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Gene Lee, CEO of Darden: “It’s a War for Talent” – HERE’s A TIP !!

We wrote last week about Gene Lee’s tutorial, within Darden’s quarterly conference call, regarding successful management of casual dining restaurants, including his comments relative to the “War for Talent”.

We attended the heavily attended MUFSO (Multi-Unit Food Service) Conference in Dallas earlier this week, and found the CEO Panel (from Del Taco, Longhorn Steakhouse, Red Robin, Smoothie King and Arby’s/Buffalo Wild Wings/Sonic) most interesting.

Most of the discussion was pertinent, but, honestly, predictable. In our four decades following the restaurant industry, attending hundreds of conferences and listening to what must be thousands of conference calls, that shouldn’t be too surprising. However, Todd Burrow’s, President of the very well run Longhorn Steakhouse (within Darden Restaurants) provided an interesting viewpoint relative to the hiring of store level talent. He didn’t say whether he was referring to “crew” or “management”, but the following thoughts would no doubt apply to both categories.

Todd wants to make the first day of employment at Longhorn “the best day of their life”. Higher management meets and greets the new arrival, and provides an enthusiastic orientation in terms of how pleased Longhorn is to have them, the great opportunities that lie ahead, etc.etc. No doubt there are specific training aspects to the first day, as well as paperwork to be done, but Todd stressed the emotional commitment of the company to the new recruit, really “selling it”. There wasn’t a great deal more detail provided, but you get the message, and I have not heard it put this way before. Naturally, this will only carry the company and the new employee so far, but at least the relationship starts with some “romance”. As they say “you only get one chance to make a first impression”.

I honestly don’t remember whether Todd discussed the “last day” of employment. As an ex-operator (a long time ago), I would like to insert a few thoughts in that regard, which could be almost as important in terms of the corporate culture.

Later in the day after the presentation, I ran into a human resource consultant that concentrates on building the corporate culture that all restaurants aspire to, and I asked him why the last day is important, and what he would include. He responded that, among other things, he would do an exit interview, obviously to determine the pluses and minuses in the mind of the departing employee. There were a few other less important suggestions but what wasn’t cited, and what I would like to add, is the following:

Treat the departing employee with as much respect and encouragement for his or her future, as you can possibly muster, perhaps even a bit more than you feel is deserved. The reason is: your remaining employees are paying attention. If your attitude toward the departing associate is “he was never that important”, “we will do fine without him (or her)”, “we’ll find someone better”, etc.etc., those remaining will get the impression that they are just a “disposable” commodity in your mind, to be used temporarily in your own interest. They will obviously be less committed to their future with your company and inclined to move along at the first opportunity to someplace that will (at least potentially) appreciate them more. Secondarily, if the employee did at least a reasonable job for you, they could come back at some point, and perhaps make an even better contribution in the future. So your departing message, under most circumstances, and it takes very little time or effort to do this is: “You did a fine job, gave it your best effort, we are a better company because of you, we wish you the best, if there is anything we can do to help you in the future don’t hesitate to ask, if things don’t work out in the new place we are still here, etc.etc.”

Costs you nothing. It’s the right thing to do. Will send an important message to remaining associates, and will pay big dividends over time.

Roger Lipton Continue reading GENE LEE, CEO of DARDEN (DRI): “IT’S A WAR FOR TALENT – HERE’S A “TIP”

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Darden Restaurants, Inc. (DRI) has just proved to be the exception to the recent rule among restaurant operators. They reported an excellent quarter, with blended same store sales up 3.3%, and traffic up a bit (which hardly anybody else is accomplishing).

Having just listened to the conference call with analysts, we consider the dialogue to be a short tutorial on “best practices” within the casual dining industry. For the sake, among our readers, of operating executives, we think the blocking and tackling fundamentals that are driving the results, as described by Gene Lee, CEO, are worth paying attention to.  As Gene pointed out, perhaps echoing Nick Saban, the world class coach of The Crimson Tide football team, it’s “all about the process”.

Summarizing the numbers, DRI beat the estimates for same store sales (a blended 3.3%) and EPS, improved store level EBITDA margins slightly (which is a rarity these days) and raised SSS and EPS guidance for the year slightly. The rise in EPS guidance was mostly a function of the very low tax rate just reported. As impressive as  anything else was the traffic improvement in the quarter, accompanied by slightly better store level EBITDA, better than almost anybody else in Casual Dining.

The most pertinent operating details include:

Olive Garden’s 5.3% comp was accomplished with an emphasis on value and convenience, and a 13% improvement in off premise sales, bringing that portion of the business to 13%. (More on this “opportunity” later.) Longhorn had a 3.1% positive comp, guest counts were up 0.3%, had only one price promotion in the quarter, versus two a year ago, trying to move to more full pricing, and menu mix was positive by 1.8%. Off premise at LH was also positive but no number was given.  Cheddar’s had SSS of negative 4.4%, still rebuilding operational standards. The original company operated Cheddar’s stores were down 2.3%, reacquired stores were down 6.7%, with obviously more work to do. The new President at Cheddar’s has been previously with DRI’s Bahama Breeze, obviously well thought of. Food and beverage costs were positive by 20 bp (pretty good these days), labor costs unfavorable by 70 bp (wage inflation of 5%, expected to continue), other restaurant expenses favorable by 20 bp, EBITDA at store level impressively improved 20 bp to 18.2%. G&A expense better by 30 bp. The tax rate in the quarter was only 4%, and was the primary reason they beat analyst estimates by about $0.10. The normal tax rate these days would be about 12%. In terms of guidance, total sales for the year are expected to be up 5-5.5%, SSS up 2-2.5%, diluted EPS $5.52 to $5.65, all up slightly.

Of more interest to us, and we think to operators among you, was the qualitative discussion. We urge you to read the full transcript, which we will be happy to forward to you upon request, and the highlights were as follows:

Casual dining, and QSR are in a “war for talent”. Consumer confidence may be at a high, but not all boats are rising. Only those restaurants adequately staffed and properly trained, can deliver against the potential increased demand. The 5% reported increase in labor costs, which is expected to continue, is not a result of management “reinvesting tax savings”, but a necessity in a tighter labor environment. Parenthetically Gene Lee added that is is “hard for lower volume businesses to attract great team members”, and that is obviously a competitive advantage for DRI. Broadly speaking, DRI management considers that their chains “cannot grow rapidly without strong management retention, the key to successful and sustainable growth”.

dCheddar’s is improving steadily, indications are positive, a result of intensive attention, leadership, organizational structure, working on process, simplifying and standardizing operations, increased accountability.  They are expecting and monitoring day to day and week to week improvement, and “it will happen”. Only when operational standards are being met will unit expansion take place, the objective being 7-10% unit growth, with a backfill strategy, considered the top of the growth range that allows operational standards to be maintained. (An interesting commentary from this excellent operator, juxtaposed against the 35% unit growth at Shake Shack (SHAK), about which we have cautioned) Applied more broadly to all  DRI’s concepts, restaurant chains  “cannot grow rapidly without strong management retention, the key to driving sustainable growth.”

The improvement at Olive Garden is a function of a healthier consumer, four years of focus on the core consumer, putting value back into the menu, continuously searching for new ways to improve the value proposition, staying engaged and relevant to the customers while staying “true to who we are”, especially trying to appeal to Millennials.

Size and scale is one of DRI’s core strengths.  It helps to improve the employment proposition, which supports the consumer proposition.  This ties into attracting, hiring, and retaining key employees. DRI is continuously trying to become more efficient at non-consumer facing functions, allowing for more investment at the store level.

There was very strong reaction by Gene Lee when discussing third party delivery. While there is a strong focus at DRI on off-premise, 13% of sales at OG and growing at 13%, with an objective of getting to 20% of sales, third party delivery tests are not encouraging. They are not happy with the economics of third party delivery, they doubt it will “enhance the brand” with “how it is executed”, and aren’t confident it “can enhance growth with scale”. They want to protect the current profitability of the current off premise business. A bit of detail was provided regarding DRI’s off premise activity. They cater with an order of at least $100, ordered 24 hours in advance. They have no interest in delivering a $10 meal. They are very proud of the “packaging and process” within OG’s off premise activity.  Their goal is to be “on-time and correct”, and creation of a compelling experience in this regard. In summary, Gene Lee said “I do not expect to go with a third party, I really don’t like that business”. My take: Never say never, but those are his words as if this morning.

Lots of lessons here.

Roger Lipton

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