a Diversity Management Department, that works to ensure its actions reflect the needs and concerns of an increasingly diverse workforce and customer base. Darden also has a Restaurant Support Center to help its staff tackle day-to-day issues. Another strategy that has remained consistent is Darden’s unwillingness to compromise quality. By not considering franchise opportunities, Darden is able to maintain control and ensure that all guests have a quality dining experience. This is unusual for a large company with a solid reputation; however, Darden will not compromise quality for financial gain. Quality and customer service have continued to be two of Darden’s core competencies over time. These factors are evident when identifying Darden’s intended strategies. As previously stated, Darden builds all of its strategies around the customer. Its intended strategy appears to be a three-tiered approach to profitability through meeting the market’s demands. First, the company understands what the customer wants in a restaurant, then it defines and refines its concept, and finally it launches the idea. Darden relies upon market research and data analysis in order to understand what its customers want. Darden invests heavily in this area, and has seen the power of information. One example of this approach is that customer information is the basis of everything from the flavor of the food, to the layout of the restaurant, to the color of the candleholders. Once Darden understands the needs of its customers, it defines and refines its product accordingly. Darden is always looking for new ways to improve. This is a standard approach for all great companies. Just as McDonalds launches a new product every few months, Darden examines the status quo and continuously launches new ideas and concepts. For instance, while the type of cuisine at Darden’s restaurants remains constant, the actual menu options are altered to fit customers’ tastes. Red Lobster continually runs marketing campaigns such as “Lobster Fest,” or promotes a specific menu category like shrimp. By launching new items, Red Lobster is able to study how well the new items appeal to guests during the “special” period and determine if the item should become part of its regular menu. By doing this, Darden gets invaluable feedback with relatively little investment. Another example of Darden’s willingness to adapt is the recent “endless pasta bowl” option at Olive Garden. Maggiano’s, a direct competitor offering all-you-can-eat-options, was quickly becoming successful and challenging Olive Garden in the family Italian food market. Darden, realizing that a demand existed for “family style” dining, launched a similar option. While no data is available on whether Maggiano’s is still closing the gap on Olive Garden, it is safe to assume that Darden was able to slow Maggiano’s progress. Once Darden has built its product and refined it to fit the customer needs, the last step is to launch the product on a more permanent level. This can be seen through Darden’s massive expansion plans. Olive Garden had one of the fastest restaurant expansion programs during the 1980’s. Similarly, Darden is now getting ready to follow the same program with its two newer chains, Bahama Breeze and Smokey Bones BBQ. Darden’s intended and emergent strategies are simple. Study the customer’s needs, create a food delivery concept, and continuously refine that method to both satisfy the guest and achieve above average returns for the owners. “Our strategy is to be brilliant with the basics. That means having strong leaders throughout the organization, providing the highest standards of hospitality and demonstrating culinary excellence that redefines casual dining.” (http://www.darden.com). Bill Darden has always wanted his name to be synonymous with a new standard of restaurant hospitality, and his company’s mission reflects that strategic intent. His complete and total dedication to customer service has enabled Darden Restaurants to become incredibly successful, and this dedication will continue to help Darden redefine hospitality in the future. Several key values are the driving forces behind the operations of Darden Restaurants: · Darden is focused on serving the needs of its employees and investors effectively so that it may in turn satisfy the relative needs of the customer. · The company focuses on diversity and maintaining integrity in its work environment. · Community involvement is paramount in portraying the company’s core values and is displayed through its support and funding of programs that enhance the individual communities that Darden Restaurants is a part of. · As stated in Darden’s Annual Report, “Our character and values are the mortar that bind our companies and strategies together.” The company’s mission statement is the base from which the individual Restaurants, Red Lobster, Olive Garden, and Bahama Breeze build their individual strategic missions. Through a closer look into the individual outlets a deeper insight can be gained about the mission of Darden Restaurants, Inc. “Believe it or not, we regularly use a compass at Red Lobster. Our Compass lays a foundation of principles that guide our interactions with each other and our guests and helps the entire crew create hospitality you can taste and touch whenever you visit one of our restaurants” (http://www.redlobster.com). Red Lobster is a perennial favorite with guests across the country, serving freshly made, and great-tasting seafood. It commands a 28 percent share of the full service seafood segment and five percent of the casual dining market. Red Lobster achieves its goals by focusing on a number of key principles, such as: · Providing great food and a hospitable environment for its guests. · Creating a fun, caring, respectful, and fair environment for customers and employees alike. · Developing an effective cost leadership strategy, paying close attention to quality while still running a profitable business. Red Lobster’s marketing director, Ken Thewes, is constantly working to avoid being pigeonholed as strictly a seafood restaurant. Thewes realizes that, for the most part, people are more interested in a good meal, than the type of cuisine. Thewes wants Red Lobster to be associated with quality food and hopes to attract more than just seafood fans, as the company strives to solidify its claim on the casual dining market. Red Lobster will continue to focus on these goals as it strives for even greater market share in the years to come. “Hospitaliano! Our passion for 100% guest delight. We take pride in doing it right the first time. We value everyone as family and friends.” (http://www.olivegarden.com). Darden determined that the full service Italian segment was one of the most rapidly growing industries, and thus, created Olive Garden. At the core of Olive Garden’s values is the idea of ‘Hospitaliano’, which merges the restaurant’s Italian roots with the high level of service that employees extend to guests. The Olive Garden continually strives to re-invent itself. One example is the current RevItalia program, which seeks to revitalize each restaurant’s atmosphere with Tuscan-inspired designs. Not only is the Olive Garden re-designing the interior of its restaurants, but it is also changing its marquee. The restaurant’s main challenge has been to develop a menu that reflects true Italian culinary expertise. After sending their culinary team to Italy, they introduced a new menu in April that has received high customer satisfaction ratings. This will help Olive Garden achieve its goal of giving the customer what they want, before they know they want it. In doing this, they will have created unexpected value for the customer. “Each team member is accountable for building our reputation and living our Values, Principles and Promises. Values are about the nature of the journey. They represent a shared inspiration that everyone who joins our team must embrace. Values define what we stand for and how we will achieve our goals.” (http://www.bahamabreeze.com). The newest addition to the Darden Restaurant Inc. is Bahama Breeze, opened in 1999; it is a tropical island themed restaurant that aims to deliver a “memorable two hour island vacation.” In comparison to Olive Garden and Red Lobster, Bahama Breeze has an extremely well developed value structure, placing greater emphasis on the necessity for the employee to adopt and live by the core values and to achieve their individual desired level of success. Bahama Breeze provides a caring environment for both customers and guests. Just as Olive Garden has the philosophy of ‘getting it done right the first time,’ Bahama Breeze has adopted a philosophy of ‘know the right thing to do and do it well.’ There are a few fundamental values and principles that the Restaurant prides it self on: · Creating amazing food and unique hand crafted drinks. · Developing and enhancing the lives and careers of its employees. · Creating and maintaining a long-term partnership with its vendors. · Participating in the community activities. · Earning returns on assets that are competitive within the casual dining segment. Bahama Breeze differentiates itself from its competitors by taking time to learn from all types of people, including customers, employees, vendors, and the community. Bahama Breeze is planning to quickly expand over the next few years, and plans are underway to open 12 new restaurants by the end of 2001. In summary, Darden’s goal is to increase its hold on the market while maintaining its core values. It hopes to capitalize on people between the ages of 40 and 60, a group whose numbers will increase dramatically over the next ten years. Darden also wants to capitalize on the growing number of dual income families. It will do this by remaining true to its mission of “being brilliant with the basics.” Tangible and intangible resources are the basis for company strengths and weaknesses. It is crucial that a company identify these areas to both take advantage of opportunities and protect itself from competitors. Darden’s strengths are in its organizational methods, human resources, innovation, and its good reputation. On the other hand, Darden’s weaknesses exist in its finances and in its portfolio diversity. One of Darden’s strengths is its organizational methods. With over one thousand restaurants, Darden has a solid infrastructure in place, for conducting market research, buying real estate, developing and building new restaurants, and running its operations. This infrastructure enables Darden to expand quickly, as seen in Olive Garden’s growth from one restaurant in 1983 to more than 400 in 1993. Furthermore, Darden’s infrastructure acts as a guarantee that all restaurants will reflect the quality of experience with which Darden is synonymous. Several intangible assets also contribute to Darden’s standing. Darden has a very strong human resources operation, which has developed a good reputation within the industry for providing a pleasant and empowering work environment. Darden is able to combat the industry’s high turnover rate. This saves the company considerable time and money in recruiting and training costs. Darden’s innovation is another strength. Bahama Breeze is a good example of how Darden is able to identify what people want in a dining experience, and then meet that need in terms of variety and cost. Current data shows many Americans have disposable income and are dining out more often. Darden capitalized on this information and is now targeting the more affluent market with Bahama Breeze. Increased emphasis is on bar service and menu selections will ideally increase the average check price. A good reputation cannot be bought, but must be earned. That is why companies are spending millions of dollars a year on branding efforts. Darden is one of the fortunate few that have an established brand. The strength of Darden’s brands has enabled it to develop catering services, different menus and specials, and now, a new restaurant chain. Tangible resources are “assets that can be seen and quantified.” (Hitt, Ireland, & Hoskisson, 2001) The financial assets of a company are an example of a tangible resource. Based upon the ratio analysis (as seen in the table beginning on page 22) this is a weakness. While the company is earning record returns, it is also allocating considerable assets to expansion. In the long term, Darden will benefit from its growing property assets. However, from a financial perspective, Darden has a comparatively high leverage ratio and a low current ratio within its industry segment. Another company weakness is that Darden is not diverse enough in its restaurant chain portfolio. For instance, Brinker International, Inc. has nine different brands whereas Darden has four, of which Bahama Breeze and Smokey Bones BBQ represent a small portion. Diversity enables companies to benefit from many different ventures as opposed to being limited in resources. ENVIRONMENTAL OPPORTUNITIES AND THREATS It is vital for a company to research, analyze, and react to its environmental opportunities and threats. Darden is no exception. Once identified, companies need to spend time, money, and manpower to analyze and react to environmental elements. Strategic decisions will determine whether the company uses its environment as an opportunity or identifies it as a threat. As discussed, Darden consists of four restaurants, each unique, but with many similarities. The first environmental factor that should be addressed is demographics. Demographics are primarily “concerned with the population size, age, structure, geographic distribution, ethnic mix, and income distribution.” (Hitt, Ireland, & Hoskisson, 2001) Red Lobster and Olive Garden have done an excellent job in targeting families. However, there is another market that must be tapped. A map of Red Lobster locations (see appendix 5) shows a strong presence in the eastern United States and a moderately strong presence in the western United States. A similar strategy appears to have been implemented for Olive Garden (see appendix 6). This strong Eastern presence contributes to Red Lobster’s and Olive Garden’s strategic advantages. However, Darden needs to look west if it is to capture the aging population. According to an article by University of Arizona economist Marshall J. Vest, “Every year Arizona has a net increase of about 23,500 seniors, and their new money contributes another $ 350 million in direct spending annually. The total trickle impact becomes statewide spending of $ 615 million, which supports 10,000 additional jobs paying $ 210 million a year.” (Vest, 1999). With Baby Boomers retiring and moving to warmer locations, Darden must quickly expand into the Southwest. Another demographic development that presents an opportunity is the growth of consumers with disposable income. According to a paper by Patricia M. Johnson and Richard F. Outcalt, there are several different spending categories in American culture. The ones relevant to Darden are “SINKs and DINKs (that's Single Income No Kids and Dual Income No Kids) and "Empty Nesters" or "Aging Baby Boomers" (We call them "Reborn SINKs & DINKs!").” (Johnson & Outcalt, 2000). These market movers are exactly the customers that Bahama Breeze hopes to capture. While some analysts might say that Darden is off to a slow start behind such competition as Cheesecake Factory or P.F. Chang’s, no company has been able to dominate the market. According to Paul Fox, Director of Training, Bahama Breeze is targeting a “highly educated, more affluent clientele.” This is an excellent example of Darden’s recognizing a changing demographic element in American society and turning it into an opportunity. Another environmental factor is socio-cultural. The “socio-cultural segment is concerned with a society’s attitudes and cultural values.” (Hitt, Ireland, & Hoskisson, 2001) Today, more women are working outside the home and children are being cared for outside the home. Time is precious, and, as a result, a traditional dinner at home does not happen as frequently. In a speech given by Lori G. Borrud, she states, “The survey data confirm that a greater percentage of Americans are eating away from home than ever before. In 1994 and 1995, 57 percent of Americans ate at least one food away from home on any given day, up one-third from 1977-78 when a previous USDA survey showed that 43 percent of Americans ate away from home.” (Borrud, 1996). Given these statistics, Darden has an opportunity to expand its services. One possible reaction to this information is the development of a home delivery or take out business. Maggiano’s, an upscale family restaurant and Darden’s competitor, has a Corner Bakery attached to its main restaurant, which offers quick dining options and take out food. This is in line with the direction American society is heading, and therefore presents an opportunity for increased financial revenue. This opportunity could quickly become a threat if Darden’s competitors are able to meet the need first. Technology is a third environmental factor. The technological segment “includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products, processes, and materials.” (Hitt, Ireland, & Hoskisson, 2001). As a veteran restaurant company, Darden has acquired valuable working knowledge of the business and its challenges. In order to continue moving forward, Darden needs to follow in the footsteps of Marriott and leverage its brand and knowledge for competitive advantage. Marriott’s eight offerings run from full service hotels to ExecuStay properties to Residence Inns. Marriott has provided consumers with several different levels and types of products. Not only does this enable Marriott to dominate a market, but it also enables different properties to share resources, which saves the company money. By opening a Red Lobster, Olive Garden, Smokey Bones, and Bahama Breeze in the same market, Darden can do the same thing. Several Darden restaurants in the same market can share services such as cleaning, linens, and training, which will result in cost savings. This would also enable Darden to improve its bargaining power with its suppliers. Suppliers include food, internal supplies and maintenance work. Money saved internally will lead to greater profits for the company. Another external environmental factor is the changing global landscape. The global segment, which “includes relevant new global markets, existing ones that are changing, important international political events, and critical cultural and institutional characteristics of global markets,” provides an opportunity for Darden Restaurants, Inc. (Johnson & Outcalt, 2000). While it is more comfortable to maintain the status quo, the global economy is changing and Darden needs to quickly and aggressively expand into new territories, such as Canada. According to the 1999 fourth quarter issue of the publication Services Indicators, “Canadians spent a higher proportion of their food dollars on meals outside the home during the 1990s than in the 1980s…This increase may have been due to several factors: economic expansion and improved consumer confidence in the mid-to-late 1990s; greater time constraints for consumers; more single-person households; and rapid growth in the number of food service establishments… meals purchased outside the home increased 42.2% from 1989 to 1998.” (Author unknown, 1999). Canada is a ripe market for restaurateurs, and Darden needs to meet its needs with a much stronger presence than the current 39 locations of Red Lobsters and Olive Gardens. Furthermore, Bahama Breeze, which caters to the more affluent customer, should be introduced quickly to Canadians before the market becomes saturated. There is also the threat of new entrants in this market. According to the 2000 Restaurant Industry Forecast, “…the restaurant industry should be the leading purveyor of food in the nation within the next decade. By the year 2010, restaurant-industry sales are projected to reach $577 billion and account for more than 53% of the consumer's food dollar. In addition, there should be more than 1 million restaurant locations.” (Ebbin, et al. 1999). Darden enjoys a strong market presence with its restaurant chains right now, but it must stay focused on its competition. Through customer satisfaction studies and market research, each Darden restaurant chain needs to be aware of its competitors and not allow another restaurant to capture a portion of its market. A SWOT analysis is commonly used by companies to evaluate internal and external factors that can potentially influence their current position in the industry. The following table shows the analysis of Darden’s current position. · The nation's largest casual-dining operator (annual sales of $3.5 billion).· Good reputation for minorities (placed #9 on Fortune Magazine's list of the Best companies for Blacks, Asians and Hispanics)· Success enables it to launch new concepts (Bahama Breeze, Smokey Bones)· High salary and management autonomy · Highly qualified employees · Earnings drain caused by developing new concepts and unit expansion· Limited brand diversity· Old concepts need to be upgraded to keep up with changing environment · Demographic shift in the United States. Focus on retiring and moving Baby Boomers, double income families, and dual income, no kid families.· Socio-cultural shift in market place as families eat out more often.· Technological opportunities exist in streamlining the different outlets into one venue for better market control and more bargaining power with vendors.· Global opportunities exist in Canada as money spent in the restaurant industry continues to increase. · New entrants in a fast changing high demand market.· Darden is entering upscale dining market with Bahama Breeze. Not only SWOT analysis, but also financial analysis will be conducted in this part. Criteria for choosing competitors, profitability, liquidity, activity, leverage, and Du Pont Identity ratio will be followed to show Darden restaurant’s current position. Advantica Restaurant Group Inc., Applebee’s International Inc., Brinker International Inc., Landry’s Seafood restaurants Inc., Lone Star Steakhouse & Saloon Inc., Il Fornaio Corporation, Outback Steakhouse, Inc were chosen as the competitive set. The following four criteria were considered in choosing the set. · Type of establishment- food only or food and beverage. · Type of business- franchise or ownership. According to Darden Restaurants Inc.’s annual report, total revenue in 1999 increased 4.9%, from 3287 millions to 3458.1 millions. Net income of 1999 was 140.5 millions which was an increase of 27.6% from 101.7 million in 1998. Food and beverage cost were 32.8%, 33% and 34%, in 1999, 1998 and 1997 respectively. In 1999, this cost was 0.2 % less than 1998 and 1.2 % less than 1997. Labor costs accounted for 32.3 % of sales in 1999 and 1998. Other restaurant expenses, such as lease expenses, property taxes, utilities and workers’ compensation costs, decreased by 14.3% of sales in 1999, compared to 14.7% of sales in 1998 and 15.2% in 1997. Selling, general and administrative expenses decreased 0.5% of sales to 10.4 % in 1999 from 10.9 % in 1998. Profit margin, ROE, and ROA are showing high profitability figures for Darden. Chronologically, Darden’s profitability ratios have improved. In 1999, net profit margin increased 31%, from 3.09 to 4.06. Return on equity increased 46%, from 9.97 % to 14.57%. Return on Assets increased 43%, from 5.12 % to 7.37 %. Darden Restaurant, Inc. has a lower current ratio (0.48) than the average of major competitors (0.82). A creditor, particularly a short-term creditor such as a supplier, believes that a higher current ratio is better. For a firm, a high current ratio indicates liquidity, but it also may indicate an inefficient use of cash and other short-term assets. A current ratio of less than 1.0 would mean that net working capital is negative. This is unusual in healthy firms. A lower current ratio may not be a bad sign for a company with a large reserve of untapped borrowing power because various types of transactions affect the current ratio. Darden has a lower quick ratio (0.1) than the competitive average (0.47), which shows that the company may have a substantial portion of its liquidity tied up in slow moving inventory. Darden's inventory turnover (20.2) is considerably lower than the competitors’ average. This signifies that Darden is managing inventory inefficiently compared to competitors. Like a low quick ratio, low inventory turnover also shows a large portion of the company's liquidity tied up in one of its least liquid assets. The receivable turnover of Darden Restaurants, Inc. is much higher (153.3) than the competitors' average (82.24). This demonstrates that Darden has collected their outstanding credit accounts and loaned them more frequently than competitors. Moving away from specific accounts like inventory or receivables, we can consider as an important "big" picture ratio, the total asset turnover ratio. In this case, the competitors' average (15.71) is much higher than Darden's (1.9). This tells us that Darden generated smaller return on sales than the competitors did for every dollar in asset. However, the competitors' high total asset turnover is not the median but just the average. Advantica, one of the competitors, has a remarkably high ratio (100.7), which resulted in high market average. Thus, Darden's financial condition cannot be confirmed with this figure alone. Time interest earned by Darden, (11.65), is higher than the average of the seven competitors, (5.07). Darden has the above-average ability to cover interest payment from operating profits. Darden’s fixed charge coverage is 10.65. This is below the average of the competitors. Debt to total assets is 0.49, which is a little higher than 0.4, the average of the competitors. But, this is because Darden attempts to decrease inventory and net receivables, which makes total assets small. Overall, Darden’s extent of debt financing is sound. According to the Du Pont Ratio, Darden Restaurant, Inc.’s operating efficiency, asset use efficiency and financial leverage are figured out from 1996 to 1999. Darden restaurant’s operating efficiency (profit margin) has been increasing: 2.3%(1996)à -2.87%(1997)à 3.1(1998)à4.1%(1999). These increasing ratios show that Darden Restaurant, Inc.’s profitability has consistently increased. The asset use of efficiency (total asset turnover) has also increased: 1.53(1996)à1.62(1997)à 1.66(1998) à1.81(1999). This ratio shows how efficiently Darden Restaurant Inc. operates. If this ratio is higher, the company is more efficient in managing its assets. The financial leverage ratio (equity multiplier) has been slightly decreasing: 1.71 (1996)à 2.63 (1997)à1.88 (1998)à1.96 (1999). Long -term or short-term obligations can be recognized by this ratio. If this ratio is higher the company is more risky. Darden is moving toward being more stable. Overall, return on equity has been increasing: 6.09%(1996)à -8.42%(1997)à 9.97%(1998)à 14.57%(1999), which means high profitability per equity. Darden Restaurant’s, Inc. profitability, asset utilization, and solvency/leverage are in good condition. Table 1: 12 Key Ratios for Darden vs. its 7 Major Competitors Advantica Applebee Brinker Landry's Lone star Il fornaio Outback Average of 7 Darden Net Profit Margin -23.39% 9.62% 5.45% 3.79% 0.62% 2.84% 7.70% 0.95% 4.06% Return on Equity N/A 22.00% 16.50% 4.60% 0.80% 7.10% 17.90% 11.48% 14.57% Return on Assets -32.30% 13.80% 10.30% 3.30% 0.70% 4.70% 15.20% 2.24% 7.37% Inventory Turnover 88.6 43.3 94.9 19.8 36 35.8 132.5 64.41 19.92 Fixed Asset Turnover 2.55 2.13 2.3 1.02 1.36 1.92 2.71 2.00 2.35 Total Asset Turnover 100.7 1.4 1.9 0.9 1.1 1.8 2.2 15.71 1.81 Receivables Turnover 73.27 37.3 115.2 36.7 N/A 75.2 146.8 80.745 170.35 Current Ratio 0.52 0.64 0.46 0.98 0.99 0.8 1.38 0.82 0.35 Quick Ratio 0.3 0.3 0.1 0.4 0.5 0.5 1.2 0.47 0.19 Debt to total assets 1.09 0.43 0.39 0.24 0.09 0.35 0.18 0.40 0.49 Time Interest Earned -1.04 9.31 16.76 10.44 0 0 0 5.07 11.64 Fixed charge coverage -1.32 56.88 11.56 1.41 0 0 142.93 30.21 10.66 Table 2: Darden’s 12 Key Ratios Over Time Net Profit Margin 4.06% 3.09% -2.87% 2.33% Return on Equity 14.57% 9.97% -8.42% 6.09% Return on Assets 7.37% 5.12% -4.63% 3.56% Inventory Turnover 19.92 15.10 20.52 21.60 Total Asset Turnover 1.81 1.66 1.62 1.53 Receivables Turnover 170.35 120.40 194.59 128.70 Debt to total assets 0.49 0.49 0.45 0.41 Time Interest Earned 11.64 8.48 4.38 9.82 Fixed charge coverage 6.20 5.00 3.25 3.89 KEY BENCHMARKS SPECIFICS TO THE INDUSTRY SEGMENT In order to analyze how well a restaurant is operating, the management needs to measure the efficiency and effectiveness of its standards and operating procedures. Comparison of sales and expenses to various factors can help identify in which areas action needs to be taken and corrections made. The restaurant industry uses a number of ratios for benchmarking such as average check, seat turnover, food & beverage costs, labor costs or revenue per employee. The average check is calculated as follows: This figure shows the sales generated for each customer served. The average check can be calculated separately for food and beverage. It is then compared to the industry average. If the average check is too low for a particular restaurant segment, every part of the operation must be analyzed to determine where the sales generating potential is not being exploited (e.g. menu, personnel, concept, procedures, etc.). If it is too high, the restaurant might be overpricing its menu and could risk losing customers to the competition. This ratio effectively shows how many guests are served per available seat in the restaurant. If the figure increases, revenue increases. Seat turnover is calculated as follows: The food cost is calculated as follows: food cost = beginning inventory + purchase – ending inventory The above ratio is used to determine if the costs incurred from the purchase, transportation delivery and storage of food meet the budgeted figures. A lower than budgeted food cost potentially means standard portions are too small or the restaurant is purchasing low quality products. A higher figure means that the costs are too high before transformation of the food. The reasons could be waste, spoilage, theft or oversized portions. This ratio is similar to the food cost percentage ratio: The ratio is expressed as a percentage of beverage revenue. By comparing it to the budgeted figure, the company can assess how efficiently the restaurant manages the purchase, transportation, delivery and storage of beverages. The labor cost ratio is expressed as a percentage of total F&B revenue: Labor cost shows the amount of revenue needed to cover salaries, wages and other employee benefits. Revenue per employee is calculated as follows: This ratio is used to determine how efficiently the restaurant is using its employees to generate sales; the higher the figure, the more efficient the employees are. Using the previously described ratios, below is a comparison of some of Darden against three of its main competitors and to the restaurant industry average (see Table 3). The figures for the latter were taken from the 1999 Restaurant Industry Report compiled by the National Restaurant Association and Deloitte & Touche LLP and show median values. The data for the four companies (i.e. Darden Restaurant, Inc., Brinker International, Inc., Outback Steakhouse, Inc. and Lone Star Steakhouse & Saloon, Inc.) was gathered from the respective 1999 10K reports. The average check figures are weighted averages for restaurants operating in the same segment. In the case of each company, the weighted average check was obtained by, first adding the products of the average check and total number of restaurants brand by brand, and then dividing the result by the total number of restaurants selected for all brands selected. The choice of brands were Red Lobster and Olive Garden for Darden Restaurants, Inc.; Chili’s, Romano’s Macaroni Grill, On the Border Mexican Grill & Cantina, Cozymel’s Coast Mexican Grill and Big Bowl for Brinker International, Inc.; Outback Restaurants and Carraba’s Italian Grill for Outback Steakhouse, Inc. and Lone Star Steakhouse for Lone Star Steakhouse, Inc. The choice for Darden was motivated by the fact that we were unable to find the average check price for the Bahama Breeze brand in the 10K report. We were unable to obtain or calculate seat turnover figures, due to lack of data. The rest of the comparison data are system-wide figures, as these could not be broken down into detailed values representative of our set choice for the average check. The labor cost figures was unavailable for Brinker and Lone Star as they were incorporated in the restaurant operating expenses. In order to calculate sales per employee figures, sales and number of employee data were obtained from the 10K reports. Table 3: Benchmarks Specific to the Restaurant Industry: Darden vs. Major Competitors and the Industry - Fiscal year 1999 For restaurants operating in similar segments, the average check figure can be used to explain operational procedures. Restaurant staff checking tables more often, resulting in customers making additional orders, could explain a higher figure. A lower figure could be due to a menu where portions are larger than the operating standards. Darden’s food & beverage costs are comparable to the industry average. They are slightly lower than Outback’s and Lone Star’s. They are however higher than Brinker who operates nine different concepts, which allows a more efficient distribution of costs throughout the range of brands. Darden’s food & beverage costs percentage has been decreasing since 1997 due to comparatively increasing sales. Darden’s labor costs percentage is within the industry average and has remained fairly constant since 1997. Although the dollar amount of labor costs has been increasing steadily during that period, proportionally increasing sales have counteracted this trend. Darden manages to efficiently control the variable nature of these costs through increased productivity. This is consistent with the expansionary strategy pursued by the company. According to the 1999 10K report, the company believes it is providing “working conditions and compensation that compare favorably with those of its competition”. (http://www.darden.com) System-wide sales volume per employee is fairly low compared to Darden’s competitors and the industry average. This is mainly due to a larger workforce compared to the competition relative to sales. In conclusion, the restaurant market is very volatile and highly competitive. Darden will continue to see the rewards of its market share by providing its guests with exceptional food and service. Darden has pushed the limits of fast expansion, and now has a presence in nearly all the major markets in the United States and Canada. They have continued to scan and monitor their competition and the changing environment, which has resulted in periodic changes in menu format and marketing plans. However, our information illustrates the need for Darden to continue to expand Red Lobster, Olive Garden, and Bahama Breeze. A huge opportunity exists in following the geographic moves of the retiring Baby Boomer generation. While Darden has significant exposure in Florida, an equally strong presence is needed in Arizona and other Southwestern states. While following migrating retirees may appear risky, history shows that warmer southern climates tend to be the location of choice. Studies cited in this paper demonstrate the accuracy of this forecast. Darden’s identification of a market demand for upscale dining is another critical factor in its future success. The market potential outweighs the risk involved in competing with restaurants such as the Cheesecake Factory and P.F. Chang’s. Studies have shown that North Americans, particularly dual income families, have a significant amount of disposable income. Bahama Breeze will be exciting to watch as higher average checks could equal a sharp rise in profits. While Darden’s last quarter showed record returns, the financial solidity shows a company that is growing as quickly as possible. This certainly could be seen as a weakness. Determining how much debt a company can assume and still stay profitable is often a topic of debate. Our research has shown that Darden should keep on its path of rapid development as they are responding to a market need for family restaurants and at the same time expanding operations to target a market of higher wage earners. There is certainly a global opportunity for Darden to continue to build its presence in Canada. Cited research has shown that Canada’s demand for restaurants and its socio-cultural swing to dining out more often point to certain success. As far as technological advances we would position Darden as an industry leader. Hotels such as Marriott International, and fast food chains such as Pizza Hut, KFC, and Taco Bell are trying to simplify their operational demands by strategically placing different venues in close proximity. As of yet, no restaurant chain has been able to accomplish this. Since Darden offers such a wide spectrum of food choices, it could concentrate several of its restaurants in the same area. This would lead to better operations, a powerful human resource pool, and greater bargaining power with vendors, allowing them to achieve a competitive advantage. Borrud, Lori G. Speech titled, “Eating Out in America: Impact on Food Choices and Nutrient Profiles”. Food Surveys Research Group, Beltsville Human Nutrition Research Center, Agricultural Research Center, U.S. Department of Agriculture at the 124th Annual Meeting of the American Public Health Association, November 20, 1996 (Co-authors: Sharon J. Mickle, Alvin B. Nowverl, and Katherine S. Tippett). Ebbin, Robert; Flora, Dan; Grindy, Bruce; Mills, Susan; Obenauer, Irina, & Riehle, Hudson. “2000 Restaurant Industry Forecast”. 1999. As posted on http://www.restaurant.org. Retrieved September 15, 2000. Hitt, Michael A., Ireland, R Duane, & Hoskisson, Robert E. Strategic Management: Competitiveness and Globalization. Concepts. 4th edition. Southwestern Publishing, 2001. Johnson, Patricia M. & Outcalt, Richard F. Copyright 2000. “Target Marketing: One Size Doesn’t Fit All!”. As posted on http://outcaltjohnson.com. Retrieved September 15, 2000. Ninemeier, Jack D. Management of food and beverage operations. 3rd edition. Lansing, Michigan: Educational Institute 2000. Vest, Marshall J. April 13, 1999. “Arizona Retirement Community Helps State Economy,”. As posted on http://freedom.gogrrl.com. Retrieved September 15, 2000. Unknown Author. “Food Services Competition in the 1990s”. First published in the 4th Quarter Report of Services Indicators. As posted on www.statcan.ca/start.html. Retrieved September 15, 2000. Appendix 1: Darden’s Financial Statements *All dollar amounts in millions except per share amounts. Income Statement May-99 May-98 May-97 May-96 Revenue 3458.1 3287.0 3171.8 3191.8 Cost of Goods Sold 2870.2 2754.7 2712.9 2607.7 Gross Profit 587.9 532.3 458.9 584.1 SG&A Expense 360.9 358.5 361.3 373.9 Operating Income 227.0 173.8 97.6 210.2 Nonoperating Income 0.0 0.4 0.0 0.0 Nonoperating Expenses 19.5 20.5 22.3 21.4 Income Before Taxes 215.8 153.7 (154.5) 113.8 Income Taxes 75.3 52.0 (63.5) 39.4 Net Income After Taxes 140.5 101.7 (91.0) 74.4 Total Net Income 140.5 101.7 (91.0) 74.4 Dividends per Share 0.08 0.08 0.08 0.04 Balance Sheet May 99 May 98 May 97 May 96 Net Receivables 20.3 27.3 16.3 24.8 Inventories 144.1 182.4 132.2 120.7 Other Current Assets 122.5 154.3 163.3 112.1 Total Current Assets 327.7 397.5 337.4 288.0 Net Fixed Assets 1473.6 1490.3 1533.3 1702.9 Other Noncurrent Assets 104.4 96.9 93.1 97.7 Total Assets 1905.7 1984.7 1963.7 2088.5 Accounts Payable 144.7 132.9 113.1 128.2 Short-Term Debt 23.5 75.1 43.4 72.7 Other Current Liabilities 366.0 350.6 324.1 244.5 Total Current Liabilities 534.2 558.7 480.6 445.3 Long-Term Debt 314.1 310.6 313.2 301.2 Other Noncurrent Liabilities 21.3 18.6 18.6 18.3 Total Liabilities 941.7 964.9 882.5 866.0 Preferred Stock Equity 0.0 0.0 0.0 0.0 Common Stock Equity 964.0 1019.8 1081.2 1222.6 Total Equity 964.0 1019.8 1081.2 1222.6 Total Liabilities and Equity 1905.7 1984.7 1963.7 2088.6 Shares Outstanding (mil.) 132.1 141.1 153.0 159.6 Cash Flow Statement May 99 May 98 May 97 May 96 Net Operating Cash Flow 348.2 236.1 189.2 294.0 Net Investing Cash Flow (96.5) (93.6) (124.5) (199.5) Net Financing Cash Flow (244.2) (134.5) (69.6) (84.3) Net Change in Cash 7.5 8.0 (4.9) 10.2 Depreciation & Amortization 130.2 131.0 140.7 136.5 Capital Expenditures (123.7) (112.2) (159.7) (213.9) Cash Dividends Paid (10.9) (11.7) (12.4) (12.6) Appendix 2: Darden’s Common Size Financial Statement Income Statement May-99 May-98 May-97 May-96 Revenue 100.00% 100.00% 100.00% 100.00% Cost of Goods Sold 83.00% 83.81% 85.53% 81.70% Gross Profit 17.00% 16.19% 14.47% 18.30% SG&A Expense 10.44% 10.91% 11.39% 11.71% Operating Income 6.56% 5.29% 3.08% 6.59% Nonoperating Income 0.00% 0.01% 0.00% 0.00% Nonoperating Expenses 0.56% 0.62% 0.70% 0.67% Income Before Taxes 6.24% 4.68% -4.87% 3.57% Income Taxes 2.18% 1.58% -2.00% 1.23% Net Income After Taxes 4.06% 3.09% -2.87% 2.33% Total Net Income 4.06% 3.09% -2.87% 2.33% Dividends per Share $0.08 $0.08 $0.08 $0.04 Balance Sheet May 99 May 98 May 97 May 96 Net Receivables 1.07% 1.38% 0.83% 1.19% Other Current Assets 6.43% 7.77% 8.32% 5.37% Total Current Assets 17.20% 20.03% 17.18% 13.79% Net Fixed Assets 77.33% 75.09% 78.08% 81.54% Other Noncurrent Assets 5.48% 4.88% 4.74% 4.68% Total Assets 100.00% 100.00% 100.00% 100.00% Accounts Payable 7.59% 6.70% 5.76% 6.14% Short-Term Debt 1.23% 3.78% 2.21% 3.48% Other Current Liabilities 19.21% 17.67% 16.50% 11.71% Total Current Liabilities 28.03% 28.15% 24.47% 21.32% Long-Term Debt 16.48% 15.65% 15.95% 14.42% Other Noncurrent Liabilities 1.12% 0.94% 0.95% 0.88% Total Liabilities 49.41% 48.62% 44.94% 41.46% Preferred Stock Equity 0.00% 0.00% 0.00% 0.00% Common Stock Equity 50.59% 51.38% 55.06% 58.54% Total Equity 50.59% 51.38% 55.06% 58.54% Total Liabilities and Equity 100.00% 100.00% 100.00% 100.00% Appendix 3: Common Size Income Statement Comparison Income Statement Brinker Applebee Lone star Outback Advantica Il fornaio Landary's Ave. of 7 Darden Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Cost of Goods Sold 86.93% 75.52% 85.80% 61.19% 100.99% 86.75% 59.25% 79.49% 83.00% Gross Profit 13.07% 24.48% 14.20% 38.81% -0.99% 13.25% 40.75% 20.51% 17.00% SG&A Expense 4.83% 9.45% 6.50% 25.01% 5.84% 8.76% 34.33% 13.53% 10.44% Operating Income 8.24% 15.02% 7.70% 13.80% -6.84% 4.48% 6.42% 6.98% 6.56% Nonoperating Income -0.78% -0.60% 0.38% -0.03% 1.40% 0.50% 0.21% 0.15% 0.00% Nonoperating Expenses 0.49% 1.61% 0.00% 0.00% 6.55% 0.00% 0.62% 1.32% 0.56% Income Before Taxes 6.98% 12.80% 1.43% 11.62% -24.38% 4.98% 5.35% 2.68% 6.24% Income Taxes 2.42% 4.70% 0.51% 4.06% 0.08% 1.89% 1.85% 2.22% 2.18% Total Net Income 4.21% 8.09% 0.92% 7.55% -24.02% 3.09% 3.51% 0.48% 4.06% Diluted EPS $1.16 $1.89 $0.15 $1.57 ($9.54) $0.50 0.13% -60.98% $0.99 Balance Sheet Brinker Applebee Lone star Outback Advantica Il fornaio Landary's Ave. of 7 Darden Cash 1.16% 0.32% 9.50% 10.86% 11.87% 7.82% 4.63% 6.59% 2.15% Net Receivables 1.97% 3.08% 0.15% 0.00% 1.48% 2.76% 1.43% 1.55% 1.07% Inventories 1.38% 2.53% 2.14% 3.06% 1.01% 3.99% 3.70% 2.55% 7.56% Other Current Assets 4.98% 1.81% 1.20% 2.87% 12.84% 2.61% 2.07% 4.06% 6.43% Total Current Assets 9.51% 7.73% 13.01% 16.80% 27.20% 17.18% 11.82% 14.75% 17.20% Net Fixed Assets 74.93% 67.87% 80.69% 71.22% 42.41% 80.37% 86.85% 72.05% 77.33% Other Noncurrent Assets 15.58% 24.38% 6.32% 11.98% 30.39% 2.30% 1.33% 13.18% 5.48% Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Accounts Payable 6.83% 3.84% 1.72% 3.99% 5.79% 10.72% 4.31% 5.31% 7.59% Short-Term Debt 1.34% 0.41% 0.00% 0.19% 21.00% 0.00% 13.71% 5.24% 1.23% Other Current Liabilities 9.34% 13.32% 7.50% 11.19% 12.46% 11.64% 3.99% 9.92% 19.21% Total Current Liabilities 17.51% 17.57% 9.22% 15.36% 39.25% 22.36% 22.01% 20.47% 28.03% Long-Term Debt 16.88% 24.03% 0.00% 0.18% 50.96% 0.00% 0.02% 13.15% 16.48% Other Noncurrent Liabilities 3.85% 0.41% 0.00% 0.53% 9.79% 12.40% 0.00% 3.85% 1.12% Total Liabilities 39.08% 42.60% 9.22% 18.70% 100.00% 100.00% 24.04% 47.66% 49.41% Preferred Stock Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Common Stock Equity 60.92% 57.40% 90.78% 81.30% -9.03% 65.24% 75.96% 60.37% 50.59% Total Equity 60.92% 57.40% 90.78% 81.30% N/A 65.24% 75.96% 61.66% 50.59% Total Equity and Liability 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Appendix 4: Common Size Balance Sheet Comparison Appendix 5: Red Lobster Locations in the United States Appendix 6: Olive Garden Locations in the United States 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