Olive Garden’s big turnaround: Better wine, fewer breadsticks

Where to find deals on Valentine’s Day
From Olive Garden via CNN
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It’s been about five years since activist investor Starboard first targeted Darden Restaurants and issued a scathing criticism of the business, particularly the food at Olive Garden.

The comments were brutal. Too many breadsticks. An abundance of items on the menu that weren’t Italian dishes — like tapas and hamburgers. Gloopy sauce. And perhaps the worst culinary sin of all — failure to salt the boiling water for the pasta.

CNN Business even did a taste test of Olive Garden’s food — and found that it agreed with many of Starboard’s points.

Starboard ultimately gained a controlling interest in the company. CEO Clarence Otis stepped down and Darden COO Gene Lee was promoted to the top spot. Starboard’s Jeff Smith was named chairman.

The management shakeup worked. Darden’s stock has surged 140% in the past five years — better than the broader market and restaurant chains McDonald’s, KFC and Taco Bell parent Yum! Brands, Chipotle and Outback owner Bloomin’ Brands.

Darden, which generates more than half its revenue from Olive Garden, is set to report its latest earnings before the opening bell Thursday. Analysts are forecasting a solid 5% jump in sales.

So what has the company done right in the past few years?

Simplifying the menu and going back to basics

Darden did not have a comment for this story but Lee noted on the company’s last earnings call in December that the company has focused on getting back to basics.

It pared back the breadsticks and the non-Italian menu items, fine-tuned existing recipes, added more expensive wine and alcoholic beverages and concentrated on service.

Analysts say those were the right priorities.

“Management is making the right decisions to drive sales, reducing discounting and upgrading entrees,” said BTIG restaurant analyst Peter Saleh in a recent report.

Saleh added that the company’s move to raise prices a bit on its popular Never Ending Pasta promotion last year to $10.99 helped boost profit margins without sacrificing revenue.

R.J. Hottovy an analyst with Morningstar, told CNN Business that Lee and Darden were smart to take much of Starboard’s advice to heart.

The company reduced the menu size at Olive Garden, which made it easier for the staff. That boosted productivity and profit margins.

“Darden simplified operations and came up with a better addressable price point to better compete with fast casual restaurants,” Hottovy said. “They got the menu mix right.”

Stephen Anderson, an analyst with Maxim Group, also thinks that more rational pricing made sense. Offering the least expensive menu items just wasn’t working. Olive Garden needed to go slightly more upscale.

“What Olive Garden has done has gotten back to its roots. It’s not the cheapest option but it provides good value that makes it competitive with other fast casual chains like Chipotle and Panera,” he said in an interview with CNN Business.

Anderson said that the company is also adding slightly more expensive menu items that will also boost profits, such as a stuffed pasta version of its Never Ending deal for $12.99.

He also said that Olive Garden has boosted its takeout and catering business over the past few years. They now account for 15% of Olive Garden’s total sales.

And Anderson pointed out that the rest of Darden’s businesses, most notably LongHorn Steakhouse, which makes up more than 20% of Darden’s total sales, also are doing well. Darden also owns Cheddar’s Scratch Kitchen, Yard House and Bahama Breeze.

As for Starboard? Smith stepped down as Darden chairman in April 2016, citing the progress that was being made under Lee. The company sold its remaining position in the third quarter of that year for a hefty profit.

Starboard now has its sights on another struggling restaurant company. It bought a position in Papa John’s earlier this year.