The Company Believes There’s a Strong Leadership Pipeline in Place to Grow the Brand in the Coming Years, but at a Measured Pace.
While meeting and greeting at the ICR Conference in Orlando, Darden CEO Rick Cardenas noted he ran into Ian Baines, who served as CEO of Cheddar's Scratch Kitchen for about five-and-a-half years. Baines asked how the concept was doing, and Cardenas' answer was simply, "It's doing great."
Over the past couple of years, the chain's margin improvement has outpaced Darden. Cheddar's did that with fewer guests, but improvements in check, labor productivity, and menu efficiency, Cardenas said.
When Darden purchased Cheddar's Scratch Kitchen in 2017 for $780 million, the company claimed it would become the second-largest brand in its portfolio.
Entering 2023, Cheddar's stood at 179 stores, 15 more than it did at time of purchase. That makes Cheddar's the third-biggest concept in Darden's portfolio, following Olive Garden (890 restaurants) and LongHorn Steakhouse (553). The remaining chains are not in the triple digits—Yard House (85); Capital Grille (51); Seasons 52 (45); Bahama Breeze (42); Eddie V's (29); and The Capital Burger (three).
Although Cheddar's is well behind LongHorn in terms of footprint, Cardenas remains still confident in Cheddar's ability to move up to the second spot—even more so than when the company bought it five years ago. He described the concept as "a value and it has a bigger consumer base that can be fed."
"We still believe that," the CEO said at this year's ICR Conference. "We never said it was going to be in the next five years. We said it's going to be our second-largest brand, and we believe that will happen."
But it's not going to do it at a pace of 40–50 restaurants. Instead, Cheddar's will opt for unit growth under 10 percent.
That's because the world is littered with brands that grew too fast, Cardenas said.
" ... We don't buy something and then all of a sudden blow the doors out and open a bunch of restaurants," he said. "We need to make sure that we have a foundation built so that we do this right in the long-term."
Cheddar's opened four restaurants in Darden's Q1, and CFO Raj Vennam said those units "are performing very well." These recent locations are mostly in existing markets, but Cheddar's is looking at fresh trade areas as well.
"We thought we had more room to infill markets that they already have restaurants," the CFO told investors in December. "So that helps us leverage our scale in those markets, that helps us leverage our supply chain and our people."
Cardenas said there's a leadership pipeline in place to grow Cheddar's. Almost every general manager that Darden has promoted in the past two years has operated a Cheddar's restaurant, which is much unlike before, the CEO explained.
"They know what the brand is," Cardenas said. "They've got a leadership team that's been together for quite a while."
In terms of further acquisitions, Darden is always looking. Cardenas said the company's No. 1 advantage is scale and that "one of the ways we can get more scale is adding to our portfolio so that's something that we will consistently look for."
Darden looks for certain characteristics in its M&A activity. Firstly, it has to be a full-service restaurant, and that includes family dining, casual dining, or fine dining. It also has to be a healthy concept with strong consumer appeal, and one that is open to receiving Darden's operations and marketing expertise. On a sales basis, the restaurant has to be able to grow faster than Olive Garden, and it needs to "make a difference" in the portfolio in about five years.
Cardenas said the food category doesn't matter either. It could be one similar to what Darden already has.
"We believe that we are good at building brands and keeping brands distinctive whether they compete against each other or not," Cardenas said. "Our brands compete against each other every day. This is a variety of categories. So we'll continue to look and it just takes a willing seller to sell for the price. We're willing to pay."