PMK Tutorial-4 Darden-Restaurants Case-Study PDF

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Darden Restaurants: Balancing Standardization and Differentiation Source: Kotler, P., & Armstrong, G. (2014). Principles of marketing, 15th ed. New York, NY: Pearson

Perhaps you’ve never heard of Darden Restaurants, but you’ve probably eaten one of the more than 400 million meals the company serves up every year in its more than 2,000 restaurants. Darden’s restaurants include niche brands such as The Capital Grille, Bahama Breeze, and Seasons 52. But you’re probably more familiar with Olive Garden, Red Lobster, or LongHorn Steakhouse. Together, these chains account for $8 billion a year in revenues, making Darden Restaurants the largest fullservice restaurant operation in the world. Darden isn’t just big, however. It is also a pioneer of what is now known as “casual dining,” a category that has become so popular that it accounts for 39% of all sit-down restaurant meals. Darden has become a dominant industry force through a strategy of standardization and collaboration. Tearing a page from the Walmart playbook, Darden employs leading-edge technology across multiple brands to make the notoriously unpredictable restaurant business more efficient. At the $100 million state-of-the-art Darden corporate headquarters in Orlando, FL, executives and support staff for all Darden brands work under the same roof. Test kitchens for each brand operate side by side. Darden encourages and expects employees from each chain to share information and best practices. At the operating level, each individual Darden restaurant is a just-in-time manufacturing plant, using standardized preparation and service methods. This allows each restaurant to create a wide range of products in minutes that are selected, consumed, and judged by customers who show up unannounced. An order-processing program called Meal Pacing helps restaurant personnel turn tables around faster. That has not only generated higher revenues but also higher chain-wide guestsatisfaction scores. Darden’s forecasting software is also the best in the business. Each restaurant, no matter what the brand, can pull up a forecast for any hour of any day that is within 1 –4% of actual turnout. This has enabled Darden to reduce unplanned workforce hours by 40% and trim excess food costs by 10%.

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In addition to these standardized practices, Darden chains also share a seafood-sourcing network that contracts directly with fish farms in dozens of countries. This system, put into place by founder Bill Darden, gives Darden an advantage in setting prices and ensuring supply. Darden Restaurants also benefit from corporate initiatives that protect and enhance sea-life ecosystems. This isn’t just an effort to save the world. Each of its chains would suffer without a steady flow of affordable seafood. Thus, standardized practices have played a key role in Darden’s rise to dominance. But perhaps the biggest secret to Darden’s success doesn’t lie in its ability to standardize its operations. Rather, it lies in the company’s ability to make brands with similar underlying operations distinct from one another. Darden has spent decades segmenting and targeting dining patrons. Much like P&G, Darden’s brands are so well differentiated and positioned—with its corporate name so low profile—that the vast majority of patrons have no idea that the chains have a common owner. According to CEO Clarence Otis, that’s because Darden doesn’t leave anything to chance: “You hear people in the restaurant industry say, ‘I have a feel for the business’” (Salter, 2009). But Otis is not one of those people. Instead, as his predecessors did before him, Otis guides the Darden brands by making use of marketing intelligence and analytics: “The direction of our business is based on understanding customers” (Salter, 2009). That understanding contributes to the distinct positioning of each of the company’s major chains. Olive Garden: “When You’re Here, You’re Family” With its heaping bowls of pasta and all-you-can-eat breadsticks, Olive Garden contributes approximately half of Darden’s revenues. Olive Garden was launched in the early 1980s as an affordable Italian restaurant—a safe choice but nothing particularly notable. By the 1990s, it had hundreds of locations, a stale menu, and declining sales. But it didn’t take long for Darden to turn Olive Garden into a hot concept. According to Drew Madsen, chief operating officer for the nation’s biggest Italian restaurant chain, the key customer insight gleaned from Olive Garden’s research was that people go to a restaurant for emotional as well as physical nourishment. In fact, emotional nourishment is most important; it stays with people much longer after they walk out the door. Today, Olive Garden builds its strategy around the concept of a mythical Italian family. No doubt, you’ve seen some of Olive Garden’s “When you’re here, you’re family” commercials, showing Italian family members enjoying a meal together. Olive Garden locations are designed to suggest an Italian farmhouse with a large family-style table. And the menu at Olive Garden has been cultivated through a partnership with real Italian people at Olive Garden’s Culinary Institute of Tuscany, Italy. That’s where corporate and restaurant chefs are exposed to authentic Italian recipes and cooking techniques. All this has led to an authentic Italian eating experience that is rare for a large chain. Hardcore foodies might scoff at the suggestion that Olive Garden is authentic Italian. But the chain has made staples of Chianti-braised short ribs, portabello mushrooms, and risotto. A decade ago, most of middle America had never heard of such dishes. And when compared to former Olive Garden menu items like Italian nachos, the current fare demonstrates the improved and authentic focus of today’s Olive Garden.

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Red Lobster: “The Taste of Wood-Grilled Seafood” The second-biggest brand in Darden’s portfolio is also the oldest. Founder Bill Darden opened the first Red Lobster in Lakeland, Florida, in 1968 after 30 years in the restaurant business. He saw a gap in the market between the still-young fast-food concept and upscale white-tablecloth restaurants. His new seafood restaurant filled the niche. And while Bill Darden had seen success as a restaurateur, Red Lobster was the breakthrough concept for expanding to a regional, then a national level. In fact, the company is credited with introducing middle America to the wonders of fried shrimp. But after more than 35 years of expansion and growth, Red Lobster’s sales began to flounder. In 2004, quarterly same-store sales dropped for the first time in 5 years. Darden had taken its eye off the fish market, sticking to the way it had always done things even as consumer trends shifted. At that point, Darden’s research indicated that consumers regarded Red Lobster as an out-of-date fried-fish shack. To turn things around, even at the risk of alienating its core customers, management made substantial changes to Red Lobster’s positioning, changes even more extensive than those made to turn Olive Garden around. At the center of these changes was a concept called “stealth health.” The chain developed a new menu around wood-fired grilling, which required extensive investments in equipment and training. Classic Red Lobster fans needn’t have worried too much—they can still get fried scallops and popcorn shrimp. But grilled items now make up one third of the offerings. Red Lobster’s new pitch is “The taste of wood-grilled seafood.” And each restaurant prints a new fresh-fish menu twice a day. Combined with an extensive remodeling plan, the strategic changes will cost Red Lobster more than $350 million. But as an indication that its new healthy strategy is more than just talk, the chain was dubbed the “best sit-down chain in America” by Men’s Health magazine. LongHorn Steakhouse: “The Flavor of the West” With about $1 billion in annual revenues, LongHorn Steakhouse is Darden’s newest and third-largest brand, acquired as part of a 2007 purchase. The chain is still being “Dardenized.” But Otis and LongHorn Steakhouse president Dave George see it as the concept with the most potential. They expect that sales could double not many years into the future. Steak is the second-biggest casual dining sector. LongHorn Steakhouse already has just over 350 restaurants, making it the perfect challenger to the market leader, Outback Steakhouse. Moreover, until just recently, all LongHorn Steakhouse restaurants were in the eastern half of the United States, giving it plenty of room for westward expansion. Darden has infused LongHorn Steakhouse with the same authenticity and hospitality that have served its other brands so well. Proclaiming itself as “the flavor of the West,” its advertising materials claim it welcomes “guests into a warm, relaxing atmosphere reminiscent of a Western rancher’s home, where friendly, attentive servers help them unwind and savor a great steakhouse meal” (Krummert, 2012). Darden has added a touch of class to the old LongHorn Steakhouse. It serves only fresh steaks, chicken, and fish, and the menu has been dressed up with variations on common steakhouse themes, such as steak stuffed with fontina cheese and wild mushrooms. The burgers have been stripped of unwieldy garnishes. And changes to the dining room include replacing musty old deer heads with cowboy sculptures by Frederic Remington. As a result, LongHorn Steakhouse customer traffic is sizzling, even more than at Olive Garden or Red Lobster. 3

Achieving the Perfect Balance Although the performance of Darden’s big three chains has been historically strong, like most restaurants today, it faces new challenges. The economic environment of the past few years has tightened consumer dining-out budgets. That adds fuel to the fire, because sit-down dining has been on the decline for some 18 years. Today, the average American eats 16% fewer sit-down meals. At the same time, the number of casual-dining restaurants has grown twice as fast as the U.S. population. And although the restaurant industry as a whole is showing signs of recovery, projected growth is expected to be much more moderate than the rapid growth during the 1990s. All this means that Darden’s future growth will have to come primarily through taking market share from competitors, a trend that is on the company’s side. Throughout the tough economic times since 2009, over 7,000 independent restaurants have closed and chains have added more than 4,500 new locations. That bodes well for the biggest company in the business. Indeed, Darden outperformed the rest of the industry throughout the recent Great Recession. But it remains a tough environment as consumers continue to exhibit more frugality when it comes to things like dining out. Last year, Darden’s overall revenues increased by 6.6%. However, same-store sales at Olive Garden and Red Lobster dropped a few percentage points. Darden recently announced a 5-year goal to increase revenue by as much as 50%, a growth rate that is considerably higher than that of its previous 5 years. Achieving this goal will not be easy. It will need strong performance from each of its brands, especially from its biggest contributor, Olive Garden. The gap between Darden’s and competitors’ sales is narrowing, an indication that other big chains are stepping up their games. Darden also faces rising food and energy costs, an issue that will have to be carefully balanced with price increases so as not to frighten off customers. Still, Darden Restaurants hold a competitive advantage based on scale, standardization across brands, and expertise in market segmentation and targeting. Darden is constantly tweaking its formula to achieve the best mix of independence and collaboration among its brands. Darden’s different chains may use the same technologies to pace cooking and predict dinner traffic, and they may all serve salmon from the same Norwegian fish farms. But COO Madsen knows that each brand must retain its distinctive positioning. “It’s all about balance. There’s an art and science to this” (Salter, 2009). For Darden, that means that whatever collaboration takes place across its brands, no one is messing with Olive Garden’s breadsticks or Red Lobster’s cheese biscuits.

Discussion Questions 1. Using the full spectrum of segmentation variables, describe how Darden segments and targets the sit-down dining market. 2. Has Darden differentiated and positioned its brands effectively? Explain. 3. Although Darden’s efforts to standardize across brands have contributed to its success, how might such practices backfire? 4. What recommendations would you make that will help Darden’s future growth?

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