Incorporated: 1995
NAIC: 72211 Full-service Restaurants
SIC: 5812 Eating Places
Operating more than 1,168 units throughout the United States and Canada, Darden Restaurants, Inc. began its existence in 1995 as the world's largest full-service restaurant organization, occupying the casual dining niche between fine dining and quick-service restaurants. Specifically, the company was spun off from General Mills to its stockholders as an independent company, overseeing the restaurant chains Red Lobster, The Olive Garden, and, until late 1995, China Coast.
Founded in 1968 and acquired by General Mills, Inc. in 1970, Red Lobster grew to become the nation's largest seafood and casual dining restaurant chain. Launched in 1982, The Olive Garden became the largest chain of casual but full-service Italian restaurants. China Coast was an unsuccessful ethnic restaurant chain that operated during the 1990s. Darden Restaurants' two newest concepts, Bahama Breeze and Smokey Bones BBQ Sports Bar, were introduced in the late 1990s and together had 30 restaurants in operation by 2001. Controlling nearly 8.5 percent of the $47 billion casual dining market, Darden Restaurants served approximately 3,000,000 meals per year through its restaurant outlets.
William B. Darden, reared in Waycross, Georgia, opened, at the age of 19, a Depression-era Waycross lunch counter that he called "The Green Frog," promising "Service with a Hop." He went on to own some local motel and hotel properties and all or part of about 20 Howard Johnson restaurants. Inspired by the great popularity of seafood in two of his eight restaurants--one in Orlando and the other in Jacksonville--Darden opened his first Red Lobster restaurant in Lakeland, Florida, in 1968. Its manager was Joe R. Lee, a native Georgian who later became chief executive officer of Darden Restaurants.
Darden wanted to market a chain of moderately priced, family-style, full-service seafood restaurants. He chose to open in Lakeland because it was as far from the ocean as possible in Florida, and he wanted to test his concept outside of coastal areas. The first Red Lobster proved a booming success, so much so that Darden and his partners had to work full shifts to meet the objective of getting food to the table within ten minutes of the order.
By 1970, there were three Red Lobsters in operation, all in central Florida, and two more under construction. The three units, which despite their name specialized in the fried fish and hush puppies favored by southerners, averaged $800,000 each in annual sales, and earnings were solid, but the company lacked the cash to grow. For General Mills, a diversified food products giant, acquiring Red Lobster Inns of America made sense because General Mills' fish sales accounted for about $80 million of revenue, or one-ninth of its total sales. Darden was hired to oversee the chain and open a restaurant headquarters in Orlando. He later became a General Mills vice-president and senior consultant, retired in 1984, and died in 1994.
General Mills upgraded Red Lobster into a midpriced seafood dinner house that was a model of corporate efficiency. Lee, who rose to become president of Red Lobster in 1975, carried a slide rule with him everywhere in the early 1970s to calculate prices and portion weights, and to quantify whatever else could be quantified. He also carried a thermometer in order to assure that entrees had been cooked to the proper temperature before being served. In 1971 Red Lobster established an in-house department for purchasing seafood on a worldwide scale. The company also established, long before the rest of the industry, a computerized point-of-purchase system to track how much of any given item was selling where.
Red Lobster grew in each year of operation, and it grew rapidly. By the end of fiscal 1971 there were 24 restaurants with total sales of $9.1 million, and by the end of fiscal 1972 there were 47 with sales of $27.1 million. When Lee was named president of Red Lobster in 1975, there were 97 restaurants with 9,500 employees. In 1976 the General Mills subsidiary opened a microbiology laboratory in Orlando to ensure the quality of its products. Red Lobster ended that fiscal year with 174 units in 26 states and total sales of $174.1 million.
Because of higher costs, attributed in large part to increased fuel bills for truck transportation and fishing boats caused by the Arab oil embargo of 1973-74, Red Lobster again felt the need to upgrade in the mid-1970s. It carpeted the floors, re-styled the interiors, and added a few fresh dishes to its predominantly frozen menu, and it sharply jacked up prices to pay for the improvements. The strategy worked. By the end of 1980 Red Lobster, with 260 units and almost $400 million in annual sales, had reached ninth place among fast-food companies and accounted for more than half of total sales by seafood fast-food companies. Although a sit-down chain, frequently with lounges, it was considered "fast food" by some analysts because most entree items were delivered frozen.
Alternatively, however, by 1982 Red Lobster was rated as the nation's largest "dinner-house" restaurant chain, this being the name for a restaurant offering table service and a full lunch and dinner menu. With an average annual return on invested assets of 22.3 percent before taxes, it was one of the most profitable chains in its field, and its growth had come entirely without franchising.
Red Lobster provided General Mills with $75 million in operating earnings during fiscal 1982. By early 1983 there were 350 establishments in 36 states. The first of dozens of franchised Red Lobsters in Japan opened in Tokyo in 1982, and the first Canadian unit opened in 1983. Securities analysts attributed the chain's success, in large part, to Red Lobster's position as the only nationwide seafood dinner chain and its extraordinary quality-control measures. According to one of its executives, while seafood could be 16 days old and still legally sold as fresh, Red Lobster's seafood, although frozen, was "fresh frozen" at five regional warehouses, each with a quality-control laboratory.
During 1982, however, Red Lobster decided to pursue a new direction. The chain's research, according to Lee, indicated that its customers resented waiting in line yet did not like being hustled out, and wanted a more casual dining experience, with an atmosphere conducive to drinks, appetizers, and finger food to share instead of massive entrees. Accordingly, a prototype unit opened in Kissimmee, Florida, in 1984 was a grazer's delight, with a seafood bar serving up oysters, shrimp, clams, calamari, and other appetizers with drinks, and a glass-enclosed grill where fresh seafood was broiled over mesquite-wood flames. Red Lobster restaurants had deliberately been built without windows so that diners would not take up time seeking a table looking out, but the new unit had picturesque views. Waiters were instructed to relax instead of speeding diners through the dinner cycle.
In 1984, General Mills authorized a $104 million remodeling program for Red Lobster, the largest capital-spending item in the parent company's history. All 370 units were to be overhauled, with the menu 40 percent longer to include such items as seafood salads and pastas, and six or eight fresh fish entrees available, twice as many as in the past. Dinner prices were lowered to draw more customers, with the expectation that patrons would make up for the difference by increased spending on appetizers and alcoholic beverages.
Red Lobster continued to reinvent itself and reward its parent company in subsequent years, passing $1 billion in North American sales during 1988. By then it was General Mills' second largest revenue producer, trailing only the cereals division and accounting for about one-fifth of the parent company's business. A food industry analyst told the New York Times, "They have a concept that works extremely well, but they also constantly refresh their franchise. ... If Cajun food is hot, they'll put five Cajun entrees on the menu. Whatever's hot, they'll do it."
By this time Red Lobster was offering more than 100 seafood items every day. To supply its units it was buying about 58 million pounds of seafood every year, combing the world's oceans for the latest novelty. These included popcorn shrimp, caught off the shores of Brazil, slipper lobster from Thailand, and Pacific orange roughy, a whitefish from New Zealand to supplement North American standbys from Florida stone crab and Maine flounder to Alaska salmon. By 1995 Red Lobster was purchasing seafood from 44 countries.
The array of options allowed the chain to draw in new customers by featuring bargain specials. Close contact between the chain's buyers and thousands of entrepreneurial fishing operations, and delivery by overnight air express services, enabled much of the catch to reach units daily while still fresh. The price of Red Lobster dinner entrees ranged from about $7 to $19 in 1995. Lunch entrees ranged from about $4.30 to $7. Red Lobster also offered a lower-priced children's menu.
Questionnaires and focus groups also convinced Red Lobster of the importance of good service to securing follow-up trade. It held a four-day training course for servers before each restaurant opened and then required the staff to attend follow-up monthly classes. After 1986 waiters and waitresses were encouraged to display individuality in serving customers rather than relying on mechanical recitations of what the restaurant had to offer. The uniform of shirts and slacks was replaced by a maroon apron under which servers wore clothing of their own choice. They also were motivated by Red Lobster's reputation for good benefits, flexible hours, chances for advancement, and the hope of earning more than $100 in tips on good nights.
Fearing saturation in the seafood market, however, General Mills had decided years earlier to expand its restaurant group, which included York Steak House as well as Red Lobster. In 1982, following five years of painstaking research and about $28 million for development funds, the company opened the first Olive Garden restaurant in Orlando. By the end of 1985 there were eight such units, and by mid-1989 there were 145, making it General Mills' fastest-growing business and probably the fastest-growing major chain in the United States.
A 1991 Forbes article found the dinner portions, averaging only $10, enormous, but called the salad soggy with dressing, the chicken bland, and the fettucine alfredo like something out of a TV dinner. The public, however, flocked to these outlets. Average sales per Olive Garden were $2.8 million that year, compared with $3 million for Red Lobster, and both were high for the industry. The Olive Garden ended fiscal 1992 with $808 million in sales and 341 outlets. It reached the $1-billion-a-year sales mark in 1993. The menu, in 1995, included not only Italian specialties such as veal piccata, baked lasagna, and chicken marsala but a variety of veal, beef, and seafood dishes. Dinner entree prices ranged from about $7 to $14.25, and lunch entree prices ranged from about $4.25 to $8.75. A limited-menu Olive Garden Cafe concept in food court settings at regional shopping malls was being tested. There were seven such units in late 1995.
The success of The Olive Garden encouraged General Mills to expand its ethnic food format. After three years of development and test marketing the restaurant group launched China Coast in 1990 as the first national Chinese food chain. This eatery opened with an eight-page menu, in Newsweek's words, "about as long as the list of emperors in the Ming Dynasty." The interiors were festooned with bamboo, paper lanterns, and Chinese-character wall scrolls, and the servers wore Chinese-style jackets. Eventually the China Coast chain grew to 51, but it failed to thrive and was ordered closed in 1995. During fiscal 1995 China Coast's sales came to only $71 million, and Wall Street analysts estimated that it lost $20 million that year. Thirty China Coast restaurants were converted into Red Lobsters or Olive Gardens.
General Mills decided in 1995 to spin off its restaurant operations into a new company so that it could concentrate more on its consumer food products. Lee, the chairman and chief executive officer, named the new company Darden Restaurants in honor of his mentor and Red Lobster's founder. Stockholders received one share of Darden Restaurants common stock for each share of General Mills common stock they held. In their last fiscal year under General Mills' auspices, Darden Restaurants' constituent units had combined net income of $108.3 million.
Investors failed to rally around Darden Restaurants, whose stock ended its first day of trading on the New York Stock Exchange below the $12 to $13 a share expected by analysts. One securities analyst said that the restaurants had been accounting for only one-quarter of General Mills' operating profits while absorbing half of the company's capital spending for expansion and renovation. Nevertheless, its market capitalization of $1.8 billion made it second in size only to McDonald's among the nation's publicly traded restaurant companies.
Darden Restaurants indicated in early 1996 that the China Coast experience would not keep it from trying other ethnic formats. In March of that year it began test marketing Bahama Breeze Caribbean Grille, with a menu drawn from Spanish, French, African, Dutch, Indian, and American influences. Entrees, priced between $5 and $15, were to include Bahamian conch chowder, slow-roasted ribs, Caribbean paella, jerk chicken, and rum-glazed yellowtail dolphin, washed down with Caribbean-island beer and other drinks. Lee predicted that, whether Bahama Breeze went into operation or not, Darden Restaurants would add at least two chains to its repertoire by 1998.
Darden Restaurants executives expressed confidence that they were on the right track toward long-term robust growth. Casual dining, according to the company, was the fastest-growing segment of the full-service restaurant market, with sales increasing at more than twice the overall market's rate since 1988 and representing, in 1995, 32 percent of full-service restaurant sales, or $29 billion. The trend toward casual dining, it argued, was reflected in the less formal dress code in the workplace and would continue in years to come. Moreover, the company noted that 40- to 60-year-olds were the most frequent visitors to casual dining restaurants, and that the population aged 45 and older was expected to grow by 40 million through 2010.
At the end of fiscal 1995, Darden Restaurants was operating 1,250 restaurants in every state except Alaska. A total of 73 were in Canada. Red Lobster restaurants were being remodeled, with weathered wood accented by nautical artifacts for a wharfside effect, to be completed by the end of fiscal 1997.
Despite the company's positive outlook for the future, Darden Restaurants began to experience financial setbacks in 1997 due to market saturation. As such, the company was forced to shutdown some of its poor performing restaurants. Lee commented on the restructuring in a 1997 Nation's Restaurant News article claiming, "There are some situations where we oversaturated and there were some areas where the market changed." The article also stated, "Lee described the closings and write-offs as a strategic move to increase positive cash flow." By the end of the fiscal 1997, 48 restaurants were closed--including 26 outlets in Canada--and the firm posted a $91 million loss as a result of the restructuring charges.
Determined to get Darden Restaurants back on track, management focused on reviving the Red Lobster and Olive Garden chains and also eyeballed its Bahama Breeze concept to bolster sales. After its lackluster performance in 1997, the company rebounded and secured profits of $102 million in 1998. The following year, the company established the Culinary Institute of Tuscany in Italy. The facility was created to train Olive Garden chefs in an authentic Italian environment. New Red Lobster restaurants were opened with open floor plans and larger bar areas. Olive Garden restaurants also received a new look and were designed to resemble a Tuscan farmhouse. Darden Restaurants also began testing a new restaurant concept entitled Smokey Bones BBQ Sports Bar and opened its first unit in Orlando in late 1999. The restaurant could seat 300 and had a U-shaped bar in the center. Decorated similar to a mountain lodge, the outlet catered to sports fans with 40 televisions throughout the restaurant and monitors at each table.
Having successfully overcome the sluggish sales of 1996 and 1997, Darden began to actively pursue new store openings. By the end of 1999, there were 669 Red Lobster restaurants, 464 Olive Garden outlets, six Bahama Breeze units, and one Smokey Bones BBQ Sports Bar, and additional store openings were slated for the upcoming year. Profits for 1999 reached $140.5 million on revenues of $3.46 billion.
Darden Restaurants entered the new millennium on solid financial ground. Sales increased 7 percent over the previous year while earnings climbed to $173.1 million. During the year, Red Lobster and Olive Garden achieved their tenth and 23rd consecutive quarter of sales increases, respectively. The company as a whole recorded its 14th consecutive quarter of earnings increases. The company posted its best financial year to date in fiscal 2001. During the year, sales reached $4 billion, while earnings increased to $197 million. The number of Bahama Breeze restaurants rose to 21, while nine Smokey Bones were in operation--national expansion for the sports concept was scheduled to begin in 2002. In addition to its financial gains, the company was named by Fortune magazine as one of the top 50 companies for minorities for the third year in a row.
Darden's strategy for 2000 and beyond included a constant reviving of the Red Lobster and Olive Garden chains, expansion of existing new concepts, and the acquisition and development of new concepts. According to Darden, casual dining sales were projected to increase between 6 to 8 percent over the next ten years. Although the American economy began faltering in 2000, the company claimed that historically, the casual dining industry had weathered past economic downturns quite well and that sales had grown during the 1990-91 recession. As such, Darden management remained confident that the company would experience success in the years to come.
Principal Operating Units
Red Lobster; Olive Garden; Bahama Breeze; Smokey Bones BBQ Sports Bar.
Principal Competitors
Brinker International Inc.; Landry's Restaurant Inc.; Metromedia Company.
Further Reading
Carlino, Bill, "Darden Gives Up on China Coast, Shutters Units," Nation's Restaurant News, September 4, 1995, pp. 1, 7.
------, "Darden Is Watching Which Way Bahama Breeze Blows," Nation's Restaurant News, January 29, 1996, pp. 1, 53.
------, "Jeffrey J. O'Hara," Nation's Restaurant News, October 9, 1995, pp. 176, 178.
------, "William Darden," Nation's Restaurant News, February 1996, p. 68.
"Darden Expanding Four Chains," Food Institute Report, June 25, 2001, p. 2.
"Darden Posts FY '97 Loss of $91 Million After Restructuring," Nation's Restaurant News, June 30, 1997, p. 12.
"Darden Turns Olive Garden and Red Lobster Around," Food Institute Report, November 8, 1999.
"Darden Ups 2nd-Q Earnings As It Digs Out of Early Slump," Nation's Restaurant News, January 15, 1996, p. 12.
Gindin, Rona, and Richard L. Papiernik, "Darden Tests More BBQ Units; Analysts Eye Strategic Growth," Nation's Restaurant News, March 20, 2000, p. 1.
Harris, John, "Dinnerhouse Technology," Forbes, July 8, 1991, pp. 98-99.
Lavecchia, Gina, "Bahama Mama," Restaurant Hospitality, November 1998, p. 64.
McGill, Douglas, "Why They Smile at Red Lobster," New York Times, April 23, 1989, Sec. 3, pp. 1, 6.
Miller, Annette, and Karen Springen, "Egg Rolls for Peoria," Newsweek, October 12, 1992, pp. 59-60.
Papiernik, Richard, "Darden Faces Up to Its Problems, Finds Its Own Solutions," Nation's Restaurant News, March 31, 1997, p. 11.
------, "New Stock Sparks Trades But No Wall Street Fireworks," Nation's Restaurant News, June 19, 1995, pp. 3-4.
Phalon, Richard, "Amicable Divorce," Forbes, May 8, 1995, pp. 70, 74.
Ponti, James, "A Guy Named Joe," Orlando, November 1995, pp. 32-39.
"Red Lobster Looking Abroad," New York Times, February 14, 1983, p. D3.
Romeo, Peter, and Scott Norvell, "Looking Leeward," Restaurant Business, November 20, 1995, pp. 40, 44-46.
Saporito, Bill, "When Business Got So Good It Got Dangerous," Fortune, April 2, 1984, pp. 61-62, 64.
— Robert Halasz; Updated by Christina M. Stansell
