For a Burger, Head to Olive Garden?

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Yes folks, that is correct. The Olive Garden is now selling hamburgers. It seems that the folks over at Darden Restaurants (NYSE: DRI  ) are willing to try anything to spur sales. What's next? Are they going to offer tacos or a burrito bowl? Or is this the answer that will get customers in the door at Olive Garden and turn things around? For us Fools, it pays to find out.

The 'Italiano' burger
This week the Italian chain will start selling a new six-ounce burger for $9.99. Olive Garden aims to take on Chili's, which is owned by Brinker International (NYSE: EAT  ) . The Olive Garden has been losing customers to Chili's more diverse menu and hopes that the 'Italiano' burger will change that.

The 'Italiano' burger will be topped with prosciutto, mozzarella cheese, arugula, marinated tomatoes, and garlic aioli. It will also come with parmesan garlic fries, also a new menu addition. For now, the burger will only be available during lunch hours and until 4 p.m. Depending on how well the burger performs, Olive Garden will also look to add it to the dinner menu. The burger will also come with Olive Garden's customary unlimited soup or salad and, of course, free breadsticks.

Hopefully a change for the better
I highlighted the importance of Olive Garden for Darden Restaurants in "The Olive Garden Is Still Darden's Crown Jewel." The company needs new menu items to get customers back into its restaurants. Olive Garden remains the largest Italian restaurant chain in the U.S., but its sales have been lagging. In the most recent quarter, same-restaurant sales decreased 4% at Olive Garden.

Many of the problems at Olive Garden are self-inflicted. Many of its menu items had gotten too expensive and we're still in the middle of an economic recovery. The chain also failed to remodel many of its stores fast enough and its customer service has declined. If Olive Garden can improve upon these items and if the 'Italiano' burger proves to be a hit, the situation could certainly start looking more favorable for the chain.

The competition
Olive Garden's move to add a burger and fries to its menu aims directly at not only Chili's, but also Applebee's, which is owned by DineEquity (NYSE: DIN  ) . Both chains offer several varieties of burgers and specials. Perhaps the most famous special is Applebee's "2 for $20" promotion.

Chili's is running a bunch of specials this holiday season. One of these specials, holiday gift cards, has performed well for Chili's. This year, for every $50 in gift cards purchased a diner gets a free $10 holiday bonus card. On December 9, Chili's will donate 10% of its net sales to Toys for Tots. Chili's is also borrowing a page from Starbucks' playbook with its Pumpkin Spice Molten Cake. This is a great dessert to go with one of Chili's six burgers.

Chili's is also going after the lunch crowd. Each restaurant offers a build your own lunch combo. At some U.S. locations, this combo includes pizza. For those who are in an extra rush, ordering can be done online.

Applebee's looks to get a leg up on its competition next year with the rollout of 100,000 new tablets for its restaurants. The restaurant chain will put a tablet on each and every table and bar at more than 1,800 locations. The tablets will allow customers to control their dining experience via interactive menus, improve payment speed, and let customers play music and games. Applebee's is following in the footsteps of Chili's, which announced its intentions in September, but Chili's rollout will only be for about 800 locations.

I highlighted Applebee's last month in "The Casual Dining Segment Is Showing Signs of Improvement."  Applebee's shows some signs of improvement, but it hasn't performed as well for DineEquity as its sister company, IHOP. In the most recent quarter, comparable-restaurant sales rose 3.6% at IHOP while decreasing 0.4% at Applebee's.

Foolish assessment
For income investors, Darden Restaurants offers the highest dividend yield among the three at 4.1%. Brinker International has the lowest P/E ratio and trades at only 15 times next year's earnings. DineEquity has the highest margins among the three since it has moved to a business model based on franchising.

For investors looking to get a taste of the casual-dining space, all three chains depend on the strength of the overall economy. After that, each company competes with each other in terms of menu innovations and promotions. Of the three concepts, Olive Garden is having the toughest time in this difficult environment. The company really needs a hit menu item to drive in customers and reverse its comparable sales decline. Olive Garden is hoping that its 'Italiano' burger will do the trick.

Some are skeptical though because this strategy would be like McDonald's deciding to put pasta on its menu. Executives at Darden Restaurants were skeptical as well, but taste tests showed a positive response from consumers. The best bet is to stop in at your local Olive Garden and try the new burger. If it's a hit, this burger could be the key to boosting sales at Olive Garden and boosting Darden's share price.

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9/26/2016 4:00 PM
DIN $79.90 Down -0.35 -0.44%
DineEquity CAPS Rating: **
DRI $62.47 Down -0.58 -0.92%
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EAT $52.94 Up +0.40 +0.76%
Brinker Internatio… CAPS Rating: ***