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Darden emphasizes traffic, not margins

Darden emphasizes traffic, not margins

Analysts say the strategy is key to long-term health of major brands

Restaurant traffic, not margins, will continue to be the “best measure of brand health” for Darden Restaurants’ three largest brands, said chief executive Clarence Otis during last week’s earnings call with analysts.

Darden’s three largest brands — Olive Garden, LongHorn Steakhouse and Red Lobster — have struggled throughout the past year to maintain casual-dining market share. The fourth quarter, however, marked a slight uptick in same-store sales for all three brands.

The positive change was largely attributable to value marketing, according to company executives.

Addressing consumers’ continuing need for affordable dining options is key to driving traffic, Otis said, adding that traffic is the key to gaining customer loyalty during tough economic times.

“To the extent that that puts pressure on restaurant-level margins, that's pressure we're willing to accept,” he said. “Now we've got…restaurant-level margins that are very high at our brands from a competitive perspective, so we've got some room there, especially at Olive Garden, where the restaurant-level margins…continue to be the highest in the industry.”

The strategy of sacrificing margins for traffic is a good one, said Will Slabaugh, restaurants research analyst at financial-services firm Stephens. It’s a strategy that has worked for other brands, he said, including McDonald’s and Red Robin: Get customers in the door, and once the economy improves, shift them toward higher-priced menu items.

“It’s medicine I think they have to take,” he said. “They have to reset the menu base and focus on bringing people in the door.”

Slabaugh added that in the near term, lower margins aren’t going to look good from an earnings standpoint. But, he emphasized, the strategy is necessary for the brands’ growth.

“I think over the long term, this is the right strategy,” Slabaugh said of Darden. “If we were to go over 12 months and not see any margin expansion and see customers begin to move up toward more profitable menu items, then I think that would be cause for alarm. As of now, I think the plans they have in place make sense.”

Stephen Anderson, senior analyst, restaurants, at Miller Tabak + Co., said that the idea of trading margins for traffics isn’t a new story — it’s one Darden has been pushing for several quarters.

Anderson said the strategy is similar to that taken by Applebee’s and Chili’s, which were able to grow same-store sales nominally by 1-3 percent after instituting 2 for $20 deals.

“I think the same thing will happen at Darden,” he said in an email.

Darden has introduced multiple value offerings throughout the year, including conducting a full revamp of Red Lobsters’ menu in October. The menu now features more non-seafood items, and more items cheaper than $15.

Olive Garden is currently testing a weeknight family-style dinner in seven markets. The $29.99 package serves four people and comes with soup or salad, breadsticks, and a choice of two entrée platters.

Orlando-based Darden has more than 2,100 locations systemwide.

Contact Erin Dostal at [email protected].
Follow her on Twitter: @ErinDostal

TAGS: Finance News
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