DARDEN LOOKS BEYOND THE BONES

Bob Krummert

It used to be that the two words no Darden executive wanted to hear were “China Coast.” That was the company’s casual dining take on Chinese food that grew to 51 units before its plug was pulled in 1995. Few remember the chain now, but its memory is still vivid within Darden. No one likes to fail that big, this publicly.

China Coast absorbed a lot of money and a lot of management attention before it met its demise. So much of it, in fact, that investors saw the end of China Coast as a good thing. Darden’s stock price went up significantly on the day the company announced it was killing this concept.

Which helps explain why Darden’s stock price rose 5.3 percent last week on the day the company announced it was getting out of the barbecue business by closing 54 Smokey Bones restaurants outright and selling off the other 73. Why now? Smokey Bones’ systemwide numbers were in a tailspin.

“Despite our best efforts, overall business results at Smokey Bones continued to deteriorate this year,” is how Darden president Drew Madsen put it in a conference call to analysts and investors. “Our plan for fiscal 2007 was to see our operating losses narrow. Unfortunately, they’ve increased significantly.”

That translates to a 5.2 percent drop in same-store sales in the most recent quarter. Madsen noted that the 54 restaurants closed lost money as a group. How anxious was Darden to get rid of these restaurants? The locations closed on a Friday, foregoing the revenue from one last weekend.

Exiting Smokey Bones wasn’t the only signal of where the company is headed. With less fanfare, Darden also closed nine of its 32 Bahama Breeze locations. Sales for this concept were off slightly in the most recent quarter, down 0.4 percent. The company said still thinks it can build out Bahama Breeze to a point where it produces $1 billion in sales each year—relatively small potatoes in the Darden scheme of things.

Painful as these closing were—collectively, 5,000 employees lost their jobs—investors were pleased. Now Darden, a formidable profit machine in the Italian and seafood segments with its Olive Garden and Red Lobster brands, can start growing again. And the purpose of that growth is the develop the so-far-elusive third concept that rivals Olive Garden and Red Lobster in size—the one that China Coast, Bahama Breeze and Smokey Bones didn’t turn out to be. What about Seasons 52? That one is a winner, but doesn’t look like it can grow to the size and scale Darden needs to reach that third-concept level.

So, what might?

Darden chairman Clarence Otis was a little vague when discussing potential candidates during his presentation to analysts. Still, there were clues.

“We’re looking for something that really has national potential,” he told them. When asked why Darden didn’t just get rid of the money-losing Smokey Bones units and keep the good ones, he responded this way. “When you look at Smokey Bones and its sales levels and its business models, to really make that work, we need a business that we can advertise nationally,” he said.

Now Darden is in the market for “a proven growth concept with demonstrated consumer acceptance,” something that really has national potential.” In his appearances at RH’s Concepts of Tomorrow Conference in years past, Otis has hinted that any new concept Darden bought would involve a casual dining operation whose price points were roughly in line with those of Olive Garden and Red Lobster. If you’ve got a concept like this, and you want to see it get big in a hurry, here’s your chance. Darden’s got the money and the managerial skill to make it work, and you can bet that after flaming out with China Coast and Smokey Bones, it’s eager to resume the search for a third national concept.