Despite increases in first-quarter profit and revenue, Darden Restaurants Inc. plans to make big changes to spur future sales at its flagship Olive Garden and Red Lobster brands, including revamped advertising and revised menus.
Orlando-based Darden, which operates 2,006 restaurants under the Olive Garden, Red Lobster, LongHorn Steakhouse and other brands, said menu changes at Red Lobster would include more non-seafood choices and items priced below $15. At Olive Garden, changes will include more healthful menu items, affordable choices and additional lunchtime options.
The menu moves come as Olive Garden reported a 0.3-percent increase in same-store sales for the August-ended first quarter — the chain’s first positive result in a year and a half — and as Red Lobster continues to post negative trends. First-quarter same-store sales fell 2.6 percent at the seafood chain.
“We think that the risk in a changing environment is to not change,” Darden chief executive Clarence Otis said during a call with investors. The menu changes are intended to “respond more powerfully to economic and lifestyle changes” occurring with U.S. consumers, he said.
The planned menu and price changes at Red Lobster are especially targeted to formerly loyal customers who have stopped frequenting the chain in recent years, said Drew Madsen, Darden’s president and chief operating officer. At Olive Garden, where some success has been seen, the chain’s "2 dinners for $25" promotion helped drive traffic, and company officials hope that the new changes at Red Lobster will have a similar effect.
“This promotion is focused more single-mindedly on affordability,” Madsen said.
He added that at Olive Garden, more guests are choosing to order appetizers, instead of entrées, as a full meal. Across Darden’s brands, he noted, there appears to be a “growing guest need for greater affordability, guest interest in safe experimentation and … increasing interest in smaller portions.”
Olive Garden has been experimenting with new menu options and pricing, including increasing the price of the chain’s never-ending pasta bowl promotion from $8.95 to $9.95.
“At Olive Garden we’ve been making changes to strengthen our core menu,” Madsen said. “Over the next several quarters, Olive Garden plans to undertake a phased introduction of several new menu platforms that will further strengthen affordability, expand their selection of lighter choices, broaden dinner variety beyond their core pasta equity and increase their number of lunch-appropriate choices.”
In addition, he said, Olive Garden is in the process of rolling out a “Via Tuscany” interior and exterior redesign that will speed up in the second half of the current fiscal year. Eighteen locations have already been renovated, he noted.
Securities analysts saw Olive Garden’s positive results as a sign the chain has completed a turnaround but note that more time may be needed at struggling Red Lobster.
“We argue the worst is over for Olive Garden, and as that concept continues to reassert its value heritage with a revamped menu and new messaging in the next couple of quarters, we anticipate continued momentum on same-restaurant sales,” Miller Tabak + Co. analyst Stephen Anderson said in a report. “We also think there is an opportunity for Red Lobster to gain incremental sales with its upcoming core menu designed to gain ‘veto voice’ customers.”
For the quarter ended Aug. 26, Darden’s net income increased 3.9 percent to $110.8 million, or 85 cents per share, from $106.6 million, or 78 cents per share, in the same quarter the previous year. Revenue rose to more than $2 billion from $1.9 billion.
Outside of Olive Garden and Red Lobster, same-store sales rose 3.6 percent at LongHorn Steakhouse. Darden’s Specialty Restaurant Group, which is composed of The Capital Grille, Bahama Breeze, Seasons 52, Eddie V’s and the newly acquired Yard House brand, posted a same-store sales increase of 2.2 percent.
First-quarter total sales at Red Lobster hit $660 million, a 2.1-percent decrease from the previous year quarter. Sales at Olive Garden rose 4.3 percent to $922 million, and sales at LongHorn Steakhouse increased 12.7 percent to $285 million. In the Specialty Restaurant Group, aggregate sales rose 26.4 percent to $163 million.
Shareholder activism hits Darden
Before the company’s latest-quarter earnings report, conflict broke out at Darden’s Sept. 18 annual shareholder meeting after several activists and former employees complained about some of the company’s practices. According to an Orlando Sentinel report , complaints surrounded employee pay and paid sick leave.
The published story said one Darden employee urged Otis to hold a separate meeting with employees to address complaints. Otis reportedly refused, saying Darden already has avenues through which employees can file grievances.
The scuffle occurred as Darden is being sued in federal court in Miami for allegedly underpaying employees and forcing “off-the-clock” working hours.
John Cronan, an organizer with Restaurant Opportunities Centers (ROC), a group that supports service workers, said he was a former waiter at The Capital Grille and often waited on customers while ill. "I couldn't afford to take a day off even if I was sick," he was quoted as saying by the Orlando Sentinel.
Otis replied: "As a former worker, you know that we have very strict and aggressive rules to encourage people not to come to work when they're ill, so I'm glad you're a former employee and not a current employee."
Darden spokesman Rich Jeffers was quoted by Reuters news service as saying the company believes the allegations "are baseless and fly in the face of our values and how we operate our business."