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Darden aims for growth abroad

Development deal in Middle East sets stage for more int'l expansion, analysts say

Darden Restaurants Inc. said Tuesday it signed an area-development agreement with one of the Middle East’s largest restaurant franchising companies, marking a major step abroad for the casual-dining giant and its first into a region that has proven ripe for U.S. brands.

Orlando, Fla.-based Darden has tapped Americana Group of Kuwait to develop and operate the Red Lobster, Olive Garden and LongHorn Steakhouse brands. The agreement calls for Americana to develop at least 60 restaurants in Bahrain, Egypt, Kuwait, Lebanon, Qatar, Saudi Arabia and the United Arab Emirates over the next five years.

This is Darden’s first area-development agreement. The company has five franchised LongHorn Steakhouse units in Puerto Rico, which it inherited from the 2007 purchase of Rare Hospitality, and 25 licensed locations in Japan, which existed before General Mills spun off Darden as a separate company in 1995.

Analysts said it is likely Darden will continue to expand in international markets through franchise partners, especially as the restaurant industry in the United States continues to mature.

“Today is an exciting milestone in Darden's history,” Clarence Otis, Darden chairman and chief executive, said in a statement. “We’ve been exploring international expansion for some time now as part of our ongoing focus on additional growth opportunities. The Middle East is an attractive, growing market that has shown a strong affinity for American brands, especially American dining brands.”

The company said it would continue to own and operate its restaurants in the United States, and to look for operating partners abroad.

“We believe the best way for us to expand the reach of our portfolio internationally is by selecting the right partners, like Americana, with outstanding operations experience, local market knowledge, and the commitment to delivering our brands’ experience with excellence,” Otis said.

Americana’s system comprises 1,200 restaurants in the Middle East, through such brands as KFC, Pizza Hut, Hardee’s, Krispy Kreme and T.G.I. Friday's. It operates eateries in 14 nations and also manufactures retail foods.

“Consumer demand for casual-dining brands in the Middle East market has grown over the past decade, and we expect that growth to continue in the future.” said Marzouk Al Kharafi, chairman and managing director of Americana. “The addition of these three highly regarded brands to our portfolio enables Americana to build on its long legacy as the leading restaurant operator in the region.”

Analysts: More international growth expected

Additional international agreements are expected from Darden, securities analyst Brad Ludington of Key Banc Capital Markets Inc. said a report to clients Tuesday. “We are encouraged by [Darden’s] first foray into international development outside of the United States and Canada, and believe that further area-development agreements could be forthcoming," he said.

“The company has previously stated that growth would be focused around the three major concepts — Red Lobster, Olive Garden and LongHorn Steakhouse — and we believe international franchise growth opportunities are significant for these brands,” Ludington added.

John A. Gordon, principal in the Pacific Management Consulting Group, said the Middle East, along with Asia, is among the most appealing expansion areas for restaurants today.

“The U.S. is very much over-restaurant-developed,” Gordon added. “DRI was facing … the specter of running out of U.S. sites that could fit its $4 million approximate average-unit-volume baseline.”

Since the mid-2000s, Gordon added, Darden needed to show growth beyond U.S. sites and margin expansion to meet the Wall Street expectations of 10 to 15 percent annual earnings growth. “DRI got a fair amount of push-back [from analysts] in September about how it could hit its 2011 numbers, with the Red Lobster at negative 1.7 percent,” Gordon said.

“A good amount of its EPS growth is due to stock buybacks; that is hardly organic growth,” he added. “This international move sets the right direction for more meaningful growth.”

Gordon also noted that Darden’s use of a local operating partner is a strong move.

“The Americana local-nation partner fits the profile of good expansion practices: find a multi-concept operator, with sufficient units, infrastructure, access to capital and local nation/region expertise,” he said.

Contact Ron Ruggless at [email protected].


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