Will Online Ordering Really Help Olive Garden?

Recently, Darden Restaurants (NYSE: DRI  ) , which owns eight concepts, announced it would soon be adding online ordering to Olive Garden, while testing computerized capabilities at its LongHorn Steakhouse locations later this year.

Darden Restaurants falls within the highly crowded full-service restaurant segment, which includes peers Brinker International (NYSE: EAT  ) , which owns Chili's Grill & Bar and Maggiano's Little Italy, and Bloomin' Brands (NASDAQ: BLMN  ) , which owns five concepts including company staple Outback Steakhouse.

Olive Garden, Red Lobster, and LongHorn Steakhouse make up 1,995 of Darden Restaurants' 2,190 total restaurants. However, all three concepts have struggled significantly in recent quarters.

Will these new technological capabilities be the catalyst that turns Darden Restaurants around?

Will online ordering make things brighter for Olive Garden? Source: Anthony92931, via Wikimedia Commons.

Recent earnings comparisons
Third-quarter FY 2014 earnings for Darden Restaurants echoed more of the same results they reported in previous quarters. Olive Garden and Red Lobster saw their same-store sales fall 5.4% and 8.8%, respectively. LongHorn Steakhouse saw negligible same-store sales growth at 0.3%.

Restaurant traffic was negative for each of the three core concepts. However, Red Lobster continues to be the biggest roadblock overall, as it saw double-digit declines in each month of the quarter.

By comparison, both Brinker International and Bloomin' Brands had both positive restaurant traffic and same-store sales in their recent quarters. Their revenues and net incomes benefited overall, as shown below.

 

Revenue Change Last Quarter 
(vs. same quarter of previous year)

Net Income Change Last Quarter 
(vs. same quarter of previous year)

Bloomin' Brands 

+5.2%

+221%

Brinker International 

+2.1%

+6.9%

Darden Restaurants 

-1.1%

-18.5%

Source: Company earnings reports. Bloomin' Brands net income increased from $18.4 million in the fourth quarter of 2012 to $59.0 million in the fourth quarter of 2013.

Will online ordering really help Darden Restaurants?
At first glance, the addition of online ordering is a step in the right direction for Darden Restaurants.

However, online ordering and the computerized conveniences Darden Restaurants plans to roll out this year have been implemented throughout the restaurant industry for years.

Both Chili's Grill & Bar and Outback Steakhouse have provided similar capabilities for years. Furthermore, Darden Restaurants is still testing carside delivery for Olive Garden, which is comparable Outback Steakhouse's almost 10-year-old curbside delivery service, but the fact that Darden won't be making its service available nationwide shows that it's still lagging behind competitors.

It is really the perfect example of putting the cart before the horse. Instead of focusing on fixing the menus and addressing the source of the problems at the three core concepts, Darden Restaurants is only adding another option for customers to order food they are not ordering within the restaurants themselves.

Darden Restaurants should also figure out the future of Red Lobster, because if it plans to keep the concept, it would make sense logistically and financially to also add computerized conveniences to Red Lobster, too, not just Olive Garden and LongHorn Steakhouse.

Darden Restaurants plans to add computer tablets to LongHorn Steakhouse locations this summer. Restaurants that use this technology have reported 20%-30% increases in appetizer and desert sales. Chili's Grill & Bar has seen similar numbers, and recently stated that half of its customers currently pay from these computer tablets.

Eight brands under one roof. Source: Darden Restaurants.

Where Darden Restaurants should focus
In 2013, the full-service steakhouse restaurant category saw sales increase 6.2% overall. LongHorn Steakhouse was one of the category's leaders, with 12.8% sales growth. While LongHorn Steakhouse is part of the technology rollout plan for Darden Restaurants, there is still room for it to further improve its portfolio's bright spot.

Better advertising and marketing could help LongHorn Steakhouse trim away some of Outback Steakhouse's $4.1 billion annual sales that have helped it keep its first-place ranking in the segment.

Lastly, there is a problem with the business philosophy within Darden Restaurant's management. In the company's last earnings conference call, CEO Clarence Otis, Jr., stated that Red Lobster is a special occasion experience for a lot of its guests. This appears to be in contrast to what Brinker International and Bloomin' Brands have followed in recent years.

Outback Steakhouse has recently expanded its operating hours to focus on the $25 billion domestic lunch segment. As a result, it hopes to give customers more reasons to visit, and make Outback Steakhouse an anytime occasion experience.

Likewise, Chili's Grill & Bar has marketed itself as a destination for lunch and happy hours for several years.

Bottom line
Introducing online ordering and computerized conveniences at Olive Garden and LongHorn Steakhouse restaurants is a move intended by Darden Restaurants to improve sales.

However, it may be wiser for Darden Restaurants to first address why foot traffic continues to fall each quarter, and what its competitors are doing differently that makes them successful.

Carside delivery to be tested again in FY 2015. Source: Darden Restaurants.

In the end, adding technological capabilities like online ordering may prove costly, and may just further hurt Darden Restaurants' bottom line.

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