Two years ago while I was working at Olive Garden, Darden made the decision to “spin off” Red Lobster because of its declining same store sales. I made the prediction at the time Olive Garden would soon be selling off its real estate because every lot of real estate that has an Olive Garden is vastly more valuable than the restaurant itself. There is a story about Ray Croc, I’m not sure how true it is, but he was once dining with business students and he asked the students “What business am I in”. This seemed to confused the students, because it was obvious to the business students one of the co-founders of the McDonald’s chain was in the burger business. That is when he corrected the students, “I’m in the real estate business”. He was absolutely right. The land that every restaurant and business occupies is highly valuable. So we should take notice every time a company begins to sell their real estate.
(Reuters) – Darden Restaurants Inc (DRI.N) said on Friday it was looking for ways to “create value” from its real estate, as management installed after last year’s activist investor-led coup reported continued traffic declines at its flagship Olive Garden chain.
During their standoff with Darden, activist investors Barington Capital Group LP and Starboard Value LP called on the company to spin off its restaurants into a real estate investment trust, or REIT.
Darden, which owns roughly 1,500 U.S. restaurants, is working to finalize its real estate plans “within the next quarter or two,” said Chief Executive Officer Gene Lee on a conference call.
Barington analyst Gus Black said the fund is “very supportive” of Darden’s plans to spin off real estate and noted that it has multiple options for its property portfolio.
Lee was named CEO in February after serving in an interim role since October, when then-CEO Clarence Otis stepped down amid activist pressure and Starboard won its bid to replace Darden’s entire board.
Darden tested the water by listing 16 properties that could be sold on a “very tax efficient basis,” for triple net sale leaseback, Lee said. Based on strong response, the company listed another 15 properties.
Darden, which also has listed its Orlando headquarters building, has secured letters of intent or contracts on the majority of the 31 properties at attractive terms, Lee said.
Lone Star Steakhouse and Burger King are among the chains that have completed sale leaseback deals.
Lee did not discuss a REIT on the conference call.
Darden is not exploring refranchising, he said, referring to a commonly used and profit-boosting strategy where brands sell restaurants to franchisees.
Darden posted quarterly profit above analysts’ estimates on Friday, helped by cost-cutting and good results at its LongHorn Steakhouse and Yard House chains. It also said May quarter earnings would best Wall Street’s view.
Still, customer visits have been falling for more than a year at Olive Garden, which accounts for more than half of Darden’s revenue.
Darden has cut back on promotions at the Italian-themed chain. It also is working to speed up service and increase alcohol sales.
Shares in Darden were up 3.7 percent at $67.26 in afternoon trading on the New York Stock Exchange.
Ray’s company used to sell pretty good burgers….Now they sell McCrap !
BUCKHED- Which is why they have been declining for some time. They aren’t selling a product people want to buy. They definitely aren’t selling real food.
How valuable is something that is in a state of oversupply?
We have many times the global average of retail/restaurant space.
WHOM is buying, with exceptions to a few areas?
In my town, they just seem to be tax abating the businesses around in a loop. Get tax break, build, leave, old build sits empty, get new tax break on new one. Lather, rinse, repeat.
Good luck Olive Garden. It must be a bitch owning one of a million parcels with no use to be attached to them.
TE- When Red Lobster was being “spun off” it was obvious the only reason anybody would buy that shitty company was for the real estate. Especially at the time their same store sales we consistently -3% or lower every quarter. Compounding their issues were the rising seafood costs. Somebody will buy from Olive Garden because all restaurants are built in desirable locations. And as it goes “location, location, location”.
Location, Location , Location is what makes money for these restaurants.
Joints like Olive G & Red Lobster, Applebee’s and Chilli’s lost the idea of being a restaurant long ago when the “dining experience” took over. They both serve crap and it costs too much. I would rather go to some locally owned place.
Westcoaster- They still try to cramp that “dining experience” motto crap on their employees. But they wanted to create a faux experience to make up for their lack of quality and charge $20 a plate for things that are microwaved. I felt so bad for the cooks I worked with, there were some really good cooks in our kitchen who could have created an amazing menu, but they weren’t allowed to.
I remember one guy used to take the pizza crust and flatten it really thin, then fill it will cheeses spices, tomatoes and spinach, add some shrimp and scallops- he would then deep fry them with a side of sun-dried tomato sauce- It was soooooo good.
“Joints like Olive G & Red Lobster, Applebee’s and Chilli’s lost the idea of being a restaurant long ago when the “dining experience” took over. They both serve crap and it costs too much.”
You can say that again. A basic burger is $8-10, isn’t very good, and any beverage costs $2.50 or more. Chili’s recently introduced these awful “Ziosk” electronic things at each table, which are (1) trying to get you to spend more on useless games, (2) trying to get you to order alcoholic drinks when your waitress can’t bother to show up, and (3) providing electronic payment that the wait staff can’t intercept or skim from. It feels about as personal as McDonald’s and the food quality is heading in that direction. IMHO, Applebee’s at the moment is the cleanest dirty shirt, a mediocre restaurant that’s doing OK through endless locations and being not quite as poor a value as, say, Chili’s. I find Red Lobster repulsive and Olive G regrettable so haven’t been into either one in several years. This market segment is teetering on the edge. I do see the upscale fast food / counter service type restaurants increasing in number and doing a good business, and I’ll say that faced with a choice between one of those four and something like Five Guys or Chick Fil-A, I’d take the latter. Usually.
http://www.zerohedge.com/news/2014-10-10/first-financial-now-food-engineering-how-starboard-capital-will-change-olive-garden-
Everything that’s happening at Darden is in the 295 page report.
I don’t know if it’s still true, but I read a histories on Mickey Ds years ago:
McDonald’s–the corporation–makes the vast bulk of its money on real estate. They spend a lot of time scoping out ideal locations, buy the land, and rent it to the franchisees. (Not sure if they own the buildings.)
Food is negotiated in bulk and sold to the restaurants at cost+.
I have sneaking suspicion that the “Olive Garden” is nothing more than front organization for the Amurikan Bariatric Society.
TE, I can answer that. Think of how a sale leaseback works. Activist investor’s (hedge funds, TBTF banks) are just corporate raiders. A large chunk of the value of darden is the real estate. Sell the real estate, that is, turn an asset into profits, and you get to take it home, in bonuses or dividends. Can’t do it again next year, but that’s someone else’s problem. Who buys the land out from under these sinking ships? The stupidest money in the world. Public pension funds, reaching for yield. Are we headed for a crash? Add it up.
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At some point the value of the real estate will go the way of their declining sales.
Sensetti. Exactly. It already has