Spotlight on Olive Garden
Olive Garden is an American casual dining restaurant chain specializing in Italian-American cuisine. It is a subsidiary of Darden Restaurants, Inc. (NYSE: DRI), which is headquartered in Orlando, Florida. As of May 2016, Olive Garden operated 837 locations in the U.S. and brand revenues account for $3.84 billion of the $6.93 billion total revenue of parent company Darden. Reported average store sales for fiscal year 2016 were $4.5 million. It is the largest full-service Italian-themed restaurant chain in the world and is followed in a distant second place by the Bloomin’ Brands owned Carrabba’s Italian Grill with only 257 locations.
Olive Garden started as a unit of General Mills, Inc. with the first store opening in 1982 in Orlando, Florida. Unlike many restaurant chains that start as independently owned stores and grow organically, Olive Garden was started with the intent of becoming a large chain. By 1989, after only seven short years, there were 145 Olive Garden restaurants, making it the fastest-growing company in the General Mills restaurant division. Olive Garden restaurants were uniformly popular, and the chain’s per-store sales soon matched former sister company Red Lobster. Olive Garden eventually became the largest chain of Italian-themed, full-service restaurants in the United States. General Mills spun off its restaurant holdings as Darden Restaurants, named for Red Lobster founder Bill Darden, as a stand-alone company in 1995.
The brand has undergone a recent transformation since a report critical of how Olive Garden was being managed was presented in 2014 by the hedge fund Starboard Value, a large Darden shareholder. The report blamed lagging sales on mismanagement of Olive Garden’s brand, menu, and labor policies. Starboard’s efforts resulted in replacement of Darden’s board of directors with a Starboard selected executive team. Since the takeover, Starboard has revamped Olive Garden’s menu and labor practices and increased Darden’s stock price by 47%. Sales at existing Olive Garden locations have increased each of the last six quarters.
For real estate investors looking at properties in the casual dining market, Olive Garden properties are subject to corporate-backed leases which offer a higher degree of financial security to a landlord since the parent company Darden Restaurants is publicly traded and the brand’s financial performance is reported. Darden also holds investment grade ratings of “BBB” (S&P) and “Baa3” (Moody’s). Physical locations are primarily stand-alone on at least 2-acre sites with buildings ranging in size from 7,700 to 8,500 square feet. Leases generally have a 10 or 15-year primary term with a series of 5-year options.