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« August 2005 Table of Contents

Top Story - New leadership revives Red Lobster

Adjusting the promotional calendar and simplifying the menu are key to the chain's turnaround

The concept reported lower-than-expected total sales of $2.4 billion and a drop in earnings in fiscal 2003. Then the bottom fell out, literally.

Red Lobster vastly underestimated the number of helpings its diners would devour during a seven-week promotion featuring all-you-can-eat snow crab in the summer of 2003.

The poorly planned promotion caused first-quarter earnings at Darden Restaurants, the chain’s Orlando, Fla.-based parent, to fall $3.3 million, to $68.6 million, from fiscal 2003 to 2004.

Red Lobster’s same-restaurant sales increased slightly in the first quarter of fiscal 2004, which ended Aug. 24 (two weeks before the promotion stopped), but four consecutive quarters of declining same-restaurant sales followed.

Now Red Lobster is in the midst of a comeback. The 38-year-old brand has reworked its promotional calendar, running fewer, longer and easier-to-execute promotions to minimize guest-count fluctuations and avoid debacles like the one it endured two years ago.

Additionally, the 679-restaurant chain has revamped its menu — removing underperforming items, adding entrées in the $10 to $15 range and introducing healthier options — and installed new leadership, including Kim Lopdrup, who’s been at the helm of Red Lobster for more than a year.

“We know there’s still work to do. But Red Lobster has made tremendous progress … over the last year or so,” Darden CEO Clarence Otis said during a June 21 Bloomberg news broadcast. “Clearly they’ve turned around.”

The chain posted three straight quarters of same-restaurant sales growth to close fiscal 2005, which ended May 29. And in fiscal June, same-restaurant sales were up about 9 percent.

Call it a comeback? Not yet. But it’s evident Red Lobster has righted the ship.

In fiscal 2005, Red Lobster’s same-restaurant sales — a key performance barometer — were up 0.9 percent from 2004. In 2004, they were down 3.5 percent from 2003. The chain’s turnaround helped Darden, which reported earnings of $290.6 million on sales of $5.3 billion in 2005, beat Wall Street’s expectations.

Darden executives, who declined to be interviewed for this story, are quick to point out that Red Lobster is still on the road to recovery.

Otis told Bloomberg on June 21, a day after Darden released its fiscal 2005 results, “We expect continued progress at Red Lobster, although we know we [have] work to do there.”

Restaurant analysts tracking the world’s biggest casual-dining company agree.

“I’ve been in the camp as an outside observer for some time now, and I think they’ve righted the ship,” says Bryan Elliott, an analyst with Raymond James in Atlanta.

“All things are relative, but I say they’re cautiously optimistic,” says Robert Derrington, an analyst with Morgan Keegan in Nashville, Tenn. Red Lobster “is much more stable now,” he adds.

Looking ahead, five Red Lobster restaurants, on a net basis, are slated to open in fiscal 2006. In 2005, one location has closed.

Same-restaurant sales at Red Lobster and Olive Garden, Darden’s second-largest concept with 563 restaurants, are projected to increase 2 to 4 percent in fiscal 2006. Otis expects Red Lobster to be at the high end of that range.

“It’s realistic,” says Elliott, “if they do it by building customer traffic.”

Restaurant analysts credit Red Lobster’s turnaround to new leadership (see timeline, pp. 20-21). Last May, Lopdrup, who joined the chain in 2003, was promoted from executive VP of marketing to president.

“Lopdrup has been a tremendous improvement,” says Derrington.

Less than three months after Lopdrup’s promotion, Joe Lee, Darden’s only CEO and chairman since the company was spun off from General Mills in 1995, announced his retirement.

In 1968, Lee, then 19, helped Bill Darden open the first Red Lobster in Lakeland, Fla.

Otis took over as Darden’s CEO in December and is expected to be named chairman this month. Also, Drew Madsen, who was Olive Garden’s president, stepped in as Darden’s president and COO in December.

Salli Setta, Olive Garden’s senior VP of culinary and beverage, was named Red Lobster’s executive VP of marketing in February.

This year began on a much brighter note than last year, when Dick Rivera resigned as Red Lobster’s president and Darden’s president and COO to explore “entrepreneurial opportunities” in the foodservice industry. Rivera had been with the company for 35 years.

Rivera’s departure came less than four months after Edna Morris stepped down as Red Lobster’s president amid the ill-fated “World of Crab” promotion, featuring Endless Crab.

The previous summer, the eight-week “Summer Festival of Crab” promotion included the Bottomless Bucket of Crab, the first time in four years the chain had menued an all-you-can-eat crab dish.

An ill-timed promotion 

In addition to underestimating the number of times diners would fill up on steamed or roasted snow crab legs, wholesale prices of the crustacean were unseasonably high at the time. Reportedly, many of the chain’s locations raised menu prices from $20 to $25 midway through the promotion. But it was too little, too late.

“It was a disaster,” says Derrington of Morgan Keegan. “People ate until they damn near exploded. It hurt the entire company.”

Red Lobster “lacked discipline,” he adds. “There was too much shooting from the hip and not enough testing.”

Now the chain is running fewer, longer and easier-to-execute promotions. For example, “World of Crab” was eliminated, while “Lobster Fest” was lengthened by two weeks this spring.

“Endless Shrimp” was moved from winter to autumn, and the price was raised $1.

“We think the deep-discounting promotions … were a problem,” Lopdrup admitted during a June 23 analysts’ conference.

“First of all, we think [the promotions] were undermining what the perceived value of what the menu items should cost and also creating tremendous operational disruptions because they would result in sharp spikes in guest counts,” he said.

“It was very difficult to staff and train for that and, frankly, it hurt our guest experience.

“During the past year, we have not run any deep-discount promotions,” noted Lopdrup. “We only raised our base menu prices 0.6 percent, and we reduced the level of discounting — and we’ve lived to tell about it. That’s a pretty tricky transition.”

Elliott, the Raymond James analyst, likens the transition to rehab. Red Lobster “went to the Betty Ford Clinic because they were addicted to aggressive all-you-can-eat promotions,” he says. “So they stopped them for a year and took a sales hit. But now they’re clean and sober.”

As a result, “the heavy users are coming less frequently, but the light users are coming more frequently,” says Elliott. “It’s the heavy users who were taking advantage of the all-you-can-eat promotions.”

Steven Kron, an analyst with Goldman Sachs in New York, wrote in a June 23 report to investors that Red Lobster’s recovery is contingent upon its ability to broaden its appeal and shift its guest base to “a more persistent, higher-end customer from the lower-income households, who feasted on all you can eat and discounting in the past.”

“We do want to broaden our appeal to the middle-income group,” Lopdrup told analysts on June 23.

Emphasizing value 

In addition to its promotional calendar, Red Lobster has also tweaked its menu. In February, the chain added three new items in the $10 to $15 range — Grilled Shrimp Skewers, Jumbo Crunch Fried Shrimp and Jumbo Parrot Bay Coconut Shrimp — and improved the visibility of items with high value ratings so that they’re easier to find on the menu.

“We’ve made substantial progress building the quality of the items in the middle of the menu,” said Lopdrup. “We do find that food quality has a bigger impact on value than absolute price. So does atmosphere. So does service. Price is about No. 5 on the list of what’s important in determining how consumers rate value.”

The menu now consists of 14 dinner entrées under $15 with a top-box satisfaction score of more than 50 percent (meaning more than half of diners are “very satisfied” with the dish), up from just six a year ago.

At the same time, Red Lobster reduced the total number of dinner entrées from 75 to 66 in the past year, eliminating items with low satisfaction ratings.

The chain also expanded the health-conscious LightHouse menu it debuted last July. LightHouse options now represent 9.4 percent of the chain’s dinner entrées, up from 6.9 percent a year ago.

“We’ve also improved our advertising,” said Lopdrup. “Our latest campaign is called ‘Ignite the Craving,’ and it’s designed to do exactly that. It’s done extremely well in our advertising test and in the marketplace.”

Red Lobster hired a new advertising agency, the Richards Group in Dallas, which developed “Ignite the Craving,” last March.

The chain had dumped Euro RSCG Tatham Partners after its $60 million “Share the Love” campaign, launched in 2003, failed to catch on with diners.

The changes are paying off. “The thing we’re most excited about is guest satisfaction, which we believe is the most important factor in driving sustainable growth,” said Lopdrup. “From fiscal 2004 to 2005, guest satisfaction jumped from 64 to 68 percent. We actually achieved more in one year than the brand had achieved in the previous five years combined.

“In the fourth quarter of 2005, we achieved a 70 percent top-box score,” he added. “Just to put that in perspective, no Darden brand had ever exceeded a 70 percent top-box score for a quarter until Smokey Bones did this past quarter. That is progress we feel very good about.”

“Intensely competitive” 

Satisfying guests is no simple task, considering the myriad of choices in casual dining these days. That’s why Red Lobster is striving to distinguish itself in the market.

Landry’s Restaurants, which operates Landry’s Seafood House and Joe’s Crab Shack, among others, is growing rapidly (see Newsline item, p. 6).

But Red Lobster sees casual-dining chains that menu a mix of proteins as its biggest threat. Combined, the country’s four largest casual-dining chains — Applebee’s Neighborhood Grill & Bar, Chili’s Grill & Bar, Outback Steakhouse and Ruby Tuesday — have opened more than 700 U.S. restaurants in the past three years (see sidebar, p. 18).

Red Lobster, which is at least four years older than the other four brands, has opened only 12.

“It’s intensely competitive,” says Derrington, the Morgan Keegan analyst. “Every casual-dining chain offers seafood or shrimp in some form. Not only are there more chains overall, but they’re selling more seafood.”

“In addition, they’re advertising seafood far more often than they used to,” said Lopdrup. “Clearly, to capture our full potential as a seafood concept we need to be significantly better at seafood than non-seafood restaurants.”

“We’ve always had a good selection of seafood,” says Fulton Smith-Sykes, VP of marketing and advertising for Outback Steakhouse. “Everyone wants choices and variety. We need to make sure we satisfy all needs.”

The 893-restaurant chain added Boomerang Shrimp (battered and breaded fried shrimp, which is “a big hit”) to the menu in 2003 and plans to roll out new seafood items in the coming months, says Smith-Sykes, who declined to elaborate.

Among the seafood items currently on Outback’s menu are North Atlantic Salmon and Botany Bay Fish O’ The Day entrées and Grilled Shrimp On The Barbie and Gold Coast Coconut Shrimp appetizers.

“All of us are fighting for a share of the casual-dining dollar, whether it’s Outback, Applebee’s, Chili’s, Olive Garden or Carrabba’s [Italian Grill, which Outback owns],” says Smith-Sykes.

“There’s more and more competition all the time. But that never changes. You just have to focus on your business.”

Elliott, the Raymond James analyst, attributes seafood’s success at casual dining to the emergence of aquaculture in the past 15 years.

“You don’t have to be a certified chef to cook tilapia and farmed salmon,” he says.

“Aquaculture has made the ability to produce acceptable and replicable seafood attainable for casual dining.”

Steven Kron, the Goldman Sachs analyst, wrote in the June 23 report, “In a competitive environment in which shrimp and other seafood items have become commonplace on other casual-dining menus, we see it as increasingly difficult for Red Lobster to differentiate.”

Maybe so. But Darden executives are cautiously optimistic that Red Lobster is on the road to recovery.

Among the numerous changes Lopdrup laid out at the June 23 analysts’ conference, perhaps the most enlightening was Red Lobster’s commitment to polish its image.

“We clarified our focus on being a great seafood restaurant,” said Lopdrup, “as opposed to being a casual-dining brand that just happens to have a lot of seafood items on the menu.”