MANAGEMENT 4842 - 009GROUP CASE 1

2/14/2012

Team 4

Catherine BradshawDerek JoynerMarjorie LandenRobin WilliamsonMegan Willis

Table of Contents

Vision Statement………………………………………………………………..1

Corporate ObjectivesFinancial Objectives……………………………………………………….1Strategic Objectives……………………………………………………….2

Corporate Level Strategies……………………………………………………..3

Business Level Strategy………………………………………………………...4

External Analysis……………………………………………………………….4Opportunities……………………………………………………………...4Threats…………………………………………………………………….5

Competitive Analysis…………………………………………………………....6Five Forces AnalysisRivalry

Tools of RivalryPotential Entry of New Competitors

Barriers to EntryLikely Reactions of Competitors

Competitive Pressures from Substitute ProductsSupplier PowerBuyer or Customer Power

Industry Key Success Factors………………………………………………..12

Internal (Company) Analysis………………………………………………...15Strengths………………………………………………………………...15Weaknesses……………………………………………………………...16

Financial Analysis…………………………………………………………….18

Strategic Issues………………………………………………………………..21

List of References……………………………………………………………..21

1. Organizational Vision:

Darden Restaurants wants to continue to build a fantastic organization. An organization that year after year produces consistent financial results and provides a workplace for employees that will allow them to achieve their personal and professional dreams. Three important areas Darden seeks to continue to improve are consistency, accuracy, and efficiency. Striving to improve their positive affect on the economy, business partners, and most importantly their customers is the overall goal.

2. Corporate Objectives:

A. Financial Objectives:

a. Increase in annual revenueRevenues increased to $7.5 billion in 2011. This is a 5.44% increase from 2010’s revenue of $7.1 billion (Mergent). Darden caters to a wide variety of customers with their wide service mix. The ability to meet the desires of so many individuals increases patronage and thus increases revenues (Datamonitor).

b. Internal cash flows to fund new capital investmentDarden’s increase in annual revenue and the addition of new restaurants to its product line create cash flows to fund new capital investments. Investments such as building new restaurants in new markets in turn create even more revenue.

c. Increase profit marginsThe profit margin for 2011 was 6.35%. This margin was lower in 2010 (5.58%) (Mergent). Darden’s shareholders are expecting the company to return larger profits every year. They are expecting this based on Darden’s success and its continued improvement in strategies. Darden aims to please investors and customers and in effect increase profits.

d. Increase shareholder valueDarden is aware of the crucial role that shareholders play and the importance of returning sufficient dividends back to those shareholders. In keeping with this goal, Darden has put some of its restaurants into tax-exempt real estate investment trusts. Leasing the restaurants to its self, the company takes tax deductions on the expenses and the trusts pay dividends back to the company (Pedicini).

e. Annual increases in earnings per share The cash flow per share rose from 6.5 to 6.56 between 2010 and 2011 (Mergent). Darden is aiming to continue improvements in cash flow and create more value for shareholders.

f. Annual increases in after-tax profits Net income was $476 million in 2011. This is an improvement from $372 million in 2009 and $404 million in 2010 (Mergent). Darden’s success in reducing expenses and increasing revenue has resulted in this significant annual increase in profits.

1

B. Strategic Objectives:

a. Increase Market ShareDarden understands that profitability is the key to their success. Entering new and existing markets are some ways to increase profitability. Darden has recently acquired Eddie V's Prime Seafood and Wildfish Seafood Grille and previously acquired LongHorn Steakhouse and The Capital Grille in 2008. With these new restaurants, Darden has the opportunity to reach new markets and continue to be a leader in the restaurant industry (SmartMoney).

b. Achieve lower overall costs than rivalsDarden achieves low overall costs through economies of scale. Operating on such a large scale allows the company to spread out expenses and control operating expenses. A policy against offering discounts on food items and centralized facilities management perpetuate the reduction of expenses (Datamonitor). Darden’s headquarters is home to the largest privately owned solar array in Florida. The solar plant is capable of producing 1.9 million kilowatts a year (Spear). The savings on electricity reduce the company’s overall expenses.

c. Overtake key competitors on customer serviceDarden has become creative in the search for outcompeting rivals in terms of customer service. In light of today’s more health-conscious society Darden restaurants are pledging to cut calories and sodium in its dishes by 10 percent by 2016 and 20 percent by 2021. A fruit or vegetable will become the standard side for kids’ meals as well as milk with free refills. Michelle Obama says, “With this new commitment, Darden is doing what no restaurant company has done before” (Malkin). By making meals healthier, Darden is conveying to customers that they care about their health and encourage them to make healthy choices even when dining out.

d. Brand RecognitionDarden is trying to establish itself as the most well-known and respected brand in the world. They have branched out to neighboring Canada and franchised five LongHorn Steakhouse restaurants in Puerto Rico. An unaffiliated Japanese corporation has also franchised 22 Red Lobster restaurants (Unknown). International expansion is supported by joint ventures and franchisee agreements and location of new restaurants in new global markets.

e. Have stronger national or global sales than rivalsSales for Darden in 2011 were $7.5 billion. Darden has been successful thus far in out-ranking similar competitors. O’Charley’s only had revenues of $830 million in 2011 (Mergent). Continuance of Darden’s current strategies will maintain Darden’s competitive edge over rivals in the restaurant industry who are failing to match their success.

2

f. Have a wider product line than rivalsThe expansion of Darden’s restaurant line with the addition of LongHorn Steakhouse and Capital Grille in 2008 (Reuters) and Eddie V’s Prime Seafood and Wildfish Seafood Grille in 2011 (New), provide Darden with a diverse product line. Such a diverse product line attracts a wide variety of customers, ensuring their product line is wider than any of their rivals. Darden has secured a top-notch place in the market.

3. Corporate Level Strategies:

a. Market PenetrationDarden seeks to capture more market share for existing products. One way to accomplish this task is to utilize the capabilities the Internet provides. Online ordering services are a convenient way for customers to purchase products when they are not able to dine in the restaurant. Online reservations would provide customers the assurance of getting a table on a busy weekend night and also alert staff of the impending arrival of large groups in ample time to avoid long wait times.

b. Market DevelopmentDarden has created a tactic to provide meals from their restaurants at lower prices. Offering a three-course meal at Olive Garden for $12.95 provides consumers with tight budgets the opportunity to dine at Olive Garden when they would not be able to otherwise. Darden is conscious of the value of developing markets for products that are already successful.

c. Product DiversificationDarden is constantly improving their products and creating new products to capture new customers. New recipes, desserts, wines and other beverages are all ways for Darden to increase the diversity of the products in their restaurants.

d. Horizontal IntegrationDarden has already demonstrated their readiness to take on merging with competing restaurants to pump up revenues and add value to their brand. Continued acquisitions of similar brands will give customers even more value and increase profits.

e. Related DiversificationThe acquisition of Eddie V’s Prime Seafood and Wildfish Seafood Grille were a continuance of the success that Darden has experienced with its Red Lobster restaurants. This strategic fit allows Darden to continue on the path of delivering quality food to customers in a wide variety of markets.

f. Horizontal Diversification The new restaurants that became a part of the Darden family in the past few years merged smoothly with the tastes of existing customers. The atmosphere and menus were similar to what was already provided. There was also an added benefit of different price points for customers to choose from to fit their budget.

3

4. Business Level Strategy:

DifferentiationDarden attracts customers through their commitment to quality and store locations that capture the heart of the local communities. Each Darden restaurant embodies a carefully crafted theme and an atmosphere of warmth. The restaurants are strategically positioned according to the palates of the local patrons. Darden’s strategy also includes locating their restaurants in accordance with the economic standing of the community (SmartMoney).

5. External Analyses – Opportunities and Threats

A. Opportunities

a. Alliances and Joint VenturesDarden Restaurants is involved in several partnerships with sustainability groups. The focus of these groups is to provide sustainable change opportunities across the globe, not just within Darden. Two main avenues that Darden focuses on are seafood and agricultural best practices. The Global Aquaculture Alliance works to create a set of standards for cultivating fish and seafood. In 2009, Darden joined forces with The Keystone Alliance for Sustainable Agriculture which focuses on implementing sustainable agricultural practices. The alliance contains about 40 different companies that provide support and information to teach about sustainable practices. Darden provides the perspective of food retailers and purchasers. (http://www.generationcommitment.com/assets/PDFs/20_collaborative-partnerships_FINAL.pdf)

b. Emerging New TechnologiesProper food handling and food safety is a main component in Darden kitchens across the country. In the past year, Darden has installed 8,500 low-flow aerators in their kitchens. This new technology helps cut costs of water usage. This has helped save more than $5,000 worth of water costs in Darden restaurants. The goal is to cut up to 15% of water usage in each restaurant by 2015. (http://www.generationcommitment.com/#/water/ )

c. Entering New Businesses In October of 2011, Darden Restaurants announced the acquisition of Eddie V’s Prime Seafood and Wildfish Seafood Grille restaurant brands. These two brands are in the market of luxury restaurants. This will allow Darden to reach a new customer base in full-service dining. This will also put them in a powerful position for long-term competitive sales growth. (http://investor.darden.com/releasedetail.cfm?ReleaseID=614552 )

4

d. International ExpansionIn August 2011, Darden announced plans to expand their brand into Mexico. They have joined forces with CMR, a leading casual dining company based in Mexico, to open a minimum of 37 restaurants over the next five years. Also, recently Darden celebrated the opening of its first restaurant in Dubai. This has allowed Darden to expand internationally into the Middle East. Darden recently started its international expansion to add international franchising. The goal of this venture is to enter markets that have the potential to operate successfully with several restaurants. The direction for choosing partners is having the ability to successfully operate and manage restaurants, with prior history to show, as well as the need to develop several of Darden’s brands. (http://investor.darden.com/releasedetail.cfm?ReleaseID=598784 )

e. Domestic ExpansionDarden Restaurants prides itself on domestic opportunities for growth. There are currently 1,900 Darden brand restaurants across the United States and Canada. Darden is always looking for markets that provide opportunities for full-service restaurants. They seek out areas that can support several restaurants in one area.

f. Supplier DiversityDarden provides opportunities for supplier organizations to grow their businesses. They pride themselves on giving diverse companies the opportunity to compete with current suppliers. They have a Supplier Initiative that focuses on utilizing women and minority owned businesses to supply their restaurants. Darden pushes a heavy emphasis on diversity awareness.

B. Threats

a. Increasing CompetitionRestaurant and food service industries are highly competitive. Darden Restaurants competes in several levels of the food industry – casual dining, full-service dining, and food/bar service. Being a part of so many market segments only increases competition. (http://www.hoovers.com/company/Darden_Restaurants_Inc/cyhsxi-1-1njea3.html)

b. Shift in Buyer NeedsWith any type of restaurant there is always concern for buyer needs. An external threat that can affect Darden is a shift in buyer needs. Many restaurants offer a variety of food offerings. Darden’s main avenues are seafood and fine dining. Outside of this buyers may choose to have different needs for offerings that Darden restaurants do not have. For example, in locations that are land-locked, many buyers may be concerned about the quality of seafood. Therefore, they may choose to eat somewhere that does not offer seafood. Also, price sensitive buyers will choose to skip Darden Restaurants fine dining options.

5

c. Economic ConditionsEconomic conditions are always a threat to any business. Declining economies directly affect buyer wants and needs. While Darden’s casual dining services may not be largely impacted by this due to lower prices, fine dining options may take a toll. Many buyers are worried about saving money in rough economic times and don’t see the advantage of spending more money for good quality food items.

d. Increased CostsWith poor economic conditions come increased operating costs. Gas and electric prices continue to rise across the country. Therefore, suppliers may have to increase prices due to ever-increasing gas prices that affect their delivery costs.

e. Changes in TechnologyWhile Darden makes its best efforts to use new, sustainable products for its restaurants, there are new technologies that competing restaurants can employ to put them at an advantage over Darden. Many new technologies that Darden should consider using are efficient cooking appliances, customer check out equipment, delivery services, and green initiatives.

f. Loss of Sales to Substitute ProductsRestaurants are in a constant battle with substitute products. With the increasing amount of grocery products and rival restaurants, there is a high risk of loss due to substitute products. Darden needs to assure that it is providing the best quality of foods that rivals and grocery stores cannot compare to. This is also includes pricing. If a buyer can find a dish similar to one of Darden’s in a grocery store for a cheaper price, there is a risk of loss of sales due to this substitute.

6. Competitive Analysis

A. Potential Entry of New Competitors- Strong

Advertisements barriers - Ads are placed in local newspapers, magazines, and are viewed by consumers daily. The cost of advertisements are a high cost for a brand new company; however if it were a chain that were opening in a new location that already has strong name recognition such as the Darden Restaurant’s name it would be more successful to entering the new location of the industry. A brand new company will have more difficulty affording the amount of money it costs to promote the new restaurant, but the new building will cause general public to try something new, which would take away business from other consumers. For example, Olive Garden one of Darden’s restaurants offers various specialty offers for cost efficient three course meals for 12.99, while a local competitor Tripp’s offers half priced wine and $9.99 pasta meals on Thursday’s. Olive Garden

6

advertises their deals on television as well as local ads while Tripp’s advertisements are based on word of mouth, and advertised on their menu.

Customer loyalty barriers - Restaurant chain’s located all over will give a customer satisfaction of knowing what to expect instead of trying a different restaurant. The loyalty barrier is both beneficial and harmful to this industry due to the amount of companies that are well known within the industry, and are located in many cities around the United States. If a restaurant has similar style of food, tastes are similar, then the costumer is going to go to whichever it feels more loyal to or whichever has the better deal. If a customer receives poor service, their loyalty decreases and will change their dining preferences to another restaurant.

Supplier Agreements - The agreements between a company and a supplier can cause a barrier for a similar company to enter that part of the industry if the main supplier is unable to have a contract with them. Sea Food suppliers have agreements with various companies within the Sea Food restaurant businesses that can prevent more restaurants from entering the industry due to the lack of availability within the supply chain. This will be an advantage to companies within the industries that have strong commitments from their suppliers, whom are unable to break their agreement due to financial reasons or other contractual reasons.

Economies of Scale - The firm that has been dominating in the industry such as Darden has been in leading the industry in the world’s largest full-service restaurant company allows the company to have many resources available to it. While a new restaurant or a smaller local restaurant does not have access to the amount of money or resources while entering into the industry especially in larger cities where many of the restaurants associated in their family of restaurants are located. It causes a negative barrier to entry based on the location and the amount of resources the new firm has to offer while entering a new industry.

Strong network affects in the costumers demands - In any industry; the most advertisement good or bad is in relation to word of mouth by its customers. The networking capabilities that costumers have involving all forms of technology can be a beneficial or harmful barrier in this specific industry. When a customer has had horrible service, or had a meal that was not worth the price that was paid it is likely that the broadcasting of their feelings will cause a negative impact on that specific restaurant within the industry. However, when restaurants own different restaurants and it is not widely known that they are related, the negativity only affects a small portion of the market segment rather than the whole firm within

7

the industry. When costumers have a great experience, they are likely to bring their friends, and to boast about their experience through various technologies such as: Checking- In on Facebook, or posting a Tweet regarding their meal on Twitter for their followers to read, which causes a positive entry within the industry.

High Capital Requirements - This is a negative barrier to entry to a firm that is trying to start out in the industry if they do not have the amount of investments required to be successful. It is a positive barrier where there are enough investments through cliental and other investors that see this as an opportunity. The higher amount of money within their budget, the more successful a firm will be with providing a substantial amount of competitive marketing, and a higher amount of spending within the building process, as well as obtaining better suppliers for their food supplies.

Likely Reactions to Competitors Competitors are likely to be in fear of losing their business due to entrances within the industry. When a new entry is being offered to the consumers, they are likely to switch because of the low cost of switching to another restaurant versus the same one that they visit frequently. Within the restaurant industry, there are various types of full-service restaurants and Darden Restaurants offers a range of various types as well as ranges of costs for the consumers. Their name recognition is beneficial within the industry, however when consumers are tired of the same restaurants they are more likely to cook their meals at home or to try a competitor that they may not have been to before. Competitors will be forced to improve their marketing skills as well as being offering new items on their menus in order to keep customer loyalty as well as continue to improve their profits.

B. Competitive Pressures from Substitute Products- Moderate

A substitute for Darden Restaurants is staying in and cooking a home cooked meal rather than going out to eat at a restaurant. The substitute is affected by the economy, consumers purchasing power, and the time of year where spending can be higher or lower due to other costs for the consumer.

Buyer power increases when buyer demand is weak -When consumers are not spending their access money on meals at a restaurant the demand for restaurants within an industry decrease, which causes their profits to decrease, which has an effect on their marketing strategies. Businesses are likely to react by proposing more cost efficient ways for families to eat out such as: “Tuesday’s kids eat free”,

8

or “Share a 3 course meal for only $20”. The buyer power increases because the value that they receive for their money will increase.

Buyers gain leverage if they are well informed- While the age of technology has been beneficial to both the buyers and the suppliers in an industry; it has been beneficial for comparisons to buyers. When advertisements for similar substitutes such as a coupon at the local grocery store versus the same meal at a restaurant being advertised, it is easier for the buyer to have a more cost efficient response when comparing prices of the substitutes. It is why different restaurants within an industry try to offer specials in their advertisements to make a meal in a restaurant more appealing than cooking it yourself. When two restaurants have similar specials at the same time, and can be substituted within their own industry such as: Applebee’s and Chili’s 2 for $20 special, it allows the buyer to use their leverage of knowing what meals are offered and which has a better value.

Buyers bargaining power is greater when switching to substitutes is relatively low- When buyers are considering the substitute of making a meal at home, they will consider the cost, time, and amount of food that they will receive after this meal is made. Their bargaining power is higher when it is slightly cheaper to make the same pasta dish at home, and have greater portions than to eat Olive Garden. This forces Olive Garden to come out with various marketing strategies such as: All You Can Eat Pasta Bowl for $9.99, where as a consumer it sounds like an excellent deal however consumers on a budget can make the same amount of pasta for under $10. This forces firms within the industry to consider lowering prices during certain days of the week, as well as giving incentives to have families eat dinner out.

C. Rivalry Among Competing Sellers – Strong

Rivalry increases as it becomes less costly for buyers to switch brands – This implies that it is less expensive for buyers to switch their purchases from one seller to another. In restaurants the switching cost for buyers is low due to the fact that there are so many options for dining.

Products of industry members are weakly differentiated – This implies that the offerings of rivals are very similar or identical. This decreases buyer-loyalty. This makes it easier for buyers to switch to rival restaurants with similar offerings.

9

Competitors are numerous and of equal size – When rivals are of equal size and strength rivalry increases. Darden has numerous competitors of equal size and strength. This allows them compete evenly which increases rivalry. There are several restaurant choices for buyers, as well as several casual dining opportunities that are in line with the offerings of Darden.

Product demand is growing slow – This implies that rivalry is more intense when

there is unused product. This is especially intense when an industry’s product has high storage costs. Darden Restaurants are a leading provider of quality seafood. However, seafood carries a very high storage capacity. If product demand slows, then these costs can significantly increase. Also, if stored too long, seafood is highly perishable which would be a total loss of product for the company.

Competitor Pricing – Rivalry can be brutal when competitors enter price wars. In such a competitive market like restaurants, companies are constantly monitoring competitor pricing to match or better their rivals.

High exit barriers – This implies that rivalry is strong when assets cannot be easily sold or transferred and owners are committed to remaining in business. The restaurant industry has a high number of assets that cannot be easily sold such as food, appliances, and quality staff members such as chefs. Restaurants that are having financial issues may heavily cut prices, which can start a price war amongst competitors. This also causes struggling companies to seek desperate measures to ensure they stay in the game.

D. Supplier Power - moderate

Whether the supplier industry is dominated by a few large companies: The pressures that Darden Restaurants have faced from suppliers have not been very strong. There is countless number of food and beverage distributors that provide their services to restaurants. Because Darden does have a number of restaurants, they actually have a link on their website where businesses can apply to be the distributor for Darden.

Whether supplier’s product is in short supply: In the restaurant industry, the main supplier is obviously in the food and beverage industry. Because these suppliers’ products are heavily affected by the environment they are able to have some bargaining power with their customers. For example, if you have been following the news at all you will know that there has been an ongoing drought in the Midwest for at least the past year. Cattle farms can’t afford to buy feed since grass isn’t growing. Because of their decline in the supply of beef they had to

10

raise their prices and there isn’t anything that companies like Darden can do about that. The suppliers have a little more power when it comes to the seafood because of the restrictions of the fishing laws. There are limits set on the number of lobsters and other species of fish that caught and because of this these species have a much higher price range.

http://www.reuters.com/article/2011/08/04/us-usa-drought-idUSTRE7735XJ20110804

Whether it is difficult for industry members to switch their purchases from one supplier to another: If Darden only had a few restaurants then switching from one supplier to another would not be hardly an issue. That fact that they have over 1900 restaurants and consistency is one of their main concerns it would be a pretty serious issue to switch suppliers. Because Darden’s Restaurants are franchises they tell the owners how to run their business and who to order from. They want all of their restaurants to be the same. Customers expect the same service whether they are eating in North Carolina or California.

Whether the supplier industry is dominated by a few large companies and whether it is more concentrated than the industry it sells to: The food and beverage industry is definitely a growing industry. There are lists that show the top 100 food and beverage companies. There is more domination in the beverage side of the industry with companies such as Pepsi and Coca-Cola. Every restaurant is expected to have one or the other and these companies know this and so they are able to have more bargaining power. http://www.foodprocessing.com/top100/#1

E. Buyer or Customer Power - moderate

Buyer’s bargaining power is greater when their costs of switching to competing brands or substitutes are relatively low: While customers of restaurants aren’t able to actually negotiate the price of their meal, their ability to drive across the street to another restaurant is their power. The cost of a customer switching to another restaurant is practically nothing and that’s why restaurant pricing stays competitive. Restaurants know that if they raise their prices to high then customers will choose to stay home and cook the meals themselves.

Buyer’s power increases when industry goods are standardized or differentiation is weak: Darden recognizes that people prefer different foods and if you look at their different restaurants that have tried to cover three pretty big areas. They understand that they have to set themselves apart from other restaurant chains. If you want seafood, Italian, or a variety of beef and poultry they have it covered. By catering to the customer this way, it somewhat lowers their buyer’s power.

11

Buyer leverage power increases if buyers have discretion to delay their purchases or perhaps even not make a purchase at all: Going out to eat is something that customers choose to do when they have the extra money. People can choose to go out once a week, once a month, or not even at all. Because they have this option to choose restaurants have to make their services more appealing to their customers and find ways to continue to draw them in. This increases the customers’ power.

Buyer price sensitivity increases when buyers are earning low profits or have low income: Since 2008 we have been in an economic recession. Our economy has started to come back some but it did affect many industries including restaurants. People’s income was affected and they realized they did not have the extra income to eat out. They made more trips to the grocery store and fixed their meals themselves. Restaurants realize that this is a big factor and so they try and do what they can to keep their meals affordable.

http://www.potatopro.com/Newsletters/20090223.htm

7. Industry Key Success Factors

In the chain restaurant industry there are many competitors to face. Having an upper hand against these competitors is crucial to stay alive in this industry. In order to do so, identifying a company’s key success factors is imperative. Key success factors are what we know works well for our company in order to sustain customers and make a profit. “Correctly diagnosing an industry’s KSF raises a company’s chances of crafting a sound strategy.” (Text 83)

“Darden restaurants are the world’s largest full-service chain restaurants,” so you can imagine the KSF it must have to have 14.8% of the industries market share.”(www.darden.com)

1. Broad Product Line Darden’s restaurants culinary inspirations come from Maine, Italy, the Caribbean,

and western American.

Its brands are: Red Lobster, Olive Garden, Longhorn Steakhouse, The Capital Grille, Bahama Breeze, and Seasons 52

Darden’s product lines vary from seafood, Italian, Western cuisine, Caribbean cuisine, and seasonally and locally inspired 475 calorie limit menus.

12

Each brand offers its customers a special dining experience from dining by the sea, a big Italian family setting, western Texas, island escape, and private party and intimate settings.

Darden’s broad product line offers many choices for all of its customers. Because of such a wide variety they are able to cater to the diversity of their customer’s wants and needs. Having something for everyone makes well for gaining and retaining loyal customers.

2. Global Supply Chain Darden has a “world-class” supply chain that rivals many of the world’s largest

retailers and provides a significant competitive advantage.

Their suppliers consist of 2,000 in 30 countries around the world, so their suppliers are truly global.

Darden is able to buy many of the same products for the multiple brands that they have which helps them effectively cut costs and spend their money where it may be needed more.

Darden uses a Supply Chain Automation system that allows them to efficiently and cost effectively manage supply and demands for the markets where they exist, allowing them to save money by having their products in the right stores when they are needed.

3. Quality Dining Experience for Low Costs Darden offers quality meals for low prices. In the chain restaurant industry,

customers want a variety of quality meals with a variety of ambiance for a reasonable price. Darden delivers exactly that.

“It operates under a variety of brands and offers variety of food and menu items at different price points designed to meet guest’s needs.” (IBISworld)

Providing customers with many quality choices for low prices will keep this company successful for years to come. With the economy the way it has been and as we are slowly recovering, people want an affordable way to get their families out of the house and spend time together. What better way than to go to the local Olive Garden or Red Lobster for an extraordinarily, delicious dining experience.

4. Marketing

13

Clever commercials and marketing of new or featured items, lets potential customers see a visual of what the food and dining atmosphere are like.

Money saving promotions for customers to have a good meal all for a low price.

For example, Red Lobster is “addressing affordability through a balanced promotional calendar that offers price certainty and through core menu changes that include more compelling affordable items. To heighten the visibility of the brand refresh, they are launching a new national advertising campaign and updated logos as well as the continuation of their highly successful restaurant remodel initiative.” (17)

Olive Garden is promoting its enhanced core menu by adding healthier selections and even more affordably priced meals. (18)

Word of Mouth. Happy customers tell their friends and family about their experience, the same goes for unhappy customers. Leaving a good impression on a customer will indirectly help business. People like to try new things, especially after they have heard good reviews.

5. Customer Service Darden spends a great deal of time working with their employees to ensure that

consumers are getting the best service possible. Thorough training from their Learning Center of Excellence is given to both experienced and inexperienced new employees. Darden wants to make sure their employees know the menu, know the ingredients, and are able to adequately answer all of their guest’s questions and deliver an unforgettable dining experience.

Darden makes sure they provide their restaurant teams with the knowledge and leadership skills to keep their restaurants running smoothly and in the most effective way.

Consumers expect quality service in any industry; they do not go back to a place where they were treated poorly. Poorly treated customers tell their friends and family and in turn can affect business. Keeping customers happy with employees who give exquisite customer service will build brand loyalty with those customers.

Excellent customer service along with an exceptional meal is what keeps customers coming back and gives Darden a competitive advantage over their

14

competitors. Darden strives to deliver an experience that consistently exceeds their guest’s expectations.

8. Internal Analysis

A. Strengths

a. Strong Brand Names and Social ImageDarden’s restaurants are widely known in the United States as well as overseas. Darden has created great reputations for its brands and they continue to do better and better. For example, Olive Garden was introduced in 1982 and is now the largest most well-known Italian Restaurant in the US. In 1968, Red Lobster was introduced and has only gotten more popular as the years have passed. At the end of May 2011, they were operating 670 Red Lobster stores in every state except for Alaska. Darden has been dedicated to adjusting its brands to the market place and ensuring that their success will be long lived. For a company to maintain customer loyalty for 44 years and hold the largest percentage of market share for the chain restaurant industry is remarkable. Their well-known brand names and the positive social image that Darden holds is strength in this industry which earns “superior guest loyalty and trust that enables them to sustain profitable market share growth.”

b. Dedicated EmployeesDarden does not just offer their employees a job; they offer an opportunity to have a rewarding career. In 2011, Darden Restaurants is the first in chain restaurant history to make Fortune 500’s- 100 Best Companies to work for. Such a prestigious recognition is a fact that their employees truly enjoy working for them. “In 2011, their Manager in training program prepared more than 1,300 individuals for restaurant management roles. A strong commitment to making Darden a special place to be has led to internal promotion rates of 50% for restaurant managers and 99% for General Managers and Managing Partners.” (15-shareholder) These statistics are incredible, and this makes Darden Restaurants a desired place to work. Because their employees are happy, their guests are happier. Satisfied employees keep a clean and pleasant dining atmosphere and deliver a more memorable experience to their guests. Great customer service is what connects their brands with their guests; Darden’s employees are the face of its company. Their satisfied, dedicated employees work with each other to make Darden a favorite place to be for both its employees and guests which directly affects its sales growth in the industry for the better. c. Strong Shareholder SupportDarden’s long-term success of creating value for shareholders is tremendous. For 14 years they have increased diluted net earnings per share, for 9 years they have increased the dividends paid to shareholders and they have had $3.4 billion of share repurchase since 1996.(24) Because they have such a great track record, it only means that shareholders will continue to invest in Darden Restaurants and make them even bigger and better than in previous years. To continue this trend, they plan on increasing existing

15

and new store sales, expanding its margins, and increasing earnings and creating strong cash flows. (24- shareholders)

d. Internal ExpertiseDarden has various expert teams that come together to make Darden an enjoyable place not only for its guests but also for its employees. The areas in which they have considerable time and effort invested are Brand Management, Restaurant Operations excellence, Supply Chain, Talent Management, and Technology and Finance. Because of their focus and energy in these important areas, Darden is able to support its strong brands more effectively and efficiently than its competitors, giving Darden a competitive advantage.

e. Economies of Scale, Lower Cost of OperationsBecause Darden is one of the largest chain restaurant companies in the business, it operates on a much larger scale than most of its competitors. Serving about 400 million meals a year between its 1,824 restaurants in the US and Canada, now that is economies of scale. “This large scale gives Darden bargaining power when making their purchases of food products and a reduced per unit cost of production.” The bargaining power that Darden holds is most definitely strength in this industry. (Denominator 360)

f. Cost Saving MeasureDarden has most recently been introducing cost saving measures to improve profitability. The measure include in-store food waste, cutting labor costs, an abundance of suppliers to make sure they are getting the best price possible, and also looking at distribution costs. In 2010, just by watching these few things, Darden saved over $18 million. Because it was so successful they are also implementing the saving measures with the use of energy, water, and cleaning supplies. If all goes according to plan, they could possible save up to $75 million a year due to these cost savings measure. That is exceptional! (Denominator 360)

B. Weaknessesa. Geographic ConcentrationDarden has focused a lot of its attention in the North American markets and they have been very successful. Besides about 30 stores outside of the US, they have made the majority of their success in the American markets. But with uncertain economic and market conditions, only having a strong presence in the US could potentially be detrimental. The Asia-Pacific and Europe foodservice markets are only getting larger and larger and Darden not having a presence in these markets could limit the company from reaching full growth potential and taking in larger revenues. Its competitors such as Brinker International Inc. have taken advantage of these international opportunities

16

and have operations in over 30 countries. If Darden wants to compete on a larger level, it is important that they broaden their markets. (Denominator 360)

b. Increasing DebtsIn the last three four years, Darden’s long-term debts have increased by $917.1 million. Along with this increase came an increase of $53.8 million increase in interest expenses. Having a large debt can hurt the company in more than one way. Such a large debt can make it difficult to respond to the ever changing business and economic condition, also having such a large debt and interest expense to pay off will tie up a good bit of cash flow from operations. With cash flows tied up for debt and interest payments that money will not be available to use for funding other areas of the business that may be needed. Lastly, companies with large debts are less likely to get additional financing which can eventually lead them to bankruptcy.

c. Increased Hourly WageFrom 2007 to 2009, the federal minimum wage increased by $2.10 per hour total. When minimum wage increases, veteran employee’s wages see a pay increase. Because of increased labor costs, restaurants had to no choice but to raise meal prices. In order to maintain previously obtained profit, price levels have to rise. This puts a strain not only on the restaurant but on its guests also. Times are tough with the economy slowly rebounding, people want a good value meal and if Darden’s prices keep rising, they will lose a big chunk of their loyal customers to these increased prices that stem from increased minimum wages. (Net Advantage)

d. Unpaid Retirement BenefitsDarden offers retirement benefits for its employees. In 2010, Darden under forecasted the planned assets that were to be used to fund these retirement accounts for its employees. They under forecasted by $45.6 million. Now Darden will have to make regular cash contributions to fund these retirement benefits which puts the company in a sticky situation and “pressurizes the liquidity position of the company.” (Denominator 360)

e. RARE Hospitality International Acquisition

Darden recently went through a RARE Hospitality International acquisition. This is where a company takes a slight dip to change some operations and in some cases merge with another company. The point of RARE is to come out of it even stronger than before and bigger and better than its competitors. When a company under goes RARE, its competitors are waiting to intervene because they know that an event such as this can come with a lot of headaches for both its employees and customers. During the time

17

period that Darden was undergoing RARE, its competitors were offering mega discounts. This did hurt Darden because it was continuing to “trade on providing quality service and value,” and regain its profits and we all know that this cannot happen with discounts. (IBISworld)

9. Financial Analysis

Although Darden is the leader in the chain restaurant industry, its competitors are fierce. For the financial analysis, we are using Brinker International Inc. to compare with Darden.

1. Profitability RatiosThese ratios show Darden’s overall efficiency and performance. Return on Assets (ROA):

ROA 2011 2010 2009IndustryBrinker Int’l Inc. 8.48 7.13 3.38Darden Restaurants 8.92 7.9 7.51

Return on assets measures the return on total investments made in the business, the higher the number is the better, and the number should be moving upward. (text 94) Darden is clearly doing well in this category; from 2010 to 2011 it grew by one, which is pretty miraculous considering current economic conditions.

Return on Equity (ROE):

ROE 2011 2010 2009IndustryBrinker Int’l Inc. 24.23 19.7 12.78Darden Restaurants 24.94 23.18 24.29

Return on equity measures the return that stockholders are earning on their investments in the business. This ratio is the most important of all the financial ratios to investors in the company. This is a number that investors use when deciding whether or not to invest in a particular company. A return between 12% and 15% range is the average, but the trend should be moving upwards. Darden has been pretty consistent the last three years, taking a little dip in 2010 but recovering at an even higher percentage than in 2009. (text 94)

2. Liquidity RatiosThis is the company’s major measure of financial health. Current Ratio:

Current Ratio 2011 2010 2009

18

IndustryBrinker Int’l Inc. .55 1.11 .9Darden Restaurants .52 .54 .51

Current ratios will show if a company is able to meet its short-term liabilities with its short-term assets. The ratio should definitely be higher than 1.0, 2.0 is ideal. Here we see that Darden may have some liquidity issues, and Brinker was doing well until it hit 2011.

Quick Ratio:

Quick Ratio 2011 2010 2009IndustryBrinker Int’l Inc. .29 .85 .33Darden Restaurants .1 .23 .08

The quick ratio does almost the same as the current ratio but it eliminates inventory and prepaid expenses that are more difficult to liquefy. The higher the ratio the more liquid it is. Both Brinker and Darden have major liquidity issues, which can potentially be detrimental if they get into a sticky situation.

3. Asset Management RatiosThese ratios measure how your company is managing its assets to produce sales. If you have too much invested in assets, your working capital may be too high, if you have too little invested you will lose sales and it can decrease profitability, cash flow, and stock price.

Total Asset Turnover:

Total Asset Turnover

2011 2010 2009

IndustryBrinker Int’l Inc. 1.66 1.48 1.75Darden Restaurants 1.4 1.39 1.46

This ratio measures how efficiently your company’s assets generate sales. The higher the ratio, the better your company is at using its assets to generate its sales. Brinker seems to be doing a little bit better of a job at using its assets to generate its sales, but Darden has remained consistent over the last three years.

Inventory Turnover:

Inventory Turnover 2011 2010 2009Industry

19

Brinker Int’l Inc. 87.67 75.76 84.75Darden Restaurants 21.88 23.45 24.31 Inventory turnover ratios are one of the most important of the asset management ratios. The number represents the number of times inventory has been sold and restocked each year. If the number is high, there is danger of having stock outs, if the number is low, there may be a time where inventory is obsolete. Here Brinker is a head of the game, this could be a good thing, but also can be a bad thing as stated above. Although Darden’s numbers are not as high, its numbers are consistent and at a comfortable level.

4. Debt Management RatiosThese ratios measure the company’s debt compared to its financing. These ratios see how much of the company’s operations are run by debt instead of other ways of financing such as personal savings, loans, and stocks.

Long-Term Debt to Equity Ratio:

LTD to ER 2011 2010 2009IndustryBrinker Int’l Inc. 1.15 .72 1.12Darden Restaurants .76 .77 1.05 Long-term debt to equity ratios shows the balance between debt and equity in the company’s long-term capital structure. (text 95) If the ratio is low, then there is more room for them to borrow more funds if they are needed. The graph shows that Darden and Brinker have a small amount of their shareholders money invested in its fixed assets.

Total Debt to Equity Ratio:

Debt to Equity 2011 2010 2009IndustryBrinker Int’l Inc. 1.2 .74 1.13Darden Restaurants .85 .89 1.15

This ratio is used to measure funds coming from creditors against funds coming from owners. If the ratio is high, creditors are faced with a great amount of risk. In 2009, Darden’s creditors were probably a little worried, but the last two years they have been able to stay under 1.0, and will be able to borrow more funds if needed in the future.

10. Strategic Issues1. Increasing brand preference and competitive pricing

20

Darden restaurants need to continue to strive in being the best preference to each of their consumers within the sit down restaurant industry. Restaurants are easily chosen not only by their menu selection, but their price ranges as well. In order to continue to be desirable to their consumers the marketing strategies have to stay competitive against other chain restaurants such as: TGI Friday’s, Logan’s, Joe’s Crab Shack and other competitors. Having reasonable prices for a three-course meal option allows it to be more affordable for families to choose their restaurants over others that may be more expensive, or not as good of food as those that are apart of Darden Restaurants.

2. How to increase presence in un-served international marketsDarden has been successful in North American markets. Entering an untapped market in other continents such as the European and Asian markets can double their success. Franchisees can deliver Darden’s company name, while adapting to the foreign cultures of the new markets and also bear some of the risk until the market is established. Once established, rapid expansion will increase brand power and create a barrier for new competition. This specific restaurant chain will be successful due to their restaurant variety and distinguished management. 3. Seafood SupplyOne of the main restaurants apart of the Darden Restaurant chain is Red Lobster and . They are known for their seafood meals, and offered at a reasonable price. However, throughout the year the fishing industry is regulated by the wild life commission in each state and has to abide by their pricing, regulations, and other laws. The laws are for regulations such as: the time of year that a certain type of fish is allowed to be caught, how many, and their minimum size. Another law states the minimum that must be paid to the government per pound of fish, which affects the pricing within the restaurants. When there is a surplus of a type of fish in their inventory, it is more likely that a special will arise through their marketing strategies in order to promote that specific catch over another type of fish in order to create the most profit, and lessen their losses. The seafood supply should be shipped from other locations in order to widen their supply chain, but within a quick receiving time in order to keep their fish as fresh as possible.

11. LIST OF REFERENCES CITED

"Chain Restaurants in the US." Joyner Library Proxy Login. IBISWorld. Web. 07 Feb. 2012. <http://clients.ibisworld.com.jproxy.lib.ecu.edu/industryus/ataglance.aspx?indid=1677>.

"Darden 2010 Annuall Report." www.Darden.com. Darden Restaurants. Web. 11 Feb. 2012. <http://files.shareholder.com/downloads/DRI/1695720160x0x493251/62EBB54F-E8F6-4EB8-BB11-392DBEF89681/Darden_2011AR.pdf>.

Datamonitor 360 (Database)

Denominator 360- SWOT Analysis for Darden Restuarants

21

Hirtzer, Michael. "Drought Worsens in Midwest; Parched Plains in Bad Shape| Reuters." Business & Financial News, Breaking US & International News | Reuters.com. 04 Aug. 2011. Web. 14 Feb. 2012. http://www.reuters.com/article/2011/08/04/us-usa-drought-idUSTRE7735XJ20110804

"Liquidity Ratios." www.morningstar.com. Morning Star. Web. 10 Feb. 2012. <http://news.morningstar.com/classroom2/course.asp?docId=145093&page=4&CN=com>.

Malkin, Michelle, 2011, A fun fact about Michelle Obama’s chummy fries police, http://michellemalkin.com/2011/09/15/a-fun-fact-about-michelle-obamas-chummy-fries-police/

Mergent Online (Database)

http://www.ncwildlife.org/Portals/0/Regs/Documents/2011-12/2011-12_WarmWaterFish.pdf

(The) New York Times, 2011, Darden Restaurants Inc., http://topics.nytimes.com/topics/news/business/companies/darden_restaurants/index.html

Pedicini, Sandra and Jason Garcia, 2011, Darden rents from itself and saves on taxes, Orlando Sentinel, http://www.orlandosentinel.com/business/os-darden-restaurants-tax-break-20110530,0,2134075.story

Reuters, 2008, Acquisitions Help Darden Restaurants’ Earnings, The New York Times,

http://www.nytimes.com/2008/03/19/business/19darden.html?adxnnl=1&ref=dardenrestaurants&adxnnlx=1328909524-7wfMnXrRw5JsDXCif953IA

SmartMoney, 2012, CEO Interview: Darden Restaurants' Clarence Otis Jr., SmartMoney,http://www.smartmoney.com/invest/stocks/ceo-interview-darden-restaurants-clarence-otis-jr-1325555282492/

Spear, Kevin, 2012, Darden now has Florida's biggest privately owned solar array, Orlando Sentinel, http://articles.orlandosentinel.com/2012-02-09/business/os-dardens-really-big-solar-20120209_1_solar-panels-solar-array-kenyon-energy

"The Recession: Impact on Fast Food Restaurants and Sales of Frozen Potato Products to Foodservice." PotatoPro: Portal for the Global Potato Processing Industry. Web. 14 Feb. 2012. <http://www.potatopro.com/Newsletters/20090223.htm>.

Thompson, Arthur A. Crafting and Executing Strategy: The Quest for Competitive Advantage : Concepts and Cases. 18th ed. New York: McGraw-Hill/Irwin, 2012. Print.

Unknown, 2012, Darden Restaurants Inc., The New York Times,

22

http://topics.nytimes.com/topics/news/business/companies/darden_restaurants/index.html

Yin, Jim C. "Restaurants." Joyner Library Proxy Login. Standard and Poor's. Web. 13 Feb. 2012. <http://www.netadvantage.standardandpoors.com.jproxy.lib.ecu.edu/NASApp/NetAdvantage/showIndustrySurvey.do?code=rst>.

23