Has Olive Garden Jumped the Shark?

Hearing about Olive Garden of Darden Restaurants (NYSE: DRI  ) adding a hamburger to its menu just about made me gag. My first thought was that no self-respecting Italian restaurant chain offers hamburgers on its menu. However, upon closer analysis, this appears to be a wise move that could help the company gain market share from competitors such as Noodles & Company (NASDAQ: NDLS  ) by using a strategy similar to McDonald's (NYSE: MCD  ) Mighty Wing idea.

The beef
Darden Restaurants isn't just launching a normal, boring burger, but rather the Italiano Burger. The burger is every bit Italian food and more as it's covered in "crispy Italian prosciutto; mozzarella cheese; arugula; tomatoes marinated in fresh basil, garlic and Italian spices; and a garlic aioli spread."

Darden Restaurants owns and operates a variety of restaurant concepts. While sales last quarter grew 6.1% and same-store sales overall grew by 0.5%, same-store sales at Olive Garden took a 4% plunge. Darden Restaurants owns more Olive Gardens than any of its other seven concepts. In fact, around 39% of the restaurants Darden Restaurants owns are Olive Garden restaurants. 

This means that Darden Restaurants should be motivated to get sales up specifically at Olive Garden. In July, the company tried a promotion to spark sales, but it failed. The good news is that this means management is capable of trying something new and quickly admitting and recognizing that it doesn't work and then trying again with something else. So what's the worst that can happen with the Italiano Burger? It fails, management pulls it, and they try something else. Seems like a low-risk, high-potential idea. If it gets people at least talking about it, that at least keeps Olive Garden on people's minds.

The McDonald's comparison
When McDonald's launched its Mighty Wings, they invoked the same eyebrow-raising reaction that the Italiano Burger is causing now. Buffalo wings at McDonald's -- huh? The Mighty Wings launch at McDonald's came in at the low end of the company's expectations -- a seeming failure -- yet the company was happy with the launch. This is because the wings did get people talking, got McDonald's on people's minds, and got them in the door. In the conference call, McDonald's explained that the Mighty Wings launch helped it partially overcome the economic and competitive pressures it is feeling. Global same-store sales were up 0.9% last quarter thanks to the weird introduction.

Noodles & Company showing Olive Garden how it's done
When Noodles & Company reported its third-quarter results, you could have sworn the company was serving an entirely different national cuisine than Olive Garden. Sales leaped 15.4% to $88.9 million. Same-store sales hopped 2.1%. Adjusted net income exploded 44.6% to $3.3 million or $0.11 per share. While CEO Kevin Reddy acknowledged the "tepid consumer environment," Noodles & Company hit its 16th straight quarter in a row of same-store sales growth.

Clearly there still is money to be made and growth to be had in the Italian restaurant industry. Noodles & Company has figured out how to do it, and Olive Garden needs to get more creative and figure out how to do it as well. Will the Italiano Burger be part of a plan that succeeds? We will find out.

Foolish final thoughts
The number one thing to look for here beyond the Italiano Burger is what else Darden Restaurants has up its sleeve in terms of creative menu introductions for Olive Garden. Foolish investors should put Darden Restaurants on their radar. If the company begins a series of successful creative launches that get guests in the doors -- or at least get them talking about Olive Garden -- Darden Restaurants could become a fantastic turnaround story.

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  • Report this Comment On December 08, 2013, at 6:50 PM, tcooper wrote:

    Since Olive Garden is not a true Italian restaurant, adding a burger to the menu makes sense. It should appeal to more mall shoppers for sure.

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