Hey, Darden Restaurants: Try Going More Upscale with Olive Garden

Darden Restaurants earnings result continue to disappoint.

Jul 5, 2014 at 9:00AM

Olive
Needs some help.  Source:  Wikimedia Commons

Darden Restaurants (NYSE:DRI) and Red Lobster will soon part ways. The conglomerate that will remain will consist of the company's Olive Garden and a number of smaller, faster growing restaurant chains like LongHorn Steakhouse. Unfortunately, Olive Garden hasn't exactly been a shining star. As the company struggles with discounts and promotions to revive its ailing sales, it just doesn't seem to be working. Perhaps it's because the reason customers aren't coming in Olive Garden's doors has nothing to do with prices on the menu. 

The thrown overboard results
Darden Restaurants reported fiscal fourth quarter results on June 20. Including the soon-to-be-sold Red Lobster, revenue ticked up 1% to $2.32 billion. Same-store sales popped 2.4% at LongHorn Steakhouse, lifted 2% among its Specialty Restaurant Group, dropped 3.5% at Olive Garden, and dove 5.6% at Red Lobster. Diluted earnings per share plunged 36% to $0.65.

Obviously, the bad winter storms were no help to Olive Garden and others. If you look at the monthly breakdown, though, it didn't seem to get much better during the quarter. Same-store sales for Olive Garden fell 4.4%, 2.6%, and 3.3% in March, April, and May respectively.

The highlights for Darden Restaurants as a whole were with the Specialty Restaurant Group, where same-store sales at Bahama Breeze leaped up 4.1% and flew 4% at The Capital Grille. It's interesting to note that both of those restaurant concepts, along with LongHorn Steakhouse, are more upscale feeling than Olive Garden, at least these days, as the Italian restaurant has been cheapening its menu and even begun promoting burgers.

Maggianos

Much classier.  Source: Wikimedia Commons

Go upscale-casual or go home
Consider Maggiano's of Brinker International (NYSE:EAT), for example. Brinker International is better known for its ownership of the large Chili's chain, but it also has 45 Maggiano's under its belt. Maggiano's, like Olive Garden, is an Italian casual dining chain. It's slightly more like upscale-casual like Bahama Breeze and even like Olive Garden used to be a decade or two ago.

Last quarter, Brinker International reported that its Maggiano's chain had its 17th quarter in a row of positive same-store sales. This was while Darden was struggling the whole time. What gives? I hate to be oversimplistic, but the culture and economy for Italian food hasn't gone away. Maggiano's proves that there is still a growing market.

Brinker International sees nothing but opportunity ahead to grow its Maggiano's chain and grow same store sales at the current locations. During its most recent conference call Brinker International CEO Wyman Roberts stated regarding Maggiano's, "The strength of the brand is really unquestionable. So we think there's growth, so we continue to move that – forward with that strategy."

Darden sees otherwise
Meanwhile, Clarence Otis, CEO of Darden Restaurants, complained during Darden's most recent conference call that the industry it operates in is maturing, incomes are hurting, and competition is heating up. This seemed kind of odd because Darden's more upscale concepts are growing more than the ones that the company keeps throwing discounts at.

Otis stated, "We look at these dynamics, in order to create value we got some very clear priorities." He then made mention of an "Olive Garden brand renaissance." Often "value" and brand change is code for more cheapening of a brand. Let's hope for Darden shareholders that's not the plan.

Header Company
Very nice.  Source:  Darden Restaurants

Perhaps if Darden goes the Brinker International Maggiano's route, or even looks internally at its own Bahama Breeze which has been doing well for many quarters now, it might realize that it's not necessarily about price with consumers but it's all about quality. People will pay up if you give them something good and a good experience.

Otis is proud of the new $9.99 price point on the dinner menu at Olive Garden. Really? Nothing screams "low quality" to me louder than pushing blue-plate specials at an Italian Restaurant. We all like to pay less, but sometimes price points themselves can actually be part of the overall marketing and impression. Ever eat at Maggiano's or Bahama Breeze? Make sure that you bring a couple of bucks extra in your purse or wallet and expect a long wait to be seated.

Foolish takeaway
In this Fool's opinion, Darden Restaurants is a victim of its own attempts at self-correction. Don't count on the price slashing or the lunch hamburger to turn Darden around. It's moves like this that killed the ambiance and smell of romance that Olive Garden used to have in the air.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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