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Darden to keep value in the mix

Heard on the Call: Company to maintain promotion strategy while taking some price increases

With consumers still cautious about spending, Darden Restaurants Inc. said it would continue to offer value in its menu promotions while taking selective price increases.

Executives at the company told analysts Friday that the effectiveness of its third-quarter promotions played a major role in the 0.9-percent increase in blended same-store sales across its big three brands, with successful offers at LongHorn Steakhouse and Red Lobster offsetting a weak ravioli-focused promotion at Olive Garden.

Darden, which also owns The Capital Grille, Bahama Breeze and Seasons 52 chains, earlier cited the positive same-store sales at its three major brands as a contributor to a 13-percent increase in net income for the Feb. 27-ended period. FULL RESULTS

A successful national-TV push at LongHorn drove strong same-store sales that made up for flat same-store sales at Olive Garden and Red Lobster. The Italian dinnerhouse chain missed with a ravioli-focused limited-time offer, while Red Lobster’s relatively successful promotions centered on price points were offset slightly by a calendar shift.

Darden officials said a long-term menu price increase outlook of 2 percent to 3 percent would not be across the board, but on certain items that could withstand slightly higher prices. Promotions focused on price point have not siphoned off orders of standard menu items, they added.

“So far, from things we’ve advertised and put on our promotional menus, we haven’t seen significant shifting away from the menu items we’ve taken price on,” said Drew Madsen, president and chief operating officer.

Olive Garden LTO falls flat

Olive Garden’s flat same-store sales in the third quarter resulted in large part from a ravioli limited-time offer that did not move the needle as much as Darden targeted after testing it.

“We didn’t get the traffic we wanted, but it wasn’t because we were trying to build margins,” Madsen said. “[The ravioli offer] has the same $10.95 price point as a year ago, and we did our endless soup, salad and breadsticks again. We leaned into a longer-term business-building opportunity, and it didn’t get quite the same interest as it had in testing. It was more [the result of a lack of] effectiveness than going after margins.”

Madsen said Olive Garden’s long-term marketing strategy is to drive incremental visits with compelling new items, balance those with value-focused promotions, and over the long haul differentiate the chain with ambitious culinary-focused items. The problem with the ravioli limited-time offer, particularly the pear and gorgonzola ravioli, was that its elevated flavor profile didn’t drive traffic as much as it may have bolstered Olive Garden’s culinary appeal, Madsen said.

“Ravioli is broadly appealing and has worked well for us in the past,” he said. “The conceptual appeal and guest satisfaction levels, along with the advertising clarity and persuasiveness, tested well within the norm, but we didn’t get the results we expected. It’s our judgment that it was a little too culinary-forward, which is why it didn’t drive the incremental guest counts as the other ravioli at $10.95 did last year in the third quarter.”

Chief executive Clarence Otis added that there always is variability around Darden’s sales targets coming out of test, “probably more so in this environment, when the consumer is cautious about spending.”

“We have three major brands that can run their businesses this way, and we can get some offsets, which is what happened [in the third quarter],” he said. “It all netted out to a combined number that was about what we thought we’d get, about 1 percent.”

Price is right for Red Lobster

Red Lobster’s 0.1-percent increase in same-store sales beat Darden’s expectations of a 1-percent decline, even despite the negative impacts of inclement weather and a calendar shift resulting in a later start to Lent.

The chain’s price-point-focused promotions helped drive traffic, Madsen said, starting with December’s Surf & Turf offering, which combined a peppercorn sirloin steak with shrimp for $14.99, steak and snow crab legs for $17.99, and steak and grilled lobster tail for $19.99.

“This was the first time Red Lobster ever promoted steak successfully,” Madsen said. “It came when our competitors also advertised surf and turf at lower prices, which showed as the we don’t need to discount as heavily [to maintain market share].”

Subsequent promotions like the Seafood Dinner for Two for $29.99 and Lobsterfest — with price points ranging from $20 to $33 — worked for Red Lobster in the third quarter not just for attractive price points but also because they were compelling, Otis said.

“Value has to be part of the mix as you think throughout the year, but it’s not a continuous siren song around price points and promotion,” he said.

As seafood costs rise, Darden will look not just at Red Lobster but across all its brands to find menu items that could withstand price increases to mitigate the inflation.

“We manage the entire portfolio of brands,” Otis said. “We have the ability to absorb some line items that may be highly inflated in one brand but not in the others. We’ve done it in the past, when we’ve seen the market basket for Olive Garden be elevated when it’s not at other places. We’ll do that with Red Lobster and seafood costs.”

Madsen added that the calendar shift moving back the start of Lent would help Red Lobster’s sales in the fourth quarter, just as it hurt results in the third quarter.

LongHorn ready for its close-up

LongHorn Steakhouse’s 6.1-percent increase in same-store sales came as the chain promoted a stuffed-filet offering and a “Values from the Grill” special menu with national cable advertising. As it comes time in 2012 to lap its first national TV push, Otis said Darden would increase national advertising for LongHorn as the chain adds more locations.

“LongHorn’s media weight is a fraction of Red Lobster’s and Olive Garden’s,” Otis said. “They spend a fraction of what their competitive set spends, which makes their same-restaurant sales growth all the more impressive.”

Remodels will be among the next big initiatives for LongHorn, Darden officials said. The chain refurbished 75 restaurants in the first three quarters of fiscal 2011, with 37 more locations to be updated in the fourth quarter and the remaining 27 units to be reimaged in the first half of fiscal 2012.

Orlando, Fla.-based Darden operates 1,868 casual-dining restaurants across all its brands.

Contact Mark Brandau at [email protected].

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