Red Lobster: 50 Yrs of Growth in Food Service Industry - Essay Sample

Company's Date of Formation

The company was formed in March 1968 as a Red Lobster Sea restaurant in Florida.

Industry in which the company operates

Food Service Restaurant Industry

Company's size in terms of annual sales $8.55 billion

Company's size in terms of total assets The vastness of the company based on the employees (all full- and part-time) The firm consists of 206,000 employees

The vastness of the company based on the total market value Market value=stock price* Outstanding shares $6,872,114,000.

The location of the headquarters of the company with the inclusion of the states and countries of operation Darden Restaurants, Inc. is the world's largest operated full-service restaurant company. Based on the 29 May 2013 fiscal year reports, the firm operated 2318 restaurants in the U.S. and Canada. The company's main headquarters are located in 1000 Darden Center Drive, Orlando, Florida 32837.

Darden Restaurants, Inc. has locations in all 50 states and Canada. Besides, the firm has franchises operated in countries such as Puerto Rico, Japan, Mexico, Qatar, Kuwait, and the United Arab Emirates

Customers and Suppliers

Identification of the company's three top customers and suppliers Darden Restaurants, Inc. has over 2,000 suppliers originating from 30 different countries. The top suppliers being seafood vendors, the Darden Direct Distribution subsidiary, and third party distribution companies.

Financing

Identify the company's sources of financing. Short term and long term debts, as well as other obligations such as purchase obligations, benefit obligations, and operating leases. Darden Restaurants. Inc had total contractual obligations of $6379.0. Other sources of financing include retained earnings and equity from the shareholders.

Related Parties

Identification of the company's related parties, with the inclusion of people and other companies

The company's related parties include Olive Garden, Red Lobster, LongHorn Steakhouse, Yard House, and many others. Associated companies, on the other hand, include

RARE Hospitality International. Inc, Eddie V's Prime Seafood restaurants, and Yard House, which have been integrated fully through acquisitions by Darden Inc.

Company Life Cycle

Identification of the present stage in the company's life cycle

Mature-slow growth due to 104 new restaurants in the fiscal year 2013, with a project 80 new restaurants in 2014.

Risks

Identification of three risks related to business and industry

Risks of food safety and foodborne illnesses.

Litigation risk due to allegations of unfair, illegal, or inconsistent employment practices.

Risks related to public policy changes by federal, local, or state regulations on health care reform, data privacy, taxes, and many other aspects.

Economic Factors

Identification of two primary economic factors that affect the company and how it stands concerning these factors Laws and Regulations- Darden Restaurant Inc. has to abide by the set policies within its various restaurants. Failure to uphold these laws leads to legal issues, which may affect the company adversely.

Cases of the recession that may lead to lower discretionary spending, hence reducing revenues for the firm. In such cases, Darden Restaurants Inc. borrows loans to ensure normal operations within the firm continue.

Accounting

Accounting considerations differ from industry to industry. For instance, accounting considerations in the manufacturing industry are way different from accounts in the restaurant industry. With that being said, the restaurant industry has its unique accounting needs and concerns. Restaurants either employ cash or accrual methods of accounting, and they benefit most from doing inventory. It is worth noting that there are only minor differences in restaurant accounting in comparison to other industries since restaurants use similar cash flow statements, as well as related financial statements. However, the restaurant industry has some unique expenses, which brings about the unique accounting consideration of food and beverage expenses. The food and beverage expenses in the restaurant industry are used to make effective business decisions. These expenses can be divided into costs of foods, costs of beverages, prime costs, labor costs, and finally, the costs of goods sold. Food and beverage expenses of Darden Restaurants, Inc. increased from $2.46 billion in the financial year 2012 to $2.63 billion in the fiscal year 2013. The food and beverage costs increased by $168 million, which was a 6.8% increase (Darden Annual Report, 2013). This increase means that fiscal years with higher costs will lead to more operations, which probably will lead to increase sales. The bottom line is that these expenses show the value of goods that were purchased and consumed over a specified period, and for the restaurants to make profits, it must sell food and beverage finished products at high prices that those users are used to purchase and prepare the foods and beverages.

Relevant Matters

Darden Restaurants, Inc. is subject to legal risks, which may include allegations of inconsistent employee practices or any illegal or unfair practices such as food contamination and foodborne illnesses, which may affect the business and its activities. One such legal issue affecting Darden Restaurants, Inc. involves the firm entering into a $300 million loan term agreement with various lenders, including the Bank of America. The loan term agreement had a clause stating that if the majority of directors were replaced over a 24 months' consecutive period, an event of default would lead to the acceleration of Darden's obligation resulting in the Dead Hand Proxy Put. A Dead Hand Proxy Put permits a lender to accelerate a debt over a short period. More so, in such a case without a dead hand under the recent law, the board may trigger the dissent slate to avoid triggering the put, which is a legal matter.

Regulatory matters refer to all applicable laws, orders, regulations, and guidelines that help in making decisions in a firm. Darden Restaurants, Inc. has a board that is responsible for making the right decisions based on the correct regulatory requirements. A perfect case of a regulatory matter is the board of directors' response to a dissident slate. In presenting arguments to the shareholders concerning the board's recommendation against a dissident slate, the firm should not use the need to refinance the firm as the primary reason to reject the slate. All in all, the new board of directors has to make a regulatory decision on how to refinance the debts.

Social matters may include all factors related to the consumers and employees that may impact the financial performance of a restaurant. Cases of foodborne illness, as well as cases of pandemics, are some of the social matters that may affect Darden Restaurants, Inc. operations. A perfect example of the social issue is that of health concerns arising from flu viruses, food-related pandemics, as well as any other diseases. For instance, the U.S and many other nations experienced cases of norovirus, the avian flu, the swine flu, SARS, and other diseases such as mad cow disease (p 17). These diseases have affected the operations of Darden Restaurants, Inc. adversely.

Recommended Additional Questions

• Question One: What is the solution to the firm's difficulty in integrating Yard House, and what are some associated challenges?
• Question Two: How do government regulations in regards to labor costs and insurance costs affect operations of the firm?

Integration with the Yard House has been identified as a potential risk factor of Darden Restaurants, Inc. It has been described as a possible risk factor because of the additional indebtedness required to fund the acquisition. This acquisition may affect Darden Restaurants, Inc.'s business operations since there will be additional activities of integrating and retaining the management, as well as other employees, to ensure the growth of the combined company. Even with the full integration of Yard House, it is not guaranteed that Darden Restaurants, Inc. will achieve its desired benefits. Specifically, the high indebtedness of Yard House and the high debt to equity ratio of Darden Restaurants, Inc. is likely to affect cash flow operations, and reduce the firm flexibility to respond to the changing business operations and economic conditions due to limited ability to obtain additional funding to run Darden Restaurants, Inc. Therefore, there is a need to precisely determine the solution to the challenges associated with the high indebtedness and the high debt to equity ratio of Darden Restaurants, Inc.

Darden Restaurants, Inc. operations are subject to federal laws of the U.S. and Canada in regards to laws related to working conditions, minimum wages, overtime, and tip payments. For instance, in the U.S., every state has its minimum wage, and they are variations even in Canada about what the workers should be paid. Thus, one can conclude that Darden Restaurants, Inc. is always subject to increased labor costs. More so, the firm is required to pay premiums to insurance companies for compensation, general liability, health, and officers' ability, which can increase at any time. An increase in insurance and labor costs will incur more costs affecting the normal operations. Due to cost increases, the prices may increase to ensure normal activities. Hence, increased in any form of costs or expenses is a cause of concern for Darden Restaurants, Inc.

Individuals within the Firm to Answer the Questions

These questions would perfectly fit any member within the board of directors, as well as the firm's CEO. Darden Restaurants, Inc. board of directors consists of the chairman, who is the chief executive officer, there are other members such as the chief operating officer, the chief financial officer, the managing directors, among many other directors. These members will offer the best answers to these questions because they oversee the normal operations of the firm, and decide on what is best for the firm.

The Primary Audit Concerns

The data provided in the section above shows some of the critical insights concerning Darden Restaurants, Inc. Information on the financial assets, market value, and ways of financing Darden Restaurants, Inc., the total number of employees, among many other insights. However, from the above analysis, there are some notable audit concerns. Some of these significant concerns include adequate internal financial controls, inadequate controls over financial reporting, and failure to adequately incorporate all the inherent risks to facilitate a more critical audit analysis. Generally, the management is tasked with the maintenance of internal controls to assure that the stated amounts are processed and reported effectively. There should be policies and procedures to ensure all costs and balances are well documented. For the above analysis, not all amounts were well documented; they are only recorded without any pieces of evidence. Besides, there were inadequate controls over financial reporting to ensure all activities were included in the analysis. For a useful audit report, the analysis should incorporate all the required activities. The same case applies to risks. Firms such as Darden Restaurants, Inc. are associated with a lot of risks that may adversely affect the firm. Therefore, based on the presented analysis, just a few risks were presented.

Preliminary Analytical Procedures

Vertical Analysis

Vertical analysis is one of the standard methods of analysis to examine the strength of a firm (Gibson, 2012). It in...