Restaurant Re-engineering

Perhaps this is an idea for the Food Network, a new show that is a twist on the tried-and-true concept of the restaurant rescue (e.g. Kitchen Nightmares, Restaurant Impossible, Restaurant Makeover) except they send in process improvement types. Something like this is going on now for the restaurant chain Olive Garden.

In September of this year Starboard Value LP, the activist investor battling the owner of Olive Garden, and its allies such as proxy advisers Institutional Shareholder Services Inc. and Glass Lewis & Co. moved to revamp the entire board of Darden Restaurants Inc. (DRI:US)’s and to enact a turnaround plan for the company, which owns Olive Garden and LongHorn Steakhouse. The turnaround plan is a 300-page PowerPoint deck:

http://shareholdersfordarden.com/wp-content/uploads/2014/09/Transforming-Darden.pdf

What is fascinating is how the material covers not just high-level strategy issues, but also specific criticisms (warranted or not) of process design and execution details that we, as process excellence professionals, would find heartwarming. In a recent article, Leslie Patton wrote:

Darden Restaurants Inc. (DRI) investor Starboard Value LP says it has a recipe to boost the Olive Garden operator’s earnings by as much as $326 million. Ask diners if they want wine, put salt in the pasta pots, clear tables faster and develop a smartphone application for the ubiquitous Italian-American restaurant chain.

No culinary detail was too small. Starboard, which is waging a proxy fight for control of Darden’s board, presented an almost 300-page proposal to streamline the company’s operations yesterday, on the eve of its earnings report. The plan also calls for separating Darden’s real-estate assets. It would raise the company’s stock by $19 to $38 a share, the investment advisory firm said.

Shares of Darden, which also runs the LongHorn Steakhouse chain, have dropped 12 percent this year. The stock fell 1.5 percent to $47.58 at the close today in New York. After Darden completed the Red Lobster sale in July, its tone became more conciliatory. Chief Executive Officer Clarence Otis, who had been criticized by Starboard, agreed to step down later this year.

Starboard’s suggestions for improving Olive Garden included specific instructions, such as serving bread sticks while warm by having wait staff regularly visit tables instead of the current practice of bringing too many bread sticks, allowing them to get cold and stale. The activist investor also criticized how the Italian restaurant chain “no longer salts the water it uses to boil the pasta, merely to get a longer warranty on its pots.”

Salads also have too much dressing, and straws and packaging deviate from standardized specifications, hurting profitability, Starboard said.

“We believe lapsed discipline around Darden’s renowned unlimited salad and bread sticks offering has led to both high food waste and a worse experience,” Starboard said. Improving “table turns” by cleaning and preparing tables faster, installing tabletop tablets and allowing customers to pay through smartphone apps could deliver another $20 million, it said.

In his coverage for Business Week, Justin Bachman wrote:

The gang at Starboard clearly enjoyed writing their manifesto for fixing Olive Garden, even though the firm’s stake in Darden has lost more than 12 percent of its value so far this year. The document addresses everything from use of corporate jets and limousine rides to the sizes of straws and chicken breasts. It also calls for the ouster of Darden’s entire 12-person board. All told, Starboard claims its reform program could boost earnings by as much as $326 million. Here are the highlights:

Can I get a drink, please? Darden’s alcohol sales severely lag its casual-dining competitors’, making up only 8 percent of sales while its peers soak up an average of 16.5 percent. Back in the 1990s and 2000s, Starboard notes, Darden and Olive Garden did a better job moving wine and notched about 13 percent of sales this way. “Wine is an integral part of the authentic Italian family dining experience. It appears that management has not focused or executed on the obvious alcohol opportunity.”

Enough with the bread sticks! Olive Garden uses as many as 700 million bread sticks across the chain, averaging three per diner. Since most diners do not eat all three, the rest go into the trash, incurring “massive, unnecessary waste.” What’s more, according to Starboard gastronomes, the current offering is a refined flour product “with more air and less flavor (similar to hot dog buns).” Better breadstick management could save as much as $5 million per year.

The pasta is overcooked—and needs salt. “If you Google ‘how to cook pasta,’ the first step of Pasta 101 is to salt the water.” Here’s the full rant on the topic:

Shockingly, Olive Garden no longer salts the water it uses to boil the pasta, merely to get a longer warranty on its pots. This appalling decision shows just how little regard management has for delivering a quality experience to guests. We believe this results in a mushy, unappealing product that is well below competitors’ quality despite similar cost. How can management of the world’s largest Italian restaurant chain think it is okay to serve poorly prepared pasta?”

Ouch.

The “Cadillac” of take-home containers. “Why do the to-go containers need to be dishwasher safe?” Starboard asks in a passage that compares Darden’s to-go boxes to Cadillacs. Overengineered packaging drives up costs by about $22 million each year, according to Starboard.

Give it a rest with all the Olive Garden TV commercials. Darden advertises on national television 50 weeks per year, compared with only 39 weeks for its rivals, who tend to skip periods when potential customers aren’t watching much TV. Starboard says the company has also been slow to embrace social media and digital tools—where’s the Olive Garden app? “Rather than fixing its message and media mix, it appears that Darden has chosen the brute force method of throwing money at the problem using the blunt instrument of national TV ads.”

What’s with the huge menus? Red Lobster, another restaurant in the Darden empire, has 138 menu items; at rival seafood chains such as Bonefish Grill and Joe’s Crab Shack, the number is closer to 80. Darden’s LongHorn Steakhouse chain likewise offers 98 dishes while rivals Texas Roadhouse and Outback Steakhouse have 70 or fewer. The flagship, Olive Garden, has 26 more items than competitor Romano’s Macaroni Grill. This “menu complexity” increases the need for more employees, Starboard argues, and customers don’t care about all the extra choices.

Why bother with that new Olive Garden logo? Changing all those signs will cost about $42 million, based on an estimate of $50,000 each to rebrand 837 restaurants. “Out of all the problems currently at Olive Garden, the last thing management should be focused on is Olive Garden’s logo,” Starboard says in a passage that dismisses the rebranding as a sign of “a loose spending policy.” The signage is “irrelevant at this moment” and won’t help the underlying business. (Not to mention design critics consider the new logo “inoffensive and charmless.”)

Slow-motion turnover at the tables. Olive Garden takes as long as five minutes to clean and set a table for the next guest, compared with about one minute at what Starboard considers a successful casual-dining restaurant. The slower turns also lead to 60- to 90-minute waits for a table on Friday and Saturday nights. Starboard says a faster table turn could improve earnings by $6 million each year.

You people know nothing about wine. Olive Garden isn’t pushing wine with its Italian-inspired entrees partially because the wait staff isn’t trained to understand vintages, taste, color, preferences, and how to serve wine. “Or, at the very least, taking a drink order.

Darden executives who plow through the full, snark-filled prescription may also be ready for a drink.

Darden’s management issued its own big deck which you can download here: http://investor.darden.com/files/doc_presentations/Investor-Presentation_2014-Sep-15.pdf