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3 Reasons the Red Lobster Spinoff Won't Save the Company

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The U.S. economy, which is largely driven by consumer spending, grew by 2.6% in the fourth quarter according to a report issued this past week by the U.S. Commerce Department. By comparison, in the fourth quarter Red Lobster, a casual-dining restaurant chain made famous for its seafood entrees and owned by Darden Restaurants (NYSE: DRI  ) , posted an 8.8% decline in same-store sales.

The troubles at Red Lobster have been apparent for some time now -- it's not as if these same-store sales declines simply popped up one night like a stray animal on the porch. In an effort to stem this decline and simultaneously focus its efforts on freshening the Olive Garden brand, Darden announced less than three weeks ago that it planned to spin off Red Lobster.

Source: Darden Restaurants.

Will Red Lobster be fileted?
The move is being made for a number of reasons on Darden's part. First, by spinning off Red Lobster the idea would be that a simpler management structure (i.e., not having to report to Darden) may result in a better chance of a focused turnaround. Second, spinoffs in nearly all sectors have helped unlock shareholder value in recent years since shareholders find it easier to decipher how a company's components make money with ease. Finally, it could help remove some of the vitriol directed at Darden's management by disgruntled shareholders.

Making matters even more difficult for shareholders who oppose the spinoff and want Darden to tackle Red Lobster's problems from within, the New York Post this week reports that Darden amended its corporate bylaws making it much tougher to unseat existing board members and giving it the ability to delay its annual meeting which had previously been scheduled for September or October. 

Ultimately, in my view, this spinoff is akin to putting a Band-Aid over a gaping wound. It's likely a moot point for investors unless the chain address three key issues.

It's not courting a younger audience
First and foremost, Red Lobster is doing an awful job of courting a younger generation of diners. As I opined last weekend, Red Lobster has been losing foot traffic to just about every other major competitor, especially those that have embraced technological advancements that the younger generation has gotten so used to.

Both Buffalo Wild Wings (NASDAQ: BWLD  ) and Brinker International's (NYSE: EAT  ) Chili's have taken on tablets as a test to see if it improves sales and table turnover. On the surface it's an ingenious idea as it lets the patron order their beverages right away and pay immediately so they're not left waiting for the server. It also makes the younger generation feel right at home since many have grown up using tech-based products. The move makes complete sense for Buffalo Wild Wings which naturally attracts a younger crowd, but it could be quite the boon for the family oriented Chili's.

No company has embraced the tablet movement more so than DineEquity's (NYSE: DIN  ) Applebee's which is set to roll out 100,000 new tablets later this year. By putting the convenience of beverage, appetizer and dessert orders in the hands of customers while still allowing servers to handle the main course orders Applebee's anticipates that it'll be able to improve customer satisfaction without impacting the consumer-server relationship that brings its core customer back to the restaurant time and again.

Red Lobster, on the other hand, doesn't have many, if any, aspects that the younger generation would find appealing. No tablets, television, electronic devices. and so on. These devices have become commonplace in restaurants ranging from Chili's to even McDonald's, but it's proving enough to discourage a younger audience and even families with children to some extent from eating at Red Lobster.

It's failing to deliver menu items people actually want
Another big problem is that Red Lobster simply isn't giving the customer what they want to eat – and if they are they're doing a terrible job of advertising that fact.

Menu innovation is one of the biggest drivers of customer traffic in the food industry. Although specials bring in cost-conscious consumers, it's the breadth of menu options which speak to even the pickiest eaters that tends to build a consumer base that keeps coming back. In October 2012 Red Lobster debuted a bevy of new non-seafood menu items across 40 of its locations designed to attract a new breed of customer or bring back its core customer who had strayed from the business. Clearly that barrage of new items hasn't worked as planned.

The biggest obstacle Red Lobster has to overcome is a move toward healthier eating. While fish is itself a fairly good source of nutrition, its bounty of pasta dishes is drawing the ire of health-conscious consumers across the U.S. Instead, Red Lobster is seeing their business eaten up by casual dining establishments like Chipotle Mexican Grill (NYSE: CMG  ) which offers customers fresh ingredients, in many cases from local farms, and a wide array of entrees to keep their caloric intake low. And even in the instances where Red Lobster has introduced healthier meals, I haven't seen or heard about these new options via advertising. Long story short, Red Lobster sorely needs to rework its menu.

Its exterior image is stale
Lastly, image is everything in the restaurant business, and Red Lobster's exterior image is also in need of an overhaul. Although the company has renovated select restaurants in the Northeast, it's going to need to go the extra mile and continue to renovate and redesign the exteriors and interiors of its restaurants to make them more inviting.

McDonald's, for example, is hardly what I'd classify as a dining restaurant, but it witnessed its sales soar after it redesigned its interior to make it more family friendly and entertaining. The point being that Red Lobster's current image isn't drawing in new customers and it certainly isn't courting that younger generation that's more than willing to spend their hard-earned cash. Until the company addresses this issue, same-store sales could very likely continue to sink.

The Red Lobster spinoff certainly looks poised to divert attention away from its miserable recent performance, but it's certainly not a long-term solution to saving the brand.

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Read/Post Comments (8) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On March 29, 2014, at 5:23 PM, Tommylee2 wrote:

    So what is Red Lobster supposed to do to court the younger generation, play loud screeching music with filthy language rap songs while diners are eating? Are they to throw a big bar and lounge in the middle of the place with big screen televisions turned up loud so the sports crowd can get drunk and yell at the teams while we try to dine? Make some menu changes, like "Buffalo Salmon" or "Burned Tilapia with Salsa" or "Clam Tacos with calamari burritos?"

    Try getting the R/L restaurants out of the ghettos they are now in. Yes, most of them are in or near some pretty rough parts of town because the CITIES have changed. I lover R/L, but in the county I used to live in there was no way i'd go to the R/L to eat. Heck, I went to the Olive Garden there and almost had my van stolen and that was 20 years ago and it has gotten a LOT worse since then. The one in Macon, Ga is on the edge of a bad area and when I go there I am very very careful to make sure I am out of there before dark.

    Darden might want to consider moving the stores to safer locations; going back to the OLD menu items that made them famous, and cutting prices a bit so people can actually afford to eat there again.

    There is no need to sell them or close them, just use some common sense and some of the profits you do make, and you DO still make profit, and you'll have new life there quickly.

  • Report this Comment On March 30, 2014, at 12:00 AM, dduvall183 wrote:

    #1,I won't wait an hour for any meal, even Lobster,

    #2 If you believe your waiters/waitresses can't handle ,more than three tables at a time (creating a log jam at the door with empty tables in the restaurant) and people leaving because they won't wait for a need to re-examine your policies.

    #3 Do not run out of food....on our last visit, they were out of fries......fries....really.......

    The real reasons this restaurant is struggling, is both obvious and many and could be fixed with some common sense.....and better management.....

  • Report this Comment On March 30, 2014, at 1:12 AM, Jim85035 wrote:

    First and foremost, Red Lobster is doing an awful job at everything, including service and food quality.

  • Report this Comment On March 30, 2014, at 6:35 AM, Interventizio wrote:

    We'll see what happens. But I think competition in the restaurant industry is already enough cut-throat as it is. Not to mention restaurants are notoriously a lousy business from an investor's standpoint.

  • Report this Comment On March 30, 2014, at 12:32 PM, dotsonmemphis wrote:

    First, Mr. Williams does not appear to have ever even eaten in a restaurant, let alone run one.

    Red Lobster is suffering from the same disease that many chains are today. They are not listening to their customer. And cool computers are not what people go to a restaurant for.

    1. They like Roadhouse Grill, Out Back, and others limit waiters to 2 to 3 tables (I have not met anyone who understands why) leaving the waiter with nothing to do but fill their time bugging the pee out of patrons by asking 100 times an hour if everything is ok, do you need a refill. In most cases the answer is no, please leave me the hell alone so my wife and I can enjoy each other's company. This results in excessively long waits at the door and pissed off customers who wonder why they had to wait when they are walked pass a dozen empty tables.

    2. They are not offering the menu that people want. The main reason any of us go out to eat is plain and simple - great food. Pasta may be profitable, but customers can only choke down so much of it. Stop pushing junk and develop some new items and the people will come.

    A fancy computer may not hurt, but it won't drive business. I cannot imagine anyone saying "let's go eat at Red Lobster - the food sucks and you have to wait an hour while they have empty seats, but they have those cool new electronic menus, so it's worth the wait."

    Remodeling won't hurt, but again, "Hey lets go eat at Red Lobster - the food sucks, and you have to wait an hour to get seated, but they painted the place the coolest colors, so it's worth the wait."

    The answers are always simple, not easy, but simple.

  • Report this Comment On March 30, 2014, at 6:27 PM, RavynousHunter wrote:

    Okay, sooooo...Mr. Williams thinks useless annoyances like "electronic menus" will attract new customers? I don't know about other folks, Mr. Williams included, but my girlfriend and I push those irritating, glowing things to the side when we dine out at a place that happens to have them. They give you a menu when you're seated, I fail to see why a secondary menu would be anything more than an annoyance to anyone that's not an extreme techophile.

    As others have said, what is suggested here is exactly what the spin-off is: a bandage that doesn't treat the real underlying problem. Bad PR, long wait times, and sub-par food destroy a restaurant's reputation more than "Oh, they don't have fresh paint or fancy tablets on our tables." They need better management, not to get fancier.

    As far as "family friendly" goes in the little quip about McD's, well...I don't see why you'd bring young kids to a sit-down place like Red Lobster in the first place. To people that do this, either get a babysitter (friend, family, or someone you hire, either way works), or don't go to a bloody sit-down restaurant unless your kids are really well-behaved. Otherwise, you're going to have nearly every patron in the entire store wanting you and your screaming, food-flinging living incarnation of irritation to be thrown out and charged double for making everyone else's time absolutely unbearable.

    Also, final comment...they need "healthier" items? Do people really still fool themselves into thinking the stuff they eat at a restaurant, be it McD's or some place run by Gordon Ramsay, are what's traditionally considered "healthy?" As in "low calorie, low fat healthy?" Pro Tip: unless they put the actual calorie counts and such (which I believe are required to be accurate) for their menu items, the stuff you're eating is chock full of calories, fat, and salt. Why? The latter two are easy ways to make things taste good, and naturally lend to the former being higher. But, honestly, I don't give a damn if the stuff they offer is "healthy," I'm not eating there for my health...well, outside the whole needing to eat to continue living thing, of course. I eat there because I like what they have and because it tastes good, and most importantly, actually bloody feeds me. However, that's a different rant for a different article of a different day.

  • Report this Comment On March 31, 2014, at 2:29 PM, suave4te wrote:

    Sean you are not in touch with the public by your article. As the other comments indicate, nothing you mentioned is stopping people from going to RL. The 3 basic reasons why people aren't going are as follows (also noted by another comment).




    The only thing that will change the decline of Darden is to get in touch with the consumers that dine there and obviously they have lost touch. To the person that advised you should not bring children to RL. Nonsense, perhaps babies but not children as they come with the parents and if your children can behave there should not be a problem. The very last time we went to RL, it took 30 minutes for a snippy woman to ask us what we wanted to drink. Maybe an hour later we got our food and it was definately not worth the money. My son complained to the managemnt about his 22.00 dinner and was comp'd as there was 2 shrimp, 1/2 lobster tail and the rest fricking spaghetti. NOT worth 1.99 let alone 22.00.. And service was horrible. When we left, there were tons of open tables and tons of people waiting. I would definately not wait for RL anymore. Perhaps in the past when it was good but not now. Sean, I dont want TVs, loud music and loud talking when we go out to eat. I don't care if they have tablets, pen and paper are fine. So directing to a 'younger crowd' is not a good reason they are failing. Most people go to sports bars or restaurants for this. The restaurants you mentioned cater to a younger crowd is also incorrect. These are family restaurants as well but do have all the loud, distracting things you mentioned...and that is why our family and many other DO NOT go there. Plus again, these restaurants are too much money for what you get and not that great either. I would rather go the IHOP or Outback where they are NOT per your description, younger audiences. Furthermore, the children of the parents that took them out to restaurants expect the same thing when they go, a quiet, good quality meal. Really, who cares if they have tablets or not. And since you dont have the most important reason why stock is declining it's no wonder your other points are weak. RL has a healthy menu alternative although fish and shell fish by themselves are very calorie friendly. The majority of people that go out want to eat what they want...not something healthy. It is what it is. And your final unfounded opinion, the way the outside hasnt changed. Again, who cares.....that is not the contributing factor. So I recommend you read the comments and rewrite your article based on facts and not your opinions.

  • Report this Comment On April 02, 2014, at 3:35 AM, JoeGuy wrote:

    the food is already overpriced; and customers must tip the server. these girls work hard and deserve it. now- they make the girls tip out the bartenders; who took a mandatory pay cut last year. add your beverage; and the meal or experience isn't worth it. the long wait for a table to be pushed out within 30 minutes, and the feeling of being ripped off, make it a regrettable affair.

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Sean Williams

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and in investment planning topics. You'll usually find him writing about Obamacare, marijuana, developing drugs, diagnostics, and medical devices, Social Security, taxes, or any number of other macroeconomic issues.

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