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.
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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