The “New Olive Garden” debuts across America today, and its roll-out is unlike anything this country’s has ever seen.
That’s because Wall Street is playing a starring role.
“Once we went on the board every single board member took a night and worked inside the restaurant,” said Jeff Smith, CEO of hedge fund Starboard Value in an interview with Bloomberg TV.
“I was waiting on tables, greeting guests,” he said.
This is unlike anything we’ve ever seen.
Starboard Value is the hedge fund that bought almost 10% of Darden Restaurant Group last fall in order to bring about changes at Olive Garden — it replaced every single person on the company’s board and management as well. It started that process by creating a 300 slide deck about what should happen at Olive Garden, including a more disciplined way of serving the company’s popular breadsticks.
The presentation was lampooned on late-night TV shows (like the Colbert Report), and in publications that rarely concern themselves with the comings and goings of the masters of the universe. It was clear Main Street was asking itself, ‘who are these Wall Street guys messing with our soup and salad situation?’
The correct answer is that these guys have always been poking around in one way or another, it’s just that they have never been this visible before. They have never played a starring role in changing an iconic brand right before America’s eyes.
Activist investing — when an investors buys a stake in a company to push for changes that (ideally) benefit shareholders — is nothing new. Back in the 1980s they used to call it “corporate raiding.” Whatever you call it, what Starboard is doing is an interesting new iteration — introducing America to its friendly neighbourhood hedge fund manager.
Can you imagine Bill Ackman folding tee-shirts at a JC Penney so that the display is just right?
Heck no. But perhaps if you did, though maybe his investment would not have been the unmitigated disaster that it eventually was. When Ackman’s Pershing Square took control of JC Penney and tried to make it look and feel more like an Apple Store, its core customers rebelled as they noticed their favourite lower-cost brands had disappeared.
It was a full-on routing. The stock collapsed, and Ackman was forced to retreat.
This is where Jeff Smith putting on an apron and taking orders comes in handy.
“When we come to a company usually the answers are inside the company,” said Smith. “I’m not a restaurant expert though I do enjoy eating at Olive Garden… I’m there often.”
He continued: “One of the changes that’s happened since we’ve been involved… has been to focus on our core guest. There was a movement to try and broaden the menu… and instead we’re focusing on the guests that love us.”
As for what Darden’s management team says about Starboard, it’s like they took the words right out of Carl Icahn’s mouth (Icahn, unarguably being the Grandaddy of activist investors).
“The brand struggled a bit because we may have been resting on our laurels,” said David George, president at Olive Garden, adding, “What Jeff and his team wanted was exactly what we wanted.”
Of course, none of this means that there will be no fancy Wall Street touches here. Darden’s stock is up 37% since September, when Starboard got involved. But more could be done. After the pasta is salted just right, and the inside of each Olive Garden restaurant looks more like your Italian nonna’s kitchen, Starboard may spin out the restaurants into a real estate investment trust (REIT).
“The business is all about the guest,” said Smith. “We’re also going to be looking into the real estate opportunity. Primarily because that’s something we could do that wouldn’t have anything to do with with the restaurant operation.”
So you can get your pasta with a side of good ol’ fashion American securitization.