Hedge fund Starboard Value has taken a big position in Olive Gardens parent company, Darden Restaurants, and is trying to shake a few things up to make more money. The media has mostly focused on Starboards critiques of the restaurants policies around breadsticks and pasta water (see Eater for full coverage of the culinary aspects of the contretemps) , but David Dayen is right to say that the most important aspect of the dispute is about real estate. He goes so far as to characterize the real estate transaction as a scandal or even legalized theft — but its really only those things if you want to question the conceptual underpinnings of American capitalism (and maybe you do). What is Starboard doing? In a standard restaurant setup, to turn a profit, your revenue needs to be larger than the cost of your food and supplies plus your labor costs plus your rent. Rent is really important. Its easier to bring in revenue if you have a great location, but the challenge is to bring in enough revenue to justify paying the high rent that location requires. Except Olive Garden owns a lot of the real estate its restaurants are located on. Obviously, its a lot easier to make a profit in the food-service business if you only need to cover property taxes rather than covering rent. But this is just an accounting trick. In effect, Olive Garden The Landlord is refusing to charge rent to Olive Garden The Restaurant — and thats an economic loss for Darden Restaurants every bit as much as Olive Garden The Restaurants rent-free tenancy is a gain. Starboards big idea is that Darden should scuttle this arrangement and sell the real estate. That would create a big bundle of cash that can be kicked out to Darden shareholders (Starboard, for example) and leave Olive Garden with reduced profits as it now needs to pay rent. Whats the problem? Well, the problem is that, by reducing Olive Gardens profit margins, the asset spinoff makes it more likely that bad luck or bad management will drive Olive Garden out of business. Thats bad news if you work at Olive Garden, and since Olive Gardens current executives work at Olive Garden, they are reluctant to do it. But, as Dayen emphasizes, lots of people who arent executives also work at Olive Garden, and this puts their jobs at risk too. On the other hand, if Olive Garden cant stay in business if it has to be paying rent, maybe thats telling us that it ought to be driven out of business and replaced with some other, better restaurant. Freezing existing arrangements in place is nice for some people, but allowing for churn and change would benefit other groups of people. Is that really a scandal? No. A business taking a step thats not great for its workforce because it will make more money for its owners is really banal. The involvement of a hedge fund and a public dispute and the high-profile nature of the Olive Garden brand make the conflict an interesting story, but Starboards plans arent theft — theyre just business. Unless, that is, you take the view that capitalism is the real scandal. Its certainly possible to organize an economy that takes advantage of market exchange and market prices without elevating the interests of business owners to the extent that the American economy does. In Germany, for example, corporate boards of directors feature representatives of the firms workers. Corporate management is thus supposed to reflect a mix of the owners interests with the workers interests. Japan doesnt have a formal system like that, but it does sharply curtail hostile takeovers — creating a situation where, in practice, management has a lot of freedom to ignore shareholder interests. The German and Japanese models have some obvious advantages in terms of security, but the United States is still richer overall than either of those countries, so our way may have some advantages, too. But in recent years, the Germany economy has performed much better than the American one, so praising the Germany social model is in vogue — just as praising Japans model was in vogue in the 1980s, when they were growing very fast.
Posted on: Thu, 25 Sep 2014 19:00:01 +0000
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