Will low-priced Cheddar’s shine in Darden’s lineup?
Robin Lagos visits Cheddar’s Scratch Kitchen in Sanford after work about once a week for a $9 or $10 entree, such as ultimate nachos or buffalo chicken wrapper.
The Osteen woman said it’s hard to find a sit-down restaurant as inexpensive as Cheddar’s. The chain’s niche as an affordable alternative is why Orlando-based Darden Restaurants bought it recently.
Darden CEO Gene Lee said Cheddar’s gives the company potential to grow, since the chain has 165 restaurants concentrated mostly in the southern parts of the United States.
But analysts and industry experts said it could also be a big risk for Darden, which put $780 million into a chain focused on big volume and cheap menu items. The risks could come from Cheddar’s thin margins, stagnant growth in the overall restaurant industry and the fact that Cheddar’s could go head-to-head with
Olive Garden in many locations.
“Why are they buying a brand that competes with the Olive Garden?” said Howard Penney, a consumer analyst with Hedgeye Risk Management. He noted that a quick Google search shows many places that have a Cheddar’s next to, or near, Olive Garden.
Cheddar’s is one of the most price-aggressive restaurants in the industry. Its average check price is $13.50, according to Darden executives. The average restaurant brings in 6,300 guests a week. To compare, Darden says Olive Garden’s average check is $17.50 and its restaurants get about 4,800 guests a week.
Lee said Olive Garden and LongHorn Steakhouse compete with hundreds of restaurants and would compete with Cheddar’s whether they were owned by Darden or not.
“So, they’re just like any other competitor and that’s part of how we have to deal with it internally as our brands have to compete against each other effectively,” Lee said in a call with investors.
The stock market has given Darden a thumbs up for the deal. Darden shares (NYSE: DRI) are up 10.3 percent since the deal was announced March 27, with a closing date in the next couple months.
The restaurants themselves include a chiseledstone facade interior and exterior, entryway fish tank and high ceilings with paddleboard-style fans.
“We want to give a premium experience at an affordable price,” said Cynthia Payne, a managing partner at Cheddar’s Scratch Kitchen in east Orange County on Colonial Drive.
Diner Kelly Murphy of Orlando said she’s a fan of the salads and soups, and also likes to sit at the bar at the location near Orlando International Airport.
“The buildings and the structure are really impressive,” said Murphy, a project manager for an architecture firm. “Their food is very good, too, even if I can’t eat a lot of it.”
Restaurant consultant Craig Weichmann said the low costs have appealed to consumers who are squeezed for cash.
“I went a few weeks ago to one that recently opened in Texas and it was slamming full,” said Weichmann, managing partner with Meyer Metz Capital Partners in Fort Worth, not far from Cheddar’s headquarters in Irving, Texas. “Most of the menu items were between $8.99 and $11.99 and you would have paid at least $15.99 at most other restaurants.”
The menu includes some low-cost favorites such as chicken tenders ($8.99) but also has grilled salmon ($11.49), steak and ribs.
Since Lee was named CEO in 2014, Darden has increased profits by focusing on efficiency. Darden’s philosophy will mesh well with Cheddar’s, Weichmann said, and there will be chances to save more money with Darden’s purchasing power and by consolidating human resources and accounting.
But Darden paid a high price too, Weichmann said. The $780 million price tag was 10.4 times Cheddar’s most recent operating profit. Darden plans to slowly move Cheddar’s headquarters operations to Orlando. Cheddar’s headquarters has fewer than 100 employees, a Darden spokesman said. Many of those positions will be consolidated in Darden’s 1,000 employee Orlando operation.
Penney said adding Cheddar’s into the Darden portfolio could be difficult, given problems the industry has faced with growing chains.
For example, Dallasbased Brinker International has jettisoned restaurant chains Romano’s Macaroni Grill and On The Border to focus on Chili’s Grill & Bar and Maggiano’s Little Italy.
“I think they are seeing the Olive Garden slowing and they need something to get a boost,” Penney said.
The most recent financial report showed Olive Garden outperforming much of the industry with 1.9 percent growth for the last nine months compared with the same period a year before. That’s below the official inflation rate of 2.7 percent, according to the U.S. Department of Labor.
Sales are slowing at Darden’s LongHorn Steakhouse and Seasons 52.
Overall, restaurant industry sales are expected to be flat in 2017, according to research firm NPD Group.
No official revenue growth numbers are available for Cheddar’s because it was a privately held company, but Darden officials said the chain saw a 15 percent growth rate over the past 10 years. They also acknowledged in an investor call that the most recent years have not yielded the same kind of growth.
Mark Johnston, a professor at Rollins College Crummer Graduate School of Business, said Darden may have simply needed a new acquisition, since they hadn’t had one since selling off Red Lobster two years ago.
“The key is going to be execution,” Johnston said. “Can they do the same thing with Cheddar’s that they have been able to do with Olive Garden?”