Restaurant operator identifies challenges in meeting guests' needs

by Eric Schroeder
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ORLANDO, FLA. — Despite making significant progress on priorities that evolve the company’s brands, Darden Restaurants has not responded “aggressively enough or effectively enough to address the need so many guests have for affordability right now,” said Drew Madsen, president and chief operating officer of Darden Restaurants, in a Dec. 20 conference call with analysts.

Mr. Madsen said the company — which owns Olive Garden, Red Lobster, LongHorn, and other restaurant chains — was “clearly disappointed” with its second-quarter performance in which net income fell 37% to $33.7 million. In order to recover, the company must better adapt to consumer changes that have resulted in a decline in category usage, he said.

“The decline is most noticeable among more economically-constrained households, and to a lesser degree among Gen-X and millennials,” Mr. Madsen explained. “For all three groups, the primary issue is affordability. These consumers want to use casual dining more often than they do today, but often do not feel that they can afford to do so. As a result, large chains have been increasing the use of promotional price incentives from nationally-advertised promotions and couponing to increased levels of more targeted digital offers, and the promotional intensity has, if anything, been ramping up recently.”

But even as this trend has evolved, not all guests have been motivated by the need for greater affordability, he said.

“Over the past several years, we’ve also seen a growing desire among more economically-secure guests for distinctive, higher-quality dishes that also have higher prices,” he said. “And in addition, many guests, millennials in particular, want more convenience in their total restaurant experience, and menus that offer more freshness and greater flexibility to dine the way they want.”

Against this backdrop, Mr. Madsen said Darden has struggled to respond tactically from month to month and quarter to quarter in a way that addresses the needs of many different consumers while strengthening the company’s brands. But he is optimistic that a plan for recovery is in place.

“As we weigh how we’re doing in maintaining appropriate balance, our assessment is that we’re making significant progress on important priorities that evolve our brands, so they are better positioned for the future across all guest segments, but we have not responded aggressively enough or effectively enough to address the need so many guests have for affordability right now,” he said. “Here are a few examples of what we’ve already done to put the planks in place to grow our guest base over time. All three of our large casual dining brands have recently introduced new advertising campaigns that help them create a more distinct brand identity, and communicate compelling news about the guest experience they each offer.”

At LongHorn and Red Lobster, improved core menus have been put in place, while Olive Garden has begun a phased implementation of new platforms to its menu.

“This is important because 80% to 90% of what our guests order are items off these core menus,” Mr. Madsen said. “These menus include a wider choice of affordable dishes, lighter dishes, as well as a wider choice of more distinctive dishes at slightly higher prices. While it will take time for these menu improvements to lead directly to increased guest counts, early results at all three brands are encouraging.”

Mr. Madsen said Darden has not been as “consistently effective” with its short-term tactics as it needs to be.

“Fundamentally, we’ve been a little too protective of brand image, guest satisfaction, and margin, and as a result, have not been sufficiently competitive to attract a more economically-constrained guest looking for a great deal,” he said. “We have also not responded quickly enough to communicate enough news across enough channels to consistently keep our brands top of mind.”

He pointed to three calculated risks the company took during the second quarter of fiscal 2013 that did not pan out. First, the company raised the price of Olive Garden’s Never Ending Pasta Bowl $1 to $9.95, a move Mr. Madsen said resulted in a traffic hit that “was much bigger than we planned.”

Second, at Red Lobster, Darden began the year with a strategy to run five longer promotions instead of the seven shorter promotions the company ran in 2011. The move was designed to free up funds to invest in advertising behind the launch of Red Lobster’s new core menu, but instead guest traffic at Red Lobster during the added weeks was lower than planned.

“This was most pronounced during October, when Endless Shrimp ran out of steam after 12 weeks on air,” he said.

The third calculated risk was the decision to launch LongHorn’s stuffed filet promotion without a price point feature.

“This is a very distinctive dish with great guest satisfaction, and it certainly helps elevate LongHorn’s steak expertise credentials, but it also carries a premium price,” he said. “And in this environment that likely contributed to guest count softness in October and November at LongHorn.”

Mr. Madsen did not disclose plans for the second half of fiscal 2013, citing a need to be “competitively less predictable,” but he did say Red Lobster, LongHorn and Olive Garden have re-planned the second half promotionally “in ways that will more aggressively attack affordability, which means more promotions that are fundamentally about communicating a great deal, and less about communicating brand-building news.”

“Ultimately, our approach is intended to grow total operating profit by broadening the appeal of our brands and growing guest counts, even if profit per guest and margin as a percent of sales is slightly lower,” he said. “Until we get further down the road, it’s difficult to assess in a very precise way the trade-offs in the short term between better guest count traction and somewhat lower margin per guest, and that difficulty is reflected in our earnings outlook for the year. We’re also zeroing on ways to make sure we aggressively leverage our new operation structure to further elevate execution in our restaurants today, and as a result, build stronger guest loyalty for the future.”

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READER COMMENTS (1)

By Sam 12/21/2012 4:00:04 PM
Maybe they should "focus" on "platforms" that actually taste good!