Darden Restaurants Shedding Franken-Chain Concept

With the Red Lobster spinoff moving forward, the restaurant operator will rebrand multibrand locations.

May 12, 2014 at 7:06PM


Source: Wikimedia Commons.

In theory, the conjoined restaurant concept should have helped Darden Restaurants (NYSE:DRI) generate revenues in markets too small to support both Red Lobster and Olive Garden separately, but as we've ultimately seen, the Franken-chain idea that had both concepts joined at the hip in one location couldn't generate any growth either, and now they're all being closed down.

As part of Darden's seafood restaurant spinoff-at-any-cost plan, the restaurant operator will convert its six dual Red Lobster-Olive Garden locations into freestanding Olive Garden restaurants. Two cobranded restaurants have already been shut down and the remaining four will be closed over time, though there's no timetable to complete the conversion.

When launched, the concept seemed to have merit. Two separate restaurants in small markets would have cannibalized each other to their respective detriment. As larger markets had largely been saturated with the sister chains -- there are over 700 Red Lobster restaurants and more than 830 Olive Gardens -- trying to branch into outlying, less densely populated areas was a potential growth path. 

The hybrid restaurants were around the size of one regular Olive Garden restaurant, but divided in half. Although they'd each have their own menus and distinct decor, the combo chains would share a kitchen, bar, and bathrooms.

Success by others trying out such dual restaurants over the years has been hit-or-miss at best. Dunkin' Brands has successfully paired its doughnut shops with Baskin-Robbins ice cream stores. Of the 10,000 total restaurants Dunkin' has in the U.S., it operates more than 1,180 of them as multibrand locations.

Similarly, Yum! Brands (NYSE:YUM) believed "multibranding" was a massive growth opportunity. In one late-1990s annual filing, for example, it said that where it then had almost 350 combined restaurants to its name, it could see as many as 3,900 such locations opening. By 2003, it noted that multibrand restaurants accounted for 12% of its restaurant base and represented "the biggest sales and profit driver in the restaurant industry since the introduction of the drive-thru window." However, by 2010, it said it was reducing its emphasis on co-branding as a long-term growth strategy.

So the combination units didn't quite turn out to be the biggest innovation in dining that Yum! imagined, but at certain times and in certain instances, there can be synergies realized. But even Darden's stand-alone units can't avoid the tectonic shift occurring in dining, with customers gravitating away from casual- and family-dining restaurants and toward fast-casual chains. A multibrand location means losses are just multiplied.

Red Lobster has been the poorest-performing concept it owns, and Olive Garden isn't much better. Conjoining two ailing chains into one healthy one didn't pan out as planned, and now as the spinoff proceeds apace, Darden is shedding the chain like a crustacean molting its shell. That's not enough to mollify investors who want the restaurant operator to do more, and it's not certain the soon-to-be-rebranded Olive Garden locations will appreciably improve Darden Restaurants' turnaround effort.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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