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Can Tablets Save Red Lobster and Olive Garden?

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The U.S. economy is recovering, the Federal Reserve is beginning to wind down its economic stimulus known as QE3, and the consumer is out spending in full force once again. Even so, Darden Restaurants' (NYSE: DRI  ) underperformance stands out like a sore thumb in the restaurant sector.

In an earnings update released three weeks ago Darden Restaurants projected that its third-quarter U.S. same-store sales would be up 0.3% for LongHorn Steakhouse, but would decline by 5.4% at Olive Garden and an even steeper 8.8% at Red Lobster. Darden blamed the extremely cold winter weather and a shift in the Thanksgiving holiday for its unsatisfactory results. Nonetheless, it continues a recent streak of underperformance for its two most iconic chains, Olive Garden and Red Lobster.

Darden's tried, but failed
Darden has implemented a number of initiatives in an effort to improve sales at these two national chains. First and foremost, the company has attempted to freshen the menus at both restaurants by introducing a number of new dishes. In late February, Olive Garden added more than 20 new menu items, while Red Lobster introduced a new core menu in October 2012 that included a better selection of non-seafood items. It's perhaps a bit early to tell one way or another how Olive Garden is faring, but the 8.8% same-store sales decline in Red Lobster would indicate that either its menu or pricing is still out of touch with the average consumer.

Also, Darden has attempted to transform and brighten the image of both Olive Garden and Red Lobster. Specifically, Darden recently updated the Olive Garden logo, changing it to something that Slate magazine equated to "a second-grader's cursive practice." In similar fashion, Red Lobster has remodeled the exterior of a number of its restaurants around the country, including those in the Northeast.

Ultimately, though, these fixes haven't done their jobs, as foot traffic is still down and competitors are pilfering its customers. Last week, Darden announced that it will spin off the Red Lobster franchise into a separate company in an effort to help unlock shareholder value and perhaps instill confidence that having it operate as a single entity would be better than focusing on completing a turnaround. Shareholders, though, remain skeptical.

I, however, have one solution that could be the answer to all of Red Lobster and Olive Garden's ills: go mobile!

How going mobile could save Olive Garden and Red Lobster
The move toward tablets in the restaurant industry is still in its infancy -- heck, it hasn't even teethed yet. However, the promise of mobile is huge, and some of the nation's fastest-growing and largest chains are beginning to latch onto its potential.

Source: E la Carte.

DineEquity (NYSE: DIN  ) -owned Applebee's announced in December that it will roll out some 100,000 E la Carte Presto tablets in its U.S. restaurants in 2014 in an effort to streamline the ordering process for beverages and the payment process for a consumers' final bill. The goal of Applebee's move to tablets isn't to push consumers away from forming a bond with their servers, as DineEquity still understands that this is why their core customer continues to return time and again. Further reinforcing this principle, patrons will still need to order their meals with their server. Instead, tablets will merely reduce the lag time of ordering a drink or paying a bill when the restaurant is busy. It could even result in a more favorable tip, since most consumers view their time as money.

But Applebee's isn't alone. The rapidly growing Buffalo Wild Wings (NASDAQ: BWLD  ) and Brinker International (NYSE: EAT  ) , the parent company of Chili's, have already installed tablets in select locations. The move makes perfect sense for Buffalo Wild Wings, which caters to a generally younger and more tech-savvy audience, but it might come as a bit of a surprise that Chili's, which presents itself as a family restaurant, would turn to tablets. I believe what this shows is that restaurants have been focusing on an aging baby boomer generation for far too long and that the industry needs to shift its focus to the 20-to-40-year-old crowd that's more technology-oriented if they hope to push growth to that next level.

I currently fall within that 20-to-40 age bracket, and I can attest that the past few times when I've eaten at Olive Garden and Red Lobster, they've been dominated by the baby boomer generation. While there's nothing wrong with courting this age group, Darden has been doing so for the past two decades, and it simply stopped working after the recession. It's pretty obvious that the company needs to change its game plan and bring new customers through its doors if it hopes to survive.

That's where the tablets come in.

Tablets offer a unique way of reaching out to Generation Y and the latter half of Generation X by signaling that a chain is adaptive to their needs. It's worth noting that the emergence of tablets in no way signals that baby boomer customers will soon be on the outside looking in -- Applebee's has made it very clear that its servers will still maintain that bond with the consumer that likely drew them into the restaurant in the first place. Tablets merely offer a level of added convenience that millennials are used to and that you can't currently find in Olive Garden and Red Lobster.

Tablets may also offer a form of entertainment that can sometimes keep families out of restaurants. While the idea of advertising using tablets has been passed around, so has the idea of installing games for kids as well as shows for adults to watch, possibly for a fee, while their food is being made or while they're eating. I'm not a parent, but I've had quite a few of my friends who are parents tell me that going out to eat with young children can be especially challenging if they aren't entertained. Tablets could help resolve this dilemma.

Obviously, installing tablets won't be a full-proof path to success for either Olive Garden or Red Lobster. Menu innovation and proper pricing are going to be paramount to drawing in a consumer that's becoming increasingly aware of the quality of food he or she is eating. Selective promotions could also play a role in its transformation.

But what I do know is that what Darden's currently doing isn't working, and tablets look like the next evolution within the restaurant industry. I believe if Darden were smart it would jump on this bandwagon while it's still in its infancy, which could give it a chance to develop some form of comparative advantage over its peers and allow it to appeal to a wider audience of consumers.

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Read/Post Comments (6) | Recommend This Article (3)

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 March 22, 2014, at 6:54 PM, imDanielle2 wrote:

    They need to step up and admit they were wrong on their attacks on their employees. They need to do a string of commercials coming out admitting their mistakes and tell everyone they are now willing to support paying their employees a living wage with real benefits. Once they do that, the boycotts will end and then maybe their previous customers will return and pretty sure they will get many new customers as well. Its not their lack luster food or their dated/themed restaurants that is keep customers away..It's their attitude! Other restaurant chains are doing very well right now and making record profits.. I wonder why that is? BOYCOTTS!

  • Report this Comment On March 22, 2014, at 7:03 PM, thunderboltnova wrote:

    This is BS here in Connecticut. You can't step into one of their restaurants without a 2 hour wait! Line out the door and that's for lunch! Dinner, you can just plan on bringing your sleeping bag!

  • Report this Comment On March 23, 2014, at 10:26 PM, Goostavio wrote:

    I recently ate at Chilis. Didn't know til afterwards that I'd be forced to pay via the tablet. You swipe your card at the table. No thanks! I don't like the vulnerability of my security. There is no way to no for sure, but shortly after I'd found out my debit card had been skimmed. Luckily my bank caught it immediately because the charges were out of state. It's too easy for a criminal to sit around at the table unsupervised to hack into the tablet and steal your info. Needless to say, I refuse to eat at these restaurants again. Sure you can pay with cash, but that's not my how I make transactions. These tablets are not convenient for me as I'd need to have cash to dine there. It wont be long and we will here of skimming on these like at gas pumps.

  • Report this Comment On March 24, 2014, at 8:18 AM, Howdie wrote:

    Actually swiping at the table is a heck of a lot more secure than handing your card to a server and letting them walk away with it to ring it in.

    But, I would never even think of wasting my time or money eating at OG or RL. The best thing that could happen is for both to just go belly up.

    Any chain with more than 50 outlet is pretty much just middle-of-the-road banal boring food anyway.

  • Report this Comment On March 24, 2014, at 9:25 AM, rlindley wrote:

    RED LOBSTER: Well I wanted to have lobster during "Lobsterfest." Well, my spouse is not into seafood much; All the "Lobsterfest" combos have enough food for two maybe three normal people. None of the entrees lend themselves to take home. So, I looked at the price of some other lobster ... only found market price (high in NV) for a lobster... So that was a no-go. Too bad. I had my usual grilled fish.

  • Report this Comment On March 28, 2014, at 8:30 PM, djones44 wrote:

    Can tablets save Darden?

    Yes, but not as you might imagine.

    My company Poort Technologies manufactures tablet enclosures to emulate or exceed the capabilities of card scanner and menu tablet overhead-intensive schemes such as you discuss here.

    But imagine a tablet that offered the whole Web, unfettered and free (to the merchant too), with a nice deep speaker bar to bring all the happy, sad and singing sounds to your booths.

    Then imagine a bar or restaurant with 20 Poorts in them all going at once - an intentional cacophony interlaced with laughter. Look closer and see that a fair portion of the booths are doing video HD Skype with - who are those people??

    All it takes is the guts to turn the canned music off and let the people use the Net. Enable a sea change for the human ear in bars and eateries - and return to interactive geniality - if we need $2 words to describe what people went to these places for, in the first place.

    Darden - can you hear me?

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Sean Williams

A Fool since 2010, and a graduate from UC San Diego with a B.A. in Economics, Sean specializes in the healthcare sector and in investment planning topics. You'll usually find him writing about Obamacare, marijuana, developing drugs, diagnostics, and medical devices, Social Security, taxes, or any number of other macroeconomic issues.

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