Why You're Spending Less at Olive Garden and Red Lobster

Image source: Darden Restaurants. 

It was a brutal summer for Darden Restaurants (NYSE: DRI  ) . The company saw profits tank after customers shunned its flagship restaurant chains over the past few months.

Earnings fell by 38% at Darden overall, as Olive Garden booked a 4% dip in sales and Red Lobster saw a 5% drop. July was particularly slow: 8% fewer customers packed into booths at either of the national chains.

Here's a look at the recent traffic trend for these two struggling brands.

Source: Darden Restaurants' filings.

An industry trend
Sure, a lot of this drop isn't unique to Darden. Full-service restaurants have been losing market share to fast-casual operators for a while now, and that trend continued in the second quarter as the sector jumped by 8%, while sales growth at full-service shops remained flat.

Chipotle (NYSE: CMG  ) and Panera Bread (NASDAQ: PNRA  ) are big beneficiaries of the move toward quicker, cheaper eating. They each improved sales by 5.5% and 3.8% last quarter, while Darden's comparable sales shrunk by 3.3%.

Menu missteps
However, Darden has made things harder on itself by pricing many of its customers off its menu. The company stumbled in its recent promotions, misreading how value-sensitive diners are these days. Darden admitted as much last winter, when it decided to retool its menu and promotions so that they "better fit customers' current financial realities and expectations."

That push toward more affordable options has sped up Darden's dip in profitability. While its operating margin almost hit 10% in 2011, it has been on a downward trend ever since.

DRI Operating Margin TTM Chart

DRI Operating Margin TTM data by YCharts

Looking ahead
Unfortunately for Darden, things could get worse from here. The company pointed out that its sales and traffic trends in August were less bad than those of the industry as a whole, suggesting that it might be on the cusp of a recovery.

However, Darden plans to cut its workforce as part of a bid to save $50 million a year and hit its 2013 earnings growth target. While that might be a good decision for the short term, it's hard to see how Darden can improve its guest experience while gutting labor spending.

In my view, the company would be better off following something like Buffalo Wild Wings' (NASDAQ: BWLD  ) latest strategy. B-Dubs just started employing what it calls "guest experience captains" who are responsible for keeping customers engaged in the brand while they're in the store. Despite the increased labor expense, B-Dubs plans to have those new positions in place at all of its restaurants by the end of next year. 

Sure, Darden's falling profits are a problem, but I'd argue that its guest experience levels are much more important. It might want to look at spending more on labor, not less, as it tries to lure customers back into its Olive Garden and Red Lobster locations.

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Read/Post Comments (21) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 22, 2013, at 5:33 PM, barrieB62 wrote:

    In the article I read, it said they will not be cutting any labor in the restaurants, only corporate, so I fail to see how that would seriously impact customer service.

  • Report this Comment On September 22, 2013, at 5:48 PM, Xcattlebreeder wrote:

    Haven't been to Red Lobster in many months (although I love the food there) because it is over 50 miles one way there from my house. Also, living on social security requires restraint.

  • Report this Comment On September 22, 2013, at 6:01 PM, tonydecatur wrote:

    Just ate at a local Red Lobster last night--great service, friendly staff BUT the portion of the lobster and crab legs was very poor--my lobster meat would have fit into 3 tablespoons after pulling it out of shell--they are sacrificing PORTION SIZE for profit--sadly--wont be back there too often--much better local restaurants with less overhead and larger portions--heck they even know us by NAME!!

  • Report this Comment On September 22, 2013, at 6:16 PM, MundoLindo wrote:

    I stopped going there after these chains threatened their employees if they voted for Obama.

  • Report this Comment On September 22, 2013, at 6:49 PM, chrism71 wrote:

    Not impressed with either Olive Garden or Red Lobster, and think personnel policies or Darden are repugnant with respect to keeping people below 30 hours so they don't have provide health care.

    However really don't understand why you like Buffalo wild wings. Each time I went with low traffic and full staff it still took 5 to 10 minutes to get drink and food equally underwhelming. This was in Greenville SC the first time and Spartanburg the second.

    Also overly expensive compared to competition.

  • Report this Comment On September 22, 2013, at 7:17 PM, shibainulover wrote:

    Olive garden is almost a two hour wait in san francisco on weekends. I can't imagine them losing money. Good food. I don't eat at red lobster.

  • Report this Comment On September 22, 2013, at 7:26 PM, JaJade wrote:

    Well I went to Red Lobster and my meal was a slop. Didn't look like the one in the picture. I like Olive Garden's endless pasta bowl... I got sick after eating so much, bad memory.

  • Report this Comment On September 22, 2013, at 7:28 PM, jonnyappleseeds wrote:

    when the bills needed to pay for the food exceed in weight the weight of the food time to fish elsewhere

  • Report this Comment On September 22, 2013, at 7:33 PM, octagramt wrote:

    reheated food and servers that follow a script and get irritable when I ask questions that force them outside of their scripts.

    that's why I don't go to Red Lobster.

    Go to any major city in the US and the only people going to these restaurants are tourists...

  • Report this Comment On September 22, 2013, at 7:41 PM, GuitarJim wrote:

    The quality of the food at both chains has been steadily declining while the price has been steadily increasing. They've reached the point where it's hard to justify paying the price when you can get food as good or better at a much less expensive restaurant. I've also noticed a tendency to close tables or entire sections of the restaurant in order to ensure that there's always at least a short wait before being seated. This keeps a small but manageable group waiting in the lobby all the time, giving the impression that the restaurant is popular. I noticed this in a local Olive Garden restaurant on a Sunday afternoon a couple of months ago. There was one couple waiting when we arrived. That couple wasn't seated until a third couple arrived, and we weren't seated until a fourth couple arrived. The restaurant was largely empty the whole time.

  • Report this Comment On September 22, 2013, at 7:47 PM, Barkerf wrote:

    Red Lobster has the smallest portion lof obster tail I have ever ordered.That and the $30.00 price tag keeps me from going back.

  • Report this Comment On September 22, 2013, at 8:55 PM, TexasGal0850 wrote:

    Went to Red Lobster recently....portions have decreased dramatically and we probably will not be returning....the prices are too high for the portions.

    The Olive Garden is not on our radar at all. We are retired and the last time we visited, our bill was $50+. We got a salad and our grandaughter or Alfredo fettucini and no wine....very disappointed....will not be returning.

  • Report this Comment On September 22, 2013, at 9:03 PM, jimatmad wrote:

    Darden threatened to eliminate as many full time positions as possible as a way to save a nickel.

    If the CEO is willing to use his clout to hurt wage-earners so his bonus stays high, I'm spending my money somewhere else where the staff has a chance at making something approaching a living wage.

  • Report this Comment On September 22, 2013, at 9:17 PM, mudauber wrote:

    Small portions and lousy service, I won't be bothering Red Lobster again.

  • Report this Comment On September 22, 2013, at 10:10 PM, LBWfl wrote:

    There are many reasons that customers are shying away from both the Olive gardens and Red Lobsters. Some have a moral agenda that leads them to not frequent a business that keeps there employees in low wage positions at less than full-time hours so that they do not have to provide health insurance. Keep in mind that the servers are paid a minimum wage and at the end of their shift a computer generated report tallies their sales and automatically deducts a percentage to go towards taxes and also deducts a standard "tip out" amount that goes to the bussers and bartenders. Now here is the kicker. If they are shorted on a tip or if they take a to go order that they are rarely tipped it does not have any effect on the estimated tips made from the sales. Nor is there any way to adjust that amount if you have a busser or bartender who is doing a horrible job. What other business taxes you and bases deductions on money you haven't earned? The money is just gone.

    Another reason people are choosing not to visit these establishments is that the food quality and quantity has decreased in the past several years. I went to RL recently and was shocked at the small portions and the prices.

    Here is my solution...frequent the great local restaurants where small business owners want your business and really do treat you like family. You'll find that the service is usually better and most often you will also get great food at a great price.

  • Report this Comment On September 22, 2013, at 10:55 PM, imDanielle2 wrote:

    I stopped going when they threatened their employee's because of their political choices.. I know of many others who feel the same way.. If they do not treat their employee's fairly, pay a decent wage and offer benefits.. Then our money will be spent elsewhere! Applebee's, Olive Garden, Papa Johns, Red Lobster and Denny's will never see me in there establishments ever again..

  • Report this Comment On September 22, 2013, at 11:37 PM, cbaker998 wrote:

    i love them both but really cant afford it anymore, sad that this is what it comes down to but thats when some little buss. becomes famous, what goes up must come down..and now i do it myself its cheaper and we save the gas by staying home and everyone loves it

  • Report this Comment On September 22, 2013, at 11:41 PM, russell151 wrote:

    These are middle class restaurants for a middle class that no longer exists.

  • Report this Comment On September 23, 2013, at 12:40 AM, idigit wrote:

    As the prices continued to climb, the amount on the plate declined. It got to be too expensive for our budget. Even the "specials" are out of our price range. It is a shame, because we really enjoyed eating there. They truly became a place to go on special occasions only. We changed from going at supper to going at lunch to cut down on the cost, but it is still too expensive for us.

  • Report this Comment On September 23, 2013, at 1:08 AM, Luckeee wrote:

    I prefer to eat at places where the people who prepare and serve my food have access to healthcare. I'd rather not risk my health.

  • Report this Comment On September 23, 2013, at 11:17 AM, cluelessnow wrote:

    I like Olive Garden, especially their bottomless salad bowl but the average wait time for a table keeps me from visiting more often. I've tried to dine at the Red Lobster here in Virginia Beach but both times the wait time was high so I opted for another choice. I think the prices are a bit too high at the Red Lobster also. Like the other writer here, I can't imagine why they are losing money either. Perhaps they need to rethink what locations are losers versus winners and close some restaurants.

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