Red Lobster Case Analysis

Red Lobster Case Analysis

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Red Lobster
Red Lobster is a very successful chain of restaurants that offer a variety of seafood items.
This casual dining restaurant was founded and managed by Bill Darden.

The headquarters of the company is in Florida,and it has branches in Japan, United Arab Emirates, Canada, and Japan. Red Lobster has become a household name and over the years, gained a good customer base. This has resulted in Red Lobster accounting for 43% of market share in the casual dining seafood chain division. The company has an approximate number of 705 branches, and they are spread in different countries of the world. Red Lobster now offers a range of seafood products that include fresh fish, shrimp, lobster and snow crabs. The company was formed in 1968, with the aim of providing a place where Americans will get some sea food. Mr. Darden also targeted employers, by creating facilities where they could relax from the vigor’s of the day.


History and Development of Red Lobster
Charley Woods by and Bill Darden came up with an idea to form a restaurant in 1968. They named the company Harbor for Sea Food Lovers. It was the first restaurant in Florida and soon they opened other branches all over the State. It was happened in of 1970s and that time their main competitor was a restaurant called Kitchen Stove. The company was successful for providing fresh and new delicacies sea food to their customers. These fresh dishes became popular, and this accelerated the growth of the company, and in 1980s, the company made its presence in Canada.
Canadian experience was not good for Red Lobster because of losses they made in Canada. Competition was so high in Canada and due to having poor strategies and lack of market information, the company was not able to do well and forced to close some of its branches in Quebec, Canada. This happened on September 1997.

In 1995, Red Lobster, Olive Garden and Bahamas Breeze were integrated as part of the Darden Restaurants Inc. Joe Lee was then in charge as the Chief Executive Officer, and later on, he handed the company to Clarence Otis. The company is passionate about sea food, and over the years, the company has initiated the culture of innovation for the purposes of introducing and developing new menus that will satisfy the needs of its customers.
The company provides a friendly and delightful environment for dining, and celebrations.

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It is devoted to produce high quality services, and sea food products. The company has an approximate number of 705 units, in different parts of United States of America, Canada, and Japan. The Headquarters of the restaurant is in Orlando, Florida. It is situated along the Darden Center Drive, 1000. It is not the policy of Red Lobster to do franchise and therefore all red Lobsters’ restaurants are company owned and operated.


Case Summary: Red Lobster
Business enterprises are an important part of socio-economic structure of our society. Any business enterprise must make reasonable profits for its survival and sustained growth. Numerous case studies on the subject exist where small enterprises turned into huge business empires (corporate) due to their successful business models; others maintained a sustained growth for long periods, a few others crumbled under their own weight and vanished and yet many others revitalized themselves after stagnation or even from the verge of collapse. We have taken up the rise and stagnation of Red Lobster, America’s oldest and largest national full-service casual dining chain of restaurants, as a case study.
Kim Lopdrup had a work experience of 25 years in chain restaurant business. When he took over as the president of Red Lobster in 2004, the chain was struggling, and in his view the chain was in bad need of an updated concept to revitalize its business.
Red Lobster was founded in 1968 when restaurant entrepreneur Bin Darden saw an opportunity to bring affordable, high quality seafood to mainstream American consumer. Until now the concept of fresh seafood was restricted to coastline areas. Taking this concept into mainland was a big success among American people living away from the coast line. In 1970, Bill Darden sold the chain of 4-5 restaurants opened so far to General Mills, but they retained him as the president. The chain grew quickly and was the first casual dining chain to achieve national scale, and hence was thefirst to advertise on network television. Red Lobster developed the first national seafood distribution system in the 1970’s – this system became an important competitive asset. It was also the first chain to use a computerized point of sale system. By 1985 it had grown to 400 locations and had introduced much of America to many “new” types of seafood such as live Maine lobster, snow crab, and jumbo shrimp. It even popularized some non-seafood items, such as key lime pie and white zinfandel wine.
In 1982, encouraged by strong earnings from Red Lobster, General Mills Restaurants, Inc. (subsidiary of General Mills) used the Red Lobster operations platform to create Olive Garden, an Italian-themed casual dining restaurant which by 1989 had 145 locations. By the end of Fiscal 2010; Darden Restaurants had 694 Red Lobsters and 723 Olive Gardens including a small number in Canada. The companyhad total revenue of $7.11 Billion in Fiscal 2010.
When Lopdrup took over as President in 2004, there were signs that Red Lobster had becomemature and stagnant. Guest experience had plateaued: the percentage of guests rating theirexperience as “excellent” (the top-box rating on a 5 point scale) was stalled at 64%, while sister chainOlive Garden was at 68%. And competition in the seafood category had intensified. The rise ofaquaculture had led to dramatic declines in the cost of some types of seafood. Despite the costdeclines, seafood was still much more expensive than other proteins – hence Red Lobster’s menu wasmore expensive than other value focused chains like Chili’s, Applebee’s, and Olive Garden.
In 2004, shortly after Lopdrup took over as President, Red Lobster’s marketing teamcommissioned a consumer survey to make sure that any changes were grounded in real consumerinsights. The research team surveyed 857 people who had visited a Red Lobster in the last year. Theywere shown a list of 11 restaurant attributes and asked, to “rate the relative importance of eachattribute when choosing a seafood restaurant” on a 7 point scale. The attribute that came out on topwas “freshness of the seafood”. Alarmingly, Red Lobster badly trailed most sit-down seafoodcompetitors on this attribute according to the surveyed customers. Two other notable attributeswhere Red Lobster was lagging the seafood competition were “quality of the seafood” and“taste/preparation of the seafood”.
This shocked Lopdrup because Red Lobster was actually buying top quality ingredients. Hence the requirement was to change perceptionsand reposition Red Lobster in the consumer’s mind from frozen to fresh. While the chain already hadlive lobster and some fresh fish on their menu, they learnt that the appearance of their restaurants and a number of other cues (including the many pictures of fried food on ourmenus) caused consumers to question the quality of the food.
In order to address this, Lopdrup launched a three phased plan.
a. Phase I – Operational excellence: Phase one involved basic operational improvements thatwould begin immediately (i.e., June 2004).
b. Phase II – Re-positioning around “freshness”: Phase two was where most of the re-positioning workwould happen, and this involved major menu changes that would develop over several years, andnot be complete until 2009.
c. Phase III – Re-modeling the restaurants: This was somethingthat Lopdrup felt was critical to changing customer perceptions. The plan was to begin testingremodels in 2008 and accelerate in subsequent years. If successful, all locations would be remodeledin the following 6 years.

Preliminary Results
By 2010, things were looking much better for Red Lobster. Internal research found that guest’s satisfaction was up 14 percentage points since 2004 to 78% “excellent.” The American CustomerSatisfaction Index had Red Lobster above the industry average, above Outback and only slightlybehind its sister brand Oliver Garden. Staff morale was up and turnover was down. Even Wall Street seemed to be buying in, withseveral analysts suggesting that Darden was on the right track.
In July 2008, Red Lobster’s marketing team had also commissioned a study by the market research firm,Copernicus, to uncover some psychographic segments: customers or potential customers who sharedsimilar preferences and behaviors. The survey revealed five segments of customers, and they named them as Experimental, Indulgent, Traditionalists, Eclectics and Frugal. The survey identified the purchase behavior of these segments of customers, and accordingly worked upon various plans to enhance the customer satisfaction.




Current Update
Red Lobster is a dining out routine for millions of Americans because it brings fresh seafood to landlocked parts of US and they also have strong supply chain. But now a days that cold chain become more prevalent because almost every restaurants now a day’s try to provide fresh sea food and people always wants to try new places with new menu with a different taste for this reason now a day’s Red Lobster is going through a bad shape and its comparative advantage has dwindled.
There is a rumor now days that the Red Lobster is shutting down after news broke just before Christmas that its parent company Darden Restaurants Inc. is planning to sell or spin off the company. Rumors are swirling that the company would close Red Lobster’s 705 restaurants, with multiple news outlets.
Rich Jeffers, a spokesman for Darden Restaurants Inc., which owns the chain, said the rumor may have started after the website LA Weekly published a story earlier this week that the company faced an "uncertain future." A torrent of tweets and other online media followed with reports that the chain was closing.
"We are not closing any restaurants," Jeffers told ABCNews.com .
The confusion may also be linked to Darden's announcement in December 2013 that it plans to sell or spin off the Red Lobster chain into a separate company.
There are 705 Red Lobster restaurants in the U.S. and Canada and it is $2.6 million chain restaurant.
Darden also announced of its second-quarter net income fell to $19.8 million, or 15 cents per share, from $33.6 million, or 26 cents per share, a year earlier. Excluding severance costs and other items, earnings were 20 cents per share. Revenue rose to $2.05 billion from $1.96 billion.
Analysts polled by FactSet predicted earnings of 20 cents per share on revenue of $2.07 billion. The company now foresees fiscal 2014 earnings per share falling 15 percent to 20 percent compared with the prior-year period. It previously predicted a 3 percent to 5 percent decline. Revenue is now expected to climb 4 percent to 5 percent versus a prior guidance for a 6 percent to 8 percent increase. Darden stock dropped $3.30, or 6.2 percent.
Darden expects that by separating Red Lobster the company anticipates that its cost-cutting efforts will bring about at least $60 million in annual savings starting in fiscal 2015. This is up from the $50 million in savings it previously predicted. Darden said it will use the increase in cash flow from lowering capital spending and operating support expenses for dividends, stock buybacks and to help strengthen its credit profile.
The planned Red Lobster spinoff still needs final approval from Darden board. It does not require a shareholder vote. The company expects any possible separation to close in early fiscal 2015.



SWOT analysis of Red Lobster
Strengths
Established History
Red Lobster strengths as a company include an established history, brand recognition, and real estate. Red Lobster owns 705 restaurants all over USA, Canada and United Arab Emirates and also powerful retail brand formed over a time span of 30 years. Red Lobster accounts for 43% of market share and is the largest casual dining seafood chain.
Strong supply chain
The world sea food catch rises by 26% from 1950 to 2000. World’s consumption was estimated about 12 lb/ capita per year and US consumption is higher than 16 lb/ capita per year.
Darden spend $600 million to buy 238 million pound of live weight sea food and that’s made them the largest buyer in US sea food industry. They have a policy for procurement that is “stay close to water”. Darden buyers make deals directly with the fisherman and seafood processor. They always visit supplier monitor them to maintain the quality and food safety. Sixteen distributors with 26 locations are responsible for shipment fresh seafood to individual restaurant, so that they able to deliver fresh sea food delivered daily, six day in a week. They use overnight express delivery from three suppliers in Maine and Massachusetts to bring the live lobster to different locations and other different food ingredients were delivered from twelve distribution centers.

Weaknesses:
No clear vision of who their customers are
Discrimination in the terms of satisfying customer needs. They value rich customers as compared to poor customers. Its competitors treat their customers equally, and they do not enact discriminative measures in serving their customers. They not only offer sea foods in their menu, they also have products that their customers may need.
Lack of Diversity
The company only concentrates on sea food, and therefore it does not diversify its services. Brinker international and Applebee’s have diversified in their operations.
Lack of enough capital
To expand its operations outside Canada, Japan and United States of America they need good amount of capital but Red Lobster is lack of capital and not able to reach its target customers. This is unlike its competitors who are well funded and capital intensive.




Opportunities:
Expand product line
Red Lobster already expands their product line by offering wood-grilled burger and also plenty of landlubber choices including steaks, chicken sandwiches, and chicken-topped pastas.
Red Lobster overhauled its menu late last year, adding to its offerings items like pork chops, parmesan-crusted chicken served over corkscrew pasta, and even roasted veggie skewers. Unfortunately it's not working. Red Lobster performed even worse than Olive Garden during the summer quarter. It apparently needs broader menu. At the very least, Red Lobster could be doing a better job of letting potential diners know that it's about more than just the signature lobster and they also can broaden and wine selection.

Expand geographic reach
Europe, Asia-Pacific has growing seafood demand. There is room for creating mergers, and strategic alliance, between the company and other related companies to reach those customers. The company can take advantage of the emerging markets of Brazil, China, Russia, India and South Africa. It should raise capital, and invest in these economies. Favorable political, economic and legal environment to enable it conduct its businesses.


Threats:
Economic State
The European and American economic recession is a threat to its operations. Economic state is causing more consumers to eat at home. People are now more careful about their spending. People are also increasingly heading to chains where it tends to cost less and take less time than a sit-down meal at a restaurant.

Existence of huge multi-national Competitors
The major competitors for Red Lobster are Applebee’s, Joe Crabs Shack and Brinker International. In relation to Joe Crabs Shack, the company is the largest and most profitable, operating over 600 branches, as compared to that of Joe Crabs Shack which stands at about 110 restaurants. On other hand, Applebee’s has more than 2000 branches, in over 20 countries of the world. In regard to this, Applebee’s has a higher market share as than Red Lobsters,another competitor is Brinker International. The company is a large multinational, serving over a million guests in a day. It operates an approximate number of 1585 restaurants all over the world. In regard to its huge capital base the business is more profitable compare to Red Lobsters .Both these institutions try to get more market share by aggressive advertisements of their services and quality. They use television channels and various promotional programs such as loyalty rewards, and social responsibility to gain market share. According to different analysis they both have wider market share than Red Lobster. However, Joe Crabs Shack is weaker than Red Lobsters in relation to the market it controls and its profitability.

Supply Chain pressure due to high cost of seafood
Rising oil price is a reason for high cost sea food. Chasing fish around the ocean costs three times as much as it did two years ago and also cost associated with processing that fish, from packaging to freezing, has getting more expensive day by day including the cost of transporting that catch to market, whether by ship, truck or airplane. Now a day’s people are really concerned about eating as healthily as possible, which means they eat more fish for healthier life style. But the main reason there will be long-term pressure on seafood prices is the simple fact that demand is growing faster than supply. Rising price fish meal is also pushing production cost to goes up and it put pressure on seafood price to rise up.
Increasing labor costs
Rising labor costs are also a big problem for them because if they are not able to earn their expected profit margin, it will be difficult for them to pay out their employees and survive in this competitive market.







Questions

Question 1: -How has Red Lobster’s positioning changed over time? Do the current ads reflect the repositioning that Lopdrup and his team envisioned when their efforts began in 2004?
Answer: Yes, I fully agree that Red Lobster’s positioning has changed overtime. Specially, significant changes have occurred since Lopdrup took over as president Red Lobster in 2004.
They are trying to get in customers by promoting the freshness of their food and culinary expertise which is very evident in their food current ads. The ads reflect more types of fresh fish for each day, a special menu which lists the dish and the menu has name of the chef on duty. The ads also reflect the appointment of grill masters who focused only on grilling, thus improving attention to detail and quality.

Question 2: -What were the most effective elements in Lopdrup’s repositioning plan (initiated in 2004)?
Answer: - Freshness was the most important element of Lopdrup’s repositioning plan, thus hiring some freshness in staff was the first step in that direction. He hired Salli Setta as EVP of marketing. Setta in turn overseas the hiring of a new culinary team.
Now to promote the key element of freshness in every aspect of business, the biggest step in that direction was de-emphasizing all the fried items and introduced wood firing grilling. Introduction of grill masters improved attention to detail and quality. “Today’s fresh fish menu” was introduced featuring five to eight fresh fish entrees which changed daily based on day’s regional catch. Thus we see everything that was being done the element of freshness was at the core of each step. Thereby make it the most important element.

Question: -3Should Lopdrup make Experiential the target segment and modify Red Lobster’s positioning accordingly? If so, how should he change its marketing mix (i.e., 4ps)?
Answer: -Yes, Lopdrup should make experiential the target segments. The two primary reasons for this are:-
• Keeping in mind the survey done by Copernicus shows clearly that experiential account a quarter of the sales of Red Lobster.
• Considering the current situation of Red Lobster with their declining profits over the past three years, is an important indication that they need to target that consumer group (i.e. experiential) which forms a good chunk of Red Lobster.
So, far that to take place Red Lobster should change its marketing mix accordingly, which means to give more importance to the points which came up from the survey done by Copernicus about experiential.
1. Promotion: - Concentrate on freshness and culinary expertise which should be reflective in their present ads. Their traditional price promotion also should be kept in the picture.
2. Pricing: - Minor price fluctuation does not have much of an effect on the experiential segment of customer.
3. Product: - Adding variety in wine i.e. offering wide selection of good quality wine coming up with newer kind of recipes in sea food is popular with the experiential section of customer.
4. Place: - Remodeling of those locations needs to be done first which have better experiential segment sales than other locations. Placing of new restaurants in quieter and in environments with less hustle-bustle.

















References

Kim, Susanna. (2013, December 27). Red Lobster Says It's Not Closing Its 705 Restaurants.abc News. Retrieved from: http://abcnews.go.com/Business/false-alarm-red-lobster-closing/story?id=21351799. Retrieved on 2014 January 20
Bell, David(2014, January 9). Red Lobster and the Brand Envy Dilemma. Harvard Business Review. Retrieved on January 22, 2014.Retrieved from : http://blogs.hbr.org/2014/01/red-lobster-and-the-brand-envy.
Chapman, Michelle. (2013). Darden looking to spin off or sell Red Lobster.The Detroit News
Retrieved on January 23, 2014 .Retrieved from :www.detroitnews.com











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