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Everything Seems to Be Getting Worse for Company Behind Red Lobster, Olive Garden

January 29, 2014
URL: http://www.entrepreneur.com/article/231123

In a sign that Darden Restaurants' troubles are far from over, the company laid off about 20 employees in its new-restaurant development group on Tuesday, reports the Orlando Sentinel.

Normally, a 20-person loss would not be notable for a company as large as Darden. However, in light of Darden’s recent struggles, the cuts reveal a company straining to reverse a downward trend.

Darden recently announced it would be spinning off Red Lobster and has canceled plans to open new Olive Gardens as it focuses on improving sales at existing locations. Darden has also cut back on the number of LongHorn Steakhouses opening, with 15 to 20 opening annually, down from a planned 30 to 35.

Last week, Starboard Value, which owns 5.5 percent of Darden’s stock, challenged Darden’s choice to spin off Red Lobster. Barington Capital, another activist investor, had already voiced disapproval with the decision to sever Red Lobster from the company.

Related: Struggling Red Lobster to Split From Parent Company

Darden originally shed Red Lobster due to investor pressure to cut the struggling company. However, investors still do not feel that the spinoff will do enough to improve Darden’s position.

"The proposed Red Lobster separation is not just a sub-optimal outcome, but one that may prove to be value destructive - potentially even worse for shareholders than the status quo," Starboard Value Managing Member Jeffrey Smith wrote in a letter to Darden's CEO and board of directors last Tuesday. 

Starboard and Barington hope to turn Darden’s business around through cost reduction and a more complete separation between mainstream casual dining restaurants such as Red Lobster, Olive Garden and LongHorn and Darden’s niche high-end growth restaurants. However, Darden’s problems go beyond company management, as the casual dining sector struggles to compete with both fast-casual and more upscale brands. Earlier this month, Chuck E. Cheese’s was bought for $1.3 billion after a sales slump by Apollo Global Management. Ruby Tuesday and Dave & Busters are likely the next targets for sale, with rumors the two chains are on the block.

Related: Is This the Year Fast-Food Pizza Disappears?