Darden CEO: Restaurants face a ‘war for talent’

Patrice & Associates is the recruiting solution for many concepts facing this War for Talent.

Gene Lee says company’s scale gives Olive Garden parent advantages in labor battle

Sep 20, 2018

Finding, hiring, training and retaining restaurant workers are growing into the restaurant industry’s biggest growth hurdles, according to the CEO of casual-dining behemoth Darden Restaurants Inc., and he says his company’s size gives it a considerable advantage.

“The biggest challenge in the industry is going to be the war for talent,” Darden CEO and president Gene Lee said in an earnings call with analysts Thursday. “Brands that can hire, train and retain front-line employees to bring their brands to life are going to win, and the dynamics inside the industry are changing dramatically.”

Lee said his Orlando, Fla.-based casual-dining company, which owns eight brands that include Olive Garden, LongHorn Steakhouse and Cheddar’s Scratch Kitchen, is focused on the workforce as a crucial component to continued growth.

The winning brands will focus on investing in team members and proper staffing — linchpins that give larger restaurant companies an advantage in a competitive market, he said.

“I haven’t seen anything that says that the large players are losing share,” Lee said. “I just think that when we think about employment, I think it’s really hard for lower-volume businesses to attract great team members, because there’s just not enough income to share at the service level and the freedom in the business model to pay what you need to pay to attract really good talent in the back of the house.

“I think our brands have a distinct advantage there, where our business model enables us to create an employment proposition that works for our team members,” he said.

Darden saw hourly wage inflation of about 5 percent in the most recent quarter, according to Darden chief financial officer Ricardo Cardenas. But Lee said that inflation helped the company attract and retain the team talent “to bring our brands to life.”

“Our retention rates are actually improving, and I think part of that is because that we’re willing to make the appropriate pay decisions to keep our people,” Lee said. “And that’s what we’ve instructed our operations teams to do.”

While Darden has struggled to incorporate Cheddar’s Scratch Kitchen, which it acquired in April 2017, into its portfolio, that brand’s growth will depend on keeping employees, Lee said, but the parent company has been working on fixing “cracks in the foundation” of the brand.

“We remain focused on rebuilding the operation’s foundation at Cheddar’s and improving execution,” he said. “Having the right leaders in the right place is fundamental to bringing our back-to-basics operating philosophy to life at Cheddar’s. We spent a significant amount of time during the quarter evaluating and evolving the leadership team.”

Darden named John Wilkerson (left) as president of Cheddar’s in July, succeeding Ian Baines in the role. Previously, Wilkerson, a 25-year Darden veteran, had served as president of Bahama Breeze.

Lee said Darden originally acquired Cheddar’s because of its position as a value leader in casual dining, and its growth potential.

“That is as true today as it was 17 months ago,” he said. “The power of this brand is reflected in its ability to maintain average weekly guest counts of approximately 6,000 per restaurant even in the face of extraordinary change.”

He added that Cheddar’s worker retention at the management and hourly level were nearing Darden’s companywide norms.

“I’ve been doing this long enough to know that we can’t grow rapidly without strong management retention and having an employee proposition that the employees stay with us,” he said. “That’s the key to driving sustainable growth.”

Across the company, the Darden brands continue to view the race toward third-party delivery skeptically, Lee said.

“We just don’t see this as something that we want to get involved in today with the current way it’s being executed,” he said.

The company continues to conduct third-party delivery tests and monitor the results, but Lee said he doesn’t see it as a good fit yet.

“For us, there are significant hurdles that we still have to work through,” he said. “We’re not sure that it enhances our brands. We’re concerned about how it’s executed. We’re concerned if it can create incremental growth at scale. We’re not happy with the economics. We still have the issue of the data.” Many third-party delivery platforms husband any information, such as emails, phone numbers, addresses and order history, gathered from customers as their own.

Lee added that “lastly, we have to get our arms around how we protect the profitability of our large and growing current off-premise business.”

Lee said the off-premise business in to-go and catering continues to grow. For Olive Garden, off-premise was 13 percent of sales in the quarter, for example. Lee has said that could grow to 20 percent over time.

Olive Garden delivers catering orders of $100 or more that are made 24 hours in advance.

“We’ll continue to look at whether $100 is the right place to be on that,” he added. “Right now, we have no interest in delivering a $10 meal, an individual meal to an individual household. That’s just not a business that we think we want to be involved in right now.”

For the first quarter ended Aug. 26, Darden’s net income rose 39.6 percent to $166.2 million, or 1.34 a share, from $119 million, or 95 cents a share, in the prior-year period. Revenues were up 6.5 percent, to $2.061 billion, from $1.936 billion in the same quarter last year.

Blended same-store sales increased 3.3 percent in the first quarter. By brand, with unit counts, same-store sales were:

• Olive Garden, 858 units (including six in Canada): up 5.3 percent
• Longhorn Steakhouse, 506 units: up 3.1 percent
• Cheddar’s Scratch Kitchen, 157 units: down 4 percent
• Yard House, 73 units: up 0.6 percent
• The Capital Grille, 58 (including one Capital Burger): up 3.9 percent
• Seasons 52, 42 units: down 1.9 percent
• Bahama Breeze, 40 units: up 1.1 percent
• Eddie V’s, 19 units: up 3 percent

As of Aug. 26, Darden had 1,753 casual-dining and fine-dining restaurants.