Red Lobster Is Trading Up
Kim Lopdrup plays up Red Lobster’s seafood expertise to enhance its image.
By David Farkas, Senior Editor -- Chain Leader, 3/1/2007
 President Kim Lopdrup is broadening Red Lobster’s appeal with a new menu, new prototypes and beefed-up operations.
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Red Lobster doesn’t have outposts in Maine, or anywhere else in New England for that matter. But tonight that isn’t keeping President Kim Lopdrup from imagining a food-related connection to the Pine Tree State. “Maybe a possible culinary center,” he muses over a plate of grilled salmon—an item from the new fresh fish menu—in a Red Lobster a few miles from parent Darden Restaurants’ headquarters in Orlando, Fla. “Customers tend to perceive we’re from Maine.”
Still, perhaps aware that he’s just made a forward-looking statement, he quickly adds that any center won’t be on the agenda for at least two years. For now, Lopdrup is orchestrating phase two of a three-phase plan that includes 16 types of fresh fish, new operations standards and a prototype designed to provide a “refreshing, seaside dining experience” reminiscent of Maine. The 7,200-square-foot eatery, which opened on a mall pad in North Olmsted, Ohio, in September, downplays a nautical theme. Asks Senior Vice President of Development Jo El Quinlan: “How many nautical cues could go away and people still would say, ‘It’s a seafood restaurant?’ That’s the push.”
These efforts and a raft of others, the goal of which is to reinvigorate sales and guest counts, began when Lopdrup was appointed to the top slot in May 2004. Same-store sales had been tumbling along with guest counts and guest satisfaction scores since fiscal ’02, the result of unfocused marketing and discount-heavy promotions. Net income at Darden, which is heavily dependent on Red Lobster’s operating profits, dropped 2 percent, to $232.2 million in fiscal ’03 (ended May 31). Then-President Edna Morris resigned in October ’03.
Seafood Behemoth
A few months later, interim-President Richard Rivera hired Lopdrup, a marketing specialist with a Harvard M.B.A., who was working for Allied Domecq’s QSR division. As marketing boss, Lopdrup put the kibosh on discounts and began emphasizing the chain’s seafood expertise through careful, value-oriented promotions. “We need to compete as a seafood restaurant. That’s a fight we win easily because of the competitive advantages we have,” he says later in his corner headquarters office, still outfitted with Rivera’s furniture.
Those competitive advantages—including arguably the best seafood supply chain in the country—have already put Red Lobster so far ahead of its competitors that “winning” is nearly beside the point. No competitor approaches the 39-year-old chain’s 28.2 percent share of the $8.7 billion the top 10 seafood chains rang up in 2005, according to Technomic Inc., a Chicago foodservice research company. Joe’s Crab Shack came the closest in ’05 with a 5.2 percent share.
Lopdrup earned the presidency after sales increased in fiscal ’04. He then filled key roles in marketing, operations and human resources with executives from Olive Garden, Red Lobster’s triumphant sibling, which has posted 49 consecutive quarters of same-store-sales gains following a re-imaging. “Part of my thinking was they helped turn around Olive Garden,” Lopdrup says.
Meanwhile, Lopdrup and Executive Vice President of Operations Kelly Baltes, a former operations vice president at Olive Garden, traveled throughout much of Red Lobster’s 682-unit empire seeking input from its operators before launching phase one. Feedback convinced them to simplify operations and marketing. They trimmed the menu by half, made recipes easier to follow, and worked on seating and serving customers more quickly during busy times.
Lopdrup describes phase one’s impact on the restaurant-level rank and file as “a bit of a cultural change from the way we used to operate.” Baltes, however, during an operator panel discussion at an industry gathering last year, reportedly said aligning operators with company programs proved to be “a huge challenge.”
Strong Start
Whatever the case, the initiatives paid off handsomely. Guest-satisfaction scores climbed to record levels, while same-store sales rose for seven consecutive quarters from fiscal ’05 through fiscal ’06. Improvements in operations, labor and other cost controls—all part of phase one—led to the highest operating margin, 21.5 percent, in Red Lobster history. Oppenheimer & Co. analyst Michael Smith, who has a “buy” rating on Darden, believes Red Lobster is poised to duplicate Olive Garden’s success. “The same opportunity exists,” he declares.
Growth has been harder to come by. Sales at Red Lobsters open for more than a year climbed barely 1 percent in the second quarter (ended Nov. 30), and that gain was largely due to pricing and menu mix changes. The chain caught a break in December: Mild weather along with a price hike and a promotion helped deliver an 8 percent increase in same-store sales. Comps rose 3 percent in January while traffic dropped 1 percent. Guest counts, 7 percent below ’02 levels, remain problematic.
To be sure, casual dining in general feels Red Lobster’s pain. With revenues hampered by increased competition and consumers looking for deals, full-service operators have put the brakes on unit growth (Red Lobster will open two to four units in fiscal ’08), emphasized value and, like Darden, repurchased vast amounts of their own stock to prop up the price.
Buckingham Research analyst Mark Kalinowski, who rates Darden stock a “neutral,” nonetheless calls Lopdrup’s plan “credible.” Although Kalinowski doesn’t believe it will produce “gangbuster numbers” like Olive Garden has, even modest same-store-sales gains should allow the seafood giant to be a significant contributor to Darden’s earnings, he says.
Lopdrup, of course, is only midway through his plan, though he isn’t shy about the result. “We are positioning Red Lobster to be the best seafood restaurant on the planet,” he boasts.
It’s About Freshness
Enter the new fresh fish program. Although fresh fin fish has been on the menu for a long time, it was rarely, if ever, promoted. It makes up only 13 percent of sales. Shellfish drives the business.
But the word “fresh” is hard to resist these days. Lopdrup frequently describes his mission in terms of creating “fresh, clean, friendly and full” restaurants. The chain’s brand promise, which is printed on a laminated card management carries around, notes: “Fresh, delicious seafood prepared with culinary expertise.”
Fresh is really important when applied to seafood. Red Lobster’s research revealed current customers were not giving the restaurants much credit for it despite the company’s vaunted global connections and rapid seafood delivery system. “When we looked across the board, we are not perceived as fresh as we could be,” allows Executive Vice President of Marketing Salli Setta. Lapsed users told officials they thought Red Lobster was a dated chain that served frozen food.
Last October, the restaurants rolled out a separate fresh fish menu that’s printed twice daily and always features five to eight species. Fish orders are grilled, broiled or blackened. Managers can pick from among 16 available species, depending on what sells best in their trading areas, Setta says.
Setta meanwhile hired Director of Culinary Operations Michael LaDuke, former executive chef at Epcot Center in Disney World. In addition to working on promotions, LaDuke is creating up-to-date recipes. Research also showed that customers deemed dishes “fresh” when they contained sauces and herbs. “We are trying to push out flavors beyond butter and lemon,” he says. To date, the menu hasn’t gone further up the flavor scale than “sweet and spicy glaze” and “Cajun spices.”
“It’s really important to signal to people food is freshly prepared,” declares Setta, the former Olive Garden executive responsible for creating the Culinary Institute of Tuscany, which added authenticity to that chain’s menu. Lopdrup, who can imagine setting up a similar seafood-related school in Maine, calls the fresh fish program “the moral equivalent of CIT.”
Fish House
So far, the only physical structure heralding Red Lobster’s new direction is a prototype in front of Sears in a Cleveland suburb. A second one opened in Englewood, Calif., last month. The look is a noticeable departure from the bright, Caribbean-influenced Coastal Home prototype, which debuted about five years ago. The chain built roughly 50 of them and remodeled dozens of others with its colorful elements.
The current design has been toned down considerably. The booth-dominated interior features dark woods, subdued fabrics, subtle lighting and textured glass. The bar top is granite. Small, framed signal flags surround the room, the only color accents. Outside, a lighthouse-like tower, bright white trim and word graphics (“Fish,” Lobster,” “Chowder”) are the only nautical clues. “We are trying to achieve a design that’s warm, welcoming and up to date—something that’s not trendy or faddish,” explains Quinlan, who designed the prototype.
More changes are in store. The building’s next iteration will be 400 square feet smaller, have 14 more seats and cost $130,000 less. Lopdrup won’t disclose its price tag or say if it’s meeting return hurdles. “We are very pleased with its results,” he allows.
The new restaurant is just one of three designs in test, although the other two haven’t been built. “We are working to identify the best possible future,” Lopdrup explains, adding that of the two other designs, one is more “pushed out” and geared to lure customers who might have given up on Red Lobster years ago.
Those folks are likely affluent, educated and over 50, a demographic with the greatest propensity to consume fresh fish, according to Setta. Red Lobster, of course, would love to have them back, thereby raising sales and incremental traffic. Yet, like a savvy politician, Lopdrup isn’t about to risk his base by making its favorite place to crack crabs and lobsters into an expensive-looking seafood house. “What we need to evaluate is what impact [the design] has on our core users,” says the son of Danish immigrants. “That has yet to be determined.”
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