A few months ago we posted a blog called How To Stay Relevant in a Changing Marketplace. Focusing on Blockbuster and Netflix, it outlined industry changes, proxy fights, CEO turnovers, the eventual demise of Blockbuster (and the subsequent success of Netflix). Although in separate industries, Olive Garden’s struggles reminded me of the ones Blockbuster also went through in the past. Activist shareholders turning over board members, threatening proxy fights… sounds very familiar. Recently, Darden Restaurants (Olive Garden in particular) has started making moves in order to keep recover after business has faltered and to keep shareholders happy. I’ll admit that Finance wasn’t my favorite class in college. But the one thing we were supposed to take away from the class, if we learned nothing else, was this: The purpose of a business is not to make a profit. It isn’t to serve your customers better than competitors. The end goal of a business is to maximize shareholder wealth and preferably, to do it profitably.
With quarterly reports out, Olive Garden has been doing something right. They beat quarterly earnings estimates and are looking strong. However, in the past days, news headlines have swarmed over Olive Garden’s additional cost-cutting tactics. One of the largest headlines, straight out of the gate was, “Olive Garden’s Latest Cost-Cutting Plan: Clean Carpet Less Often.”
How Will Olive Garden Market This?
I immediately envision walking on a soggy stained carpet with green, arduous odors steaming up from it like a week-old pile of garbage. Unrealistic? Maybe. But, will patrons react well to this new money-saving plan put in place by its parent company, Darden? It remains to be seen if this announcement changes the perception of the quality of restaurant Olive Garden is or its perceived cleanliness. Customer perception is an unwieldy animal, whether or not the logic of cleaning carpets 50% as often is sound or not.
Points of consideration: we have no idea how often other restaurant chains clean their carpets. Also consider how often you clean yours at home. Barring a wine spill on white carpet or spaghetti sauce splattering from your toddler’s need to soil every surface around them- every 6 months? Once per year during spring cleaning? However, a restaurant enjoys constant foot traffic day after day from open to close, in addition to all the food that’s dropped or spilled underneath tables.
My biggest question is: how will Olive Garden spin this? At Trademark we’ve dealt with several clients in need of Reputation Management, for one reason or another. This decision to cut carpet cleaning by 50% has been trending for two whole days. Changes are, if you’ve been on the internet in the last 48 hours, you’ve seen this headline. Now, perhaps every person won’t be as put off as the next but, if Olive Garden’s earnings start to drop again, we’re always here to help! All jokes aside, an even better solution? Get rid of the carpets.
The second, and reportedly unrelated change is Darden’s decision to carve out Olive Garden’s real estate portion of their revenue streams and create a Estate Investment Trust (REIT). When this is done, the real estate can be put on the market and sold to shareholders; basically the exact same way bonds are sold. The revenue generated from this move will go back to the parent company, Darden, and to shareholders. And thus, we’ve come full circle. With the new revenue pouring in from the REIT’s, I’m sure Darden can afford to do a little Reputation Management for Olive Garden. And, if not, we may see it have the same future as Blockbuster. Only time well tell!