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Why have investors been bailing on Darden?

In a Dec. 5, 2012, Wall Street Journal article titled "Darden Cuts Its Forecast," the authors (Annie Gasparro and Saabira Chaudhuri) stated in the lead sentence "Poised as the leader of casual-dining industry for years, the owner of Olive Garden and Red Lobster now seems to be losing its swagger."

To back this statement up, the authors site Darden's stock tumble of 9.6 percent on the previous day. They further state "The restaurant holding company stumbled coming out of the recession, when its rivals offered deep discounts to attract attention, while it refrained from 'gimmicks' to avoid hurting profit margins. In late 2010, Darden said it would shift its strategy — focusing on low prices rather than the quality of its food in advertisements. (But) two years later, Darden still hasn't found the right balance."

A closer look at these statements reveal a shareholder value problem outlined by the Wall Street Journal, and an interesting analysis of corrective action by Darden. Darden appears to link food quality with dollar value, but is that a fair link? In other words, does selling food at a lower price point imply food quality has changed or eroded? I argue that food quality should never be compromised no matter what the selling price is. In any case, Darden is spinning a typical strategy shift comment to keep naysayers at bay — but Darden does not offer a "real solution."

Can innovation salvage Darden Restaurants?

I believe there is a genuine time-tested solution for restaurant chains like Darden — and that is "Innovation." In the nonfood business world, I continue to focus food executive sights on Apple. Time and time again, Apple keeps developing new innovative technologies that they either use to develop new innovative products (iPhone), or incorporate new innovation technologies into other formats like the iPad. As a result, Apple continues to increase shareholder value year after year after year.

Now, innovation in the restaurant industry does not always need to be new product innovation. It can also be service innovation, design innovation, equipment innovation, marketing innovation, or information systems innovation. Either way, innovation always guarantees an increase in shareholder value — as well as highly motivated employees. Innovative companies always attract the top industry talent. But to achieve new innovation value, restaurant CEOs need to communicate to their executive teams that old marketing spin messages will no longer be tolerated. And from this point on we are going to implement new innovation teams and business processes to create innovation and measure our success with a new set of Key Performance Indicator metrics.

I continue to argue that it's the smaller start-up restaurant chains, food truck entrepreneurs, and individual inventors who are the true food industry innovators. An innovative local restaurant chain called Crave Real Burgers has turned the burger industry on its heels in Denver. They decided to create innovative burger builds that has, in turn, created unusually high repeat customer business. Smashburger is another local innovation success story in the burger market. Now that I think about it, maybe Smashburger found Tom Ryan left McDonald's so that he could be innovative.

In follow-up, Food Technical Consulting (www.foodbevbiz.com) has scheduled a 3-day industry workshop in Denver on "Food innovation Business Principles: How to apply food innovation to your new product development process," March 18 - 20, 2013. Please contact me at dsuderman@foodbevbiz.com or 303-471-1443. A course manual will be available for sale to international small business operators who cannot attend.

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User Comments – Give us your opinion!
  • Natalie Blacher
    41165948
    Darden's problems run much deeper. Focusing on price and discounting alone are not the solution. Food quality and service have declined across all Darden concepts (exception: Season 52). They need to start figuring out what makes their restaurant concept worth the trip.

    Darden's criticism of Obamacare was totally misplaced and a distraction. The company continues to misread the consumer and the broader consuming public.
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Latest posts by Darrel Suderman
Darrel Suderman
Darrel Suderman, Ph.D., is president of Food Technical Consulting and founder of Food Innovation Institute. He has held senior R&D/QA leadership positions at KFC, Boston Market, Church's Chicken and Quiznos and led KFC’s development team of “Popcorn Chicken”, now a $1B international product –invented by Gene Gagliardi.
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