Darden Restaurants: business strategy and competitive positioning

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Company Background

Business History

Growth and Financial Objectives

Legal Structure and Ownership

Company Location and Facilities

Plans for Financing the Business

Organization

Team Members

Organizational Structure

Other Key Employees

Principal Stockholders

Market Analysis

Industry Analysis

Target Market

Customer Profile

Major competitors and participants

Market Segmentation

Projected Market Growth and Market Share Objectives

Product and Service Offering

Product and Service Summary

Product and Service Uniqueness

Product and Service Descriptions

Competitive Comparisons

Research and Development

Patents and Trademarks

Marketing Plan

Creating and Maintaining Customers

Product Pricing Strategy

Product Positioning

Sales and Distribution Plan

Promotional Strategy

Business Plan

Darden Restaurants

Executive Summary

Darden company is the largest in the world public company which is an important player in restaurant business, thus is a service providing company, specializing in casual dining and is located primarily in the U.S.A. And Canada in approximately 1,427 locations. The company has two major brands the Olive Gardens and the Red Lobster. The first is a full-service special Italian restaurant, while the second is an operator focusing on sea food. These two brands both account for approximately 45% of total company revenues.

The company has enjoyed great success as its products and services have gained a strong following in its target market.

The company has several competitive advantages:

Established brands with stable highly attractive to investors financial performance

Association of the food offered with good quality and accelerating health conciousness improves potential development of the both brands.

Large distribution chain and development program through franchising.

At the same time, top management realizes company weaknesses in other then the mentioned above brands and is working at development program in new emerging markets.

Type of Business

The company has been in business since 1962 which is longer than the biggest number of company competitors. It is in the restaurant industry and is trading under DIR code on New York exchange. The primary services offered are good quality casual dining.

Business Summary

The company enjoys U.S. $5.77 billion market capitalization, has operations in over 1,500 places around the U.S.A. And Canada, and is starting to grant franchisees to well established operators to expand the company prevalence. It has 4 major brands, two of which are well established and 2 are rather new brands. Financial performance of each of them varies. The company has 150,000 employees.

Financial Objectives

The company aims to continue its' growth pattern of 7% annually increase in sales for at least two coming years and achieve up to U.S.$11 billion sales in 10 years time, by maintaining or improving its profitability margins. The company achieved approximately net cash receivables from operating activities of U.S.$717 million in the year of 2006 compared to U.S.$525 in the year of 2004.

Product and Service

The company offers restaurant services under four brand names. The industry has expanded rapidly in the past several years and growth is expected to continue at a strong pace for the foreseeable future. This offers excellent opportunities for new companies to enter this market and for existing companies to expand into new product areas and to differentiate existing products. However, because the company has been effective at carving out it's own niche, management believes that the company can remain very competitive in this market. The company name distinguishes itself from the competition by:

Offering only finest quality products meeting sophisticated health requirements.

Increasing brand awareness, prevalence and reputation.

Managing costs hikes and thus being able to maintain profitable performance while only slightly increasing menu costs.

Carefully orchestrating the marketing mix (product, price, physical distribution (place), and promotion) to meet the needs of its target market.

Funds Requested

The amount of funds needed is up to U.S.$170 mln annually to carry out annual expansion of approximately 35 restaurants both located in the main market and other markets. The company operating proceeds are sufficient to cover expansion and existing long-term debt.

Company Background

Business History

Founded in 1968 as the chain of Red Lobster restaurants, the company has achieved total number of operations approximately 1,500 in different locations and has become the leader in casual dining industry. For most of its history, the company has distributed its services via a network of restaurants and is open to grant its' franchisees to well established local operators, which happened in the case of Japan and allowed the company to open 34 restaurants in this country and thus start gaining the market share. The company is very well established in its major markets of the U.S.A. And Canada, serving approximately 300 millions meals annually resulting in approximately $5.7 billion sales in the year of 2006 with optimistic outlook for the future sales. The company headquarters are located in the U.S.A., Florida, Orlando city and the total company staff is reaching enormous number o f150,000 employees. he company is [well established in its market, becoming well established, highly profitable, seeking financing]. The major challenges facing the firm are:

Low barrier to entry which has lead to tightened competition in the industry and increasing number of competitors.

Growing oil prices and total economic downturn in the major company markets threat further company development and trigger necessity to source for new more attractive markets.

High price elasticity further make the demand for the company services vulnerable.

The company intends to respond to these challenges by offering high-quality products and services differentiated by careful orchestration of the marketing mix.

Legal Structure, Management Overview

One of the company founders, Mr. Jack Smith is still on the company Board of Directors monitoring and advising due to his rich expertise as to the further company development strategy. The board of directors comprises of 13 professionals, listed below. Out of the current board of directors, Blaine Sweatt III is among one of the biggest company shareholders with approximately 330,000 shares.

As can be inferred from the composition of the company board of directors, the skills within the top management of the corporation are very well diversified, with specialists from different relevant areas. Also, all the managers are seniors and thus possess very in depth knowledge into the industry, can bring in their expertise and advise, are both marketing, investment, hospitality business professionals thus ensuring company strategic growth and development.

Out of the total company shares, approximately 7% are held by the insiders, within this figure 5% out of the total shares are held by the owners, and thus 2% are held by middle level management and the like. Approximately 82% of the shares are held by strong institutional investors / owners, the number of the involved institutions reaches 367. This represents strong interest of risk averse investors to the company, its stable income producing abilities, growth opportunities.

Company Location and Facilities

The company's primary operations are in the U.S.A. And Canada, thus the company does not operate either in Europe, Asia or in any emerging promising European markets. The company has flexible criteria for the size of the premises for their restaurants, with location playing a more important role and the company then adjusting the premises for their needs of good quality facilities. The company either owns or leases on long-term lease agreements premises for its operations, and has a number of logistics space where it stores good quality food necessary for the operations of the company business. The company does not manufacture products which allows it to save costs on manufacturing facilities. As the main property necessary to open one unit within the company is the restaurant premises, the company will be quite flexible to win over the new markets and create management teams necessary to be there.

Plans for Financing the Business

Currently, according to historic company development plans, the company needs to acquire approximately 35 more premises around the U.S.A. And Canada to continue the company development plan. This will require up to UA$170 million dollars as some properties will be located in prime clusters in the biggest cities and will require heavy initial investment. Net income of the company annually is above U.S.$330 million which is sufficient to cover this expansion program even out of the cash. In light of growing interest rates it would not be financially wise to attract another loan to finance the expansion plan with debt. Furthermore, as the company is targeting to buy out shares as the financial management believes this is the optimal time to reduce the number of owners now and that the shares are under priced, the company should not issue more stock to finance its' growth program.

As the suggestion of this subject business plan, the company should target and try to enter some new emerging markets in the Europe and Eastern Europe which are becoming the Clondike for new business opportunities there due to their maturing economies, but very low starting base of any services/products offered and thus big development potential for good quality retailers / service producers. Such entry can offer much higher returns on capital employed compared to still attractive, but lower than in new markets returns possible to be achieved.

The company projected 5-year growth is graphed below.

Thus, the company is likely to achieve up to U.S.$8.7 bln up to 2011 and if the company maintains its profitability at 8% (after servicing long-term debt, taxes), the annual profit of U.S. $695 ml should be sufficient for outlay and expansion for other districts and locations.

Organization

Organizational Structure

Currently, the company has the following organization Structure:

The board of directors select the strategic priorities of the company development, such as brand strengthening / disassembly, regions to be entered, amount of capital to be invested into each brand and district and the like. Then, the strategic decisions are broken down into quantitative and qualitative goals to be fulfilled for the management teams of each brand, which are at more operational management level, but who still have a strong influence on the decision of the board of directors as they report on the inside of each of the brands operations.

Other Key Employees

If the company wishes to enter a new market it selects a country or a region representative who then together with local professionals selects the best format/brand of the company suitable for the local needs, and then appoints managers to these local brand operations. For this purpose the company has developed a strong HR management team who ensure leadership growth programs to be implemented at all the levels of the company, including perfection of middle management levels, and growing operating specialists into future managers knowing the business from the inside.

Market Analysis

Summary

Though the economy in the core markets of the company prevalence is slowing down and the growing oil prices motivate consumers to shift their consumption patterns, the total profits achieved by the restaurant industry in the fiscal year of 2006 and expectations of the major industry player for the year of 2007 are optimistic. Professionals expect to achieve approximately U.S.$537 billion total sales in 2007 which is approximately 5% growth compared to the 2006 revenues. Due to formed life style and high opportunity cost of time for working people, latest studies reveal that a typical American family spends as high as 48% of their total food budget. This has lead to 16 years of high real growth for the restaurant industry in the U.S.A.

Furthermore, it is believed that 12.8 million people more will be working for the restaurant industry in the coming 10 years. But as the competition within the industry is one of the strongest, only those capable of adjusting to shifting preference, shall be able to secure long-term growth. Recent studies present that the biggest trend currently is for smaller portions, bite-sized deserts of organic foods, good quality brown bread, grass-fed meat, fresh herbs, untypical mushrooms, Mediterranean and Pan Asian cousins is among the most popular, grilled products, and locally produced goods are extremely popular among the fine, family and casual dining. Up to 65% of population from 25 to 34 years old are ready to serve themselves which can create a new trend and decrease the costs of restaurants operations. Another positive for the industry trend is the decreasing number of consumers eating either in their cars or on the go.

The operators of full service restaurants are targeting to expand the options of take home menus to grow their sales, and are also targeting to increase their efficiency. Quick service restaurants are targeting to promote healthier choices menus, delivery and catering, gift cards ideas.

According to some analysts, the industry of casual dining is expected to be increasing by 5% to 7% each year in the coming from 10 to 15 years, which will positively influence the development of the competitive companies operating in it, the likes of the subject corporation.

The economic situation in the U.S.A. is likely to be reserved from expansion and the country is likely to experience the economic slow down, which together with worsening mortgages market is likely to put pressure on daily consumption of the residents of necessity goods and on consumption of such goods of more leisure perceived goods such as dining out. This restriction of the future home industry development must put pressure on the management of the company to improve competitive position of the existing operating objects by addressing current health awareness, to withdraw from the places with the least margins and highest competition except for strategically important locations, and to rather employ this capital to expand into the new and emerging attracting markets.

Based on an in depth study of opportunities for restaurant markets, the most promising are those of Asia with latent demand of U.S.$192 million and 31.9% of the globe, followed by North America & the Caribbean with U.S.$155 mln of latent demand and 25.7% of the global market, and then Europe with U.S.$152 mln and 25.2% of the market. All the other markets have much lower shares and potential in terms of their size and profitability. Among the Asian countries, the most attractive are China accounting for 64% of the total demand, Japan with 44% of the total Asian market, followed by India with 31.44% and all the other countries attributing less that the mentioned above into total attractiveness of Asia for restaurant chains development. Thus, Darden company must consider expanding to this region not only in Japan, but also choosing the menus and concepts, adapting them for the attractive and promising Chinese markets and Indian markets.

Industry Analysis

Though the company has up to 10% market share in the home market, expansion is necessary to improve the positions.

Opening of further 35 restaurants in the home market is planned in the coming year.

Though the local market has been growing by 5% in the last couple of years, the growing oil costs and operating inflation have likely eroded the returns and profits achieved by the operators, making the real profitability less attractive than achieved in years before.

To continue its rapid growth, the company is beginning to exploit the international market where growth is forecast to be at about 20%.

Target Market

Expansion in the home market plus entry into new emerging markets.

Customer Profile

The company's target consumers tend to be both male and female, singular and families, in different age ranges, with an educational level higher than high school, health conscious and seeking for better quality fine dining.

The company has 4 different brands which are targeted at similar, but still differentiated clientele in order to increase the total company audience. A typical Darden customer has these characteristics:

Average age: health conscious youth, and 22+

Median household income: $75,000 +

Male: 40%; Female: 60% (for restaurants located within business districts of large cities, ratios are diluted).

Employed as: professionals, middle management, intellectual oriented workers.

Major competitors and participants

As the industry is very competitive, the company is fully aware of the strengths and weaknesses of each of the major rivals, their market targets and market shares.

The competitive characteristics of the participants in this market are summarized below:

Company

Competitive Characteristics

Applebee's International

It is a traditional player in the industry, but has been slow to react to changing health awareness issues, is losing market share now due to worse quality and services offered.

Domino's Pizza

The Darden company has started to differentiate clientele from that of Domino's Pizza by offering more competitive products into the market, thus, but the attempts to cut down costs of this company are being monitored.

Lone Star Steakhouse

Has become popular due to prevalence of different protein diets, but generally the restaurant does not offer as nice selection of vegetables, fresh and healthier foods. Thus, considering the recent market trends, the Darden company is likely to out win this competitor in the long-term.

In terms of entry into foreign markets, it is necessary to carry out precise research of competitive situation there, the types and qualities of the products offered and thus the niche to be filled in.

Market Segmentation

The market is segmented by product attributes, such as quality, speed of service, different consumer groups targeted. All these segments are growing due to more sophisticating desires of the clients, while it is impossible to precisely estimate quantitatively each of the segments.

Projected Market Growth and Market Share Objectives

The industry is expected to grow at approximately 5% annually, while those restaurants to which Darden can be benchmarked (good quality healthy foods) are likely to grow at a faster rate, and Darden is likely to have premium above the benchmark as currently it is the strongest chain positioning itself as finest quality foods. Thus, expectations of at least 7% annual sales growth are realistic.

If the company decides to proceed with the opportunity of expanding into Asian and then European markets at the time where the entry costs are lower, the company is likely to outperform the major competitors in the home market.

Product and Service Offering

Products of the Company

The main company products and their performance in the last year are analyzed and summarized below:

The first product group (Olive Garden) is operating in 576 locations in the United States and 6 in Canada. In the fiscal year of 2006 the product attributed to 46% of the total company sales which is the result of 9% growth compared to this product sales in 2005.

The second product group (Red Lobster) has accounted for approximately 45% sales of the company and is open in more locations than the Olive Garden, namely in 651 in the U.S.A. And in 31 in Canada. This brand has shown growth of 6% in the year of 2006 compared to the results of the year 2005. The fact that this brand is prevalent in more locations and thus the costs to operate these units are higher than those for the Olive Garden brand, but their sales are almost equal, reveal that the Olive Garden profitability margins are likely to be higher and thus this brand should be developed more to grow the total sales and profits of the corporation.

The third product group ([Smokey Bones) is open in 126 restaurants in the U.S.A. while is not present in the Canada as the other market of the company. This product of the corporation underperformed either its company competitors or market competitors by approximately 3.7% in the year of 2006, though the total sales of this brand have grown by 25.3% in the year of 2006. The management is cognizant that the sales growth was also associated with the increased costs as the sales were attributable to openings ofnew restaurants rather than improvement of performance in the existing operational spots. The management believes that the failure has become the too narrow niche at which the positioning of the restaurant was targeting, namely barbeque, and thus expansion of the potential clientele must be carried out together with repositioning and changing of the product mix within this restaurant.

The fourth product group ([Bahama Breeze) has 32 restaurants across the U.S.A. which are positioned as Carribean themed dining places and serve good quality tropical dishes. Though the positioning corresponds with the growth health awareness of the country, the brand underperformed competitors in the same niche by 1.6% during the fiscal year of 2006 and the management is struggling to improve its' position in the market.

The company has come up with a new business line which will be named Seasons 52 fresh grill and wine bar, offering low calorie finest quality foods, serving smaller portions and international choice of wines. The company is yet determining the number of places where the brand is likely to operate: if the repositioning of Bahama Breeze fails the company may change the operator in those locations.

Product and Service Uniqueness

The first two brands are already well established and operating at nice margins, thus need market share improvement. The second two products are unique and need improvements in their operations costs, PR campaign as to differentiating of these products as best quality fine dining, and reasonably priced casual dining of the best quality products, also family dining and take aways of healthy choices, which shall set the products aside from those of the competitors. The company is targeting to market not the products it sells, but the product being the service, and the uniqueness and qualities of the services being associated with the brand name.

Product Name

The Olive Garden/Red Lobster brand satisfies basic consumer needs, can be visited mainly once to twice a week, for the restaurants located close to business districts, times per week visited can be higher if menus are varied and bargains are offered. The Seasons 52 concept can develop into one of such branded restaurants also.

The Smokey Bones, Bahama Breeze are visited mainly once a week, either specialized visiting or family dining.

Competitive Comparisons

The primary competitive factors for each of the company's product and service offerings is shown in competitive grids below:

Product or Service Name

Applebees

Domino's Pizza

Lone Star Steakhouse

Product Quality

Lower

Price

Lower

Higher

Lower

Target user

Income > $45,000

Income > $25,000-35,000

Income > $45,000

Promotion

Strong advertising, PR

PR, advertising

Marketing Plan

Creating and Maintaining Customers

From the analysis carried out above, the company has achieved a strong competitive position, is likely to be winning more customers in the future, has sufficient financial and management resources for future growth and expansion to the new districts.

The company must improve its customer loyalty programs for the well positioned Olive Gardens and Red Lobster brands, create clientele for the new emerging brands by more aggressive marketing, adjustment of the products offered, better prices in low days as the brands are targeted at once a week visitors.

Product Pricing Strategy

The clients for the fine quality dining are not as sensitive to the pricing as those for lower quality dining, but the company must still manage the pricing accordingly and manage it for the Bahama Breeze and Smokey Bones brands. Investing more capital into brands with lower margins can prove to be the wrong strategy in the long-term, rather than expanding the brands of healthy eating which are likely to boom in the future. When opening in new markets, pricing must be adjusted to meet the demand there.

Product Positioning

If the company finds that operating the latter two restaurants is not as profitable as the first two, but there is enough target clientele in the district for the first two brands, the company should reposition the locations and restaurants and bring these brands to other districts. For example, Smokey Bones concept could be well applied to some of the meat eating countries in the Europe, while Bahama Breeze could be well applied to Asia and Europe at appropriate pricing strategy.

Sales and Distribution Plan

The company utilizes one channel of distribution: own restaurants. The company should consider mail order, phone order and expansion of take away options for its brands.

Promotional Strategy

The company must utilize the following promotional tools:

Direct advertising (including web banner advertising)

Media advertising

Public relations and free publicity

The 2006-2011 World Outlook for Bars, Booths, and Back Bars for Bars, Bowling Centers, Cafeterias and Restaurants, www.icongrouponline.com

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