Darden’s Location Strategy Includes Grabbing Sites Vacated by Independent Eateries in Pandemic
This Darden Restaurants recipe for location growth in the coming year is no longer a secret from other large, full-service dining chains: seek out and pounce on sites left empty by restaurants that shut in the pandemic.
The company's rivals, including the corporate parents of Chili’s, Outback Steakhouse and Applebee’s, have been saying of late they are joining the hunt as many shopping areas look for tenants to fill empty restaurant space. That's raising the stakes for Darden, parent to eight chain brands that include Olive Garden, LongHorn Steakhouse and Yard House.
“We’re building our pipeline, there’s competition out there,” Darden CEO Gene Lee said in a call to discuss earnings on Thursday. “My expectation would be that as interest rates rise, there will be less speculation in the real estate market and people will be less likely to allow their buildings to sit dark for a period of time.”
The Orlando, Florida-based company owns and operates more than 1,800 full-service restaurants that are often important to owners of shopping areas that need to provide customers a place to eat after they visit stores. Executives told analysts the company is looking to open about 35 new restaurants in fiscal 2023, which starts in June, on par with the current year’s openings.
While the pace of that ramp-up could accelerate in coming years, depending on the availability of real estate in the right places, it could also slow if inflation drives up costs for food and salaries and disrupts consumer confidence.
For now, the firm is relying on its financial strength and the reputation of its brands as a proven attraction for shopping centers.
“At the end of the day, most landlords want a Darden-guaranteed signature on their property,” Lee told analysts. “We get to look at most of the real estate out there in the United States. We get first look at it, and if we can make it work we will tie up a lease and we’ll try to put the right brand in there to maximize the opportunity.”
Landlords Like Chains
Restaurant development consultant Jerry Prendergast told CoStar News the good news for Darden and its competitors is that many retail property owners are only considering big chains to fill vacant slots. Major national operators are seen by skittish landlords as best equipped to raise capital and prove their creditworthiness and staying power.
“It’s the chains that are raising money these days, not the independents,” said Prendergast, principal at Prendergast & Associates in Los Angeles. “Unless it’s a really bad location, landlords are very particular about obtaining letters of credit and other proof that your business is viable for the life of the lease.”
The bad news for the chains is that having many large companies in the race for the best spaces can result in the bidding up of rents. Prendergast said that effect will be most pronounced in high-traffic areas of cities such as Los Angeles and other Southern California coastal cities with low retail vacancy rates.
Also, most spaces vacated by restaurants — 90,000, or 14% of all U.S. eateries, largely independent operations, have closed permanently since the start of the pandemic, according to the National Restaurant Association trade group — are not big enough to meet the operating requirements of most large chains.
Prendergast noted that the bulk of vacated dining spaces span between 2,500 and 4,000 square feet — far below the 8,000 to 12,000 square feet sought by dining chains looking to seat at least 200 people at a time.
“It’s all about turning tables and maintaining volume,” Prendergast said. “If the chains are going to invest $5 million to $7 million per location on buildouts, it has to make sense financially for them.”
Darden executives said its brand candidates for expansion in coming months include Cheddar’s Scratch Kitchen, a chain with a relatively low-cost menu acquired by Darden in 2017 that now has more than 170 locations. About a third of openings planned for fiscal 2023 are expected to be Cheddar’s locations.
“I can’t tell you how big Cheddar’s will be, but I can tell you they have a big addressable population,” Darden President Rick Cardenas told analysts. “There’s a lot of Cheddar’s that could be built out there.”
For its third fiscal quarter ended Feb. 27, Darden Restaurants reported revenue of $2.4 billion, up from $1.7 billion in the year-earlier period. Net income was $247 million, up from $128.7 million the year earlier.