Darden to focus on menu revamp, pricing as major brands see sales softness

Darden Restaurants Inc. said Friday it plans to offer customers new value options at its flagship Olive Garden and Red Lobster brands to reverse recent same-store sales softness, including a new “Two for $25” promotion to start at Olive Garden next week and menu overhauls at both concepts this winter.

Orlando, Fla.-based Darden, which operates 1,994 units and is the nation’s largest casual-dining operator, reported a 10-percent increase in fourth-quarter profit over the same quarter last year, but also said it continues to struggle with reduced guest traffic and customer spending at its two largest brands, Olive Garden and Red Lobster.

Same-store sales at the 792-unit Olive Garden fell 1.8 percent in the quarter, which ended May 27, and fell 3.9 percent at the 704-unit Red Lobster.

The negative results at the two restaurant chains were mostly “the result of disappointing promotional performance at those two brands,” Drew Madsen, Darden’s president and chief operating officer, said on Friday in a post-earnings call with analysts.

Madsen added that both Olive Garden and Red Lobster will be introducing new core menus later this year, with the latter brand making more significant changes.

Olive Garden shifts focus to affordability

Madsen said that the majority of Olive Garden's decline in the fourth quarter occurred during May, when same-store restaurant sales fell 4.6 percent.

"We believe this reflects two dynamics," Madsen noted. "First, we decided not to advertise around Mother’s Day, which resulted in two fewer weeks of television support during May this year compared to last year. In retrospect, this decision negatively impacted same-restaurant sales momentum given the significant level of competitive media across the industry at that time.

"Second," he continued, "the Taste of Tuscany promotion that started in May and has continued into June is not as effective as we anticipated.”

Olive Garden had started the quarter with a three-course Italian dinner for $12.95 with five new entrees, followed by Passion for Parmesan with new items, and then a mid-May launch of the Taste of Tuscany promotion that started at a $10.95 price point.

Madsen noted that the focus of the Taste of Tuscany promotion was off. “Our assessment was that this promotion was too much about the brand, especially the desirability and culinary inspiration of Tuscany, and not enough about the $10.95 price point and affordability of the new dishes,” he said.

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Olive Garden’s advertising strategy has moved away from focusing on one or two new dishes, occasionally with a price point, to featuring broader platform ideas, according to Madsen.

Next week's launch of the chain's “two for $25” promotion is aimed at putting the focus back on affordability. “It offers guests the opportunity to enjoy unlimited soup or salad, their choice of entrée plus a shareable appetizer for dessert all for $25,” Madsen explained, adding that the promotion leverages the unlimited soup or salad course that is already included in every entrée.

Further into fiscal 2013, promotions will meet the “elevated need for affordability,” he said.

Red Lobster revamps menu

During Darden’s second quarter, which begins in September, Red Lobster will introduce what Madsen called "the most comprehensive core menu change at the brand in the last decade.”

He noted, “They’ve been working on this menu transformation for nearly two years to make sure it’s compelling for their guests, can be executed at a high level consistently by operations and contributes to profitable guest-count growth.”

Madsen also said the new Red Lobster menu will include a “significant number” of items at less than $15 and will expand the number of non-seafood selections “to eliminate the veto vote.”

“It’s important to have both price-approachable and premium-price offers so that we don’t commoditize Red Lobster or any of our other brands around price,” Clarence Otis, Darden’s chairman and chief executive, said during the call. Darden also owns LongHorn Steakhouse, The Capital Grille, Seasons 52, Bahama Breeze and Eddie V’s.

Beyond rolling out its revamped menu, Red Lobster also plans to work on increasing same-store guest counts, which Madsen said were about 15 percent below what they were 10 years ago.

Current promotions include s $14.99 Seafood Feast, which Madsen said produces a margin “that contributes to profit growth in absolute and percent terms with appropriate guest-count growth.”

The fourth quarter produced disappointment for the usually popular Lobsterfest promotion, Otis said, because it occurred amid a spike in retail gasoline prices. “That reduced consumers’ discretionary income and more importantly had an adverse effect on their confidence,” he explained.

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Darden reported fourth-quarter profit of $151.2 million, or $1.15 per share, compared with earnings of $137.4 million, or 99 cents per share, a year ago. Revenue rose to $2.07 billion from $1.99 billion a year ago.

More information on Darden’s major divisions and corporate strategies covered in Friday’s analyst call:

Olive Garden: Fourth-quarter sales totaled $904 million, a 2.7-percent increase from the same prior-year period. The results were driven by revenue from 38 net new restaurants. Olive Garden has 786 restaurants in the United States and six in Canada. Annual unit volumes for Olive Garden total $4.7 million, said Brad Richmond, Darden’s chief financial officer.

Red Lobster: Fourth-quarter sales of $681 million were 2.8 percent less than in the same prior-year period. Red Lobster has 677 restaurants in the United States and 27 in Canada. Average annual unit volumes total $3.8 million.

Longhorn Steakhouse: Fourth-quarter sales rose 11.7 percent to $297 million, reflecting a net 32 new restaurants. LongHorn has 386 units. Madsen said LongHorn plans to accelerate new-unit growth in 2013, opening between 44 and 48 net new restaurants with about half of those in new markets. Average annual unit volumes total $3 million.

Specialty Restaurant Group: Darden’s specialty restaurant group has brands that “are better insulated from the economic sluggishness that we’ve seen,” Otis said. “We do expect macro-economic sluggishness to continue in our 2013.”

Fourth-quarter sales of $179 million were 26.9 percent higher than in the same prior-year period. Same-stores sales increased 2.8 percent at The Capital Grille, 2.8 percent at Bahama Breeze and 1.9 percent at Seasons 52. Sales growth reflected revenue from two net new restaurants at The Capital Grille for a total of 46, four new restaurants at Bahama Breeze for a total of 30, six new restaurants at Seasons 52 for a total of 23. The 11 Eddie V's were purchased in November.

Eugene Lee Jr., president of Darden’s Specialty Restaurant Group, said that the upper-end division had 4.6 percent blended same-store sales growth. Average annual unit volumes for restaurants in the group are $6.4 million, with average annual unit sales by concept of: The Capital Grille, $6.8 million; Bahama Breeze, $5.6 million; and Seasons 52, $6.4 million.

The specialty group this fiscal year plans to open seven to eight new Seasons 52 restaurants, three to four Bahama Breeze units, three Capital Grilles and one Eddie V’s.

“We’re continuing to build the real estate pipeline for each of our brands,” Lee said, including expansion sites for Eddie V’s.

“With new restaurant growth, we expect meaningfully stronger earnings growth in fiscal 2013 than we had in fiscal 2012,” Otis said. “And that’s because we were burdened in 2012 with food-cost inflation headwinds that we don’t anticipate in 2013.”

Contact Ron Ruggless at [email protected].
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