Future Unit Growth
Lee said that once April hit and Darden fortified its liquidity, he knew the company would get to the other side with little issues. The industry isn’t there yet, but the Darden leader said his restaurants will be ready when it does.
Darden is preparing for an environment that will see fewer units sharing pent up consumer demand, and the full-service company plans to capitalize on the opportunity. Although some of those opportunities are taking longer to pan out than anticipated. Lee said Darden is seeing better deals on the fringe, but for the most part, the real estate market hasn’t weakened yet; he estimates another 12 months for that to truly occur.
He added that as restaurant level returns increase significantly to what Darden expects them to be post-pandemic, the company feels it can penetrate into some smaller markets and handle the cannibalization that comes from adding that restaurant.
To return to 2 to 3 percent annual unit growth, Lee said Darden will need a big contribution from Olive Garden. Additionally, LongHorn Steakhouse is expected to be the largest growth driver in the next handful of years, along with Cheddar’s Scratch Kitchen and Yard House. For LongHorn in particular, California and Texas are the “new frontier.” Darden recently opened its first LongHorn in California, but had to close it due to the pandemic. There aren’t many insights yet, but the store has done well in off-premises.
“I’m pretty optimistic that we can make those markets work in a post-pandemic world,” Lee said. “When you look at our penetration per capita versus our other steakhouse competitors, we’re a leader in relative market share in those marketplaces. So yes, there’s still a lot of backfill that we can do, but the real unit growth comes from growing Texas out to look like that Olive Garden footprint and growing California out to look like an Olive Garden or even an Outback footprint in California.”
Darden reported in December that same-store sales were down 36.9 percent in the week ending December 13, including a 32.6 percent drop at Olive Garden and a 23.3 percent slide at LongHorn.
At the end of Q2 (November 29), Darden owned 874 company-operated Olive Garden stores and 527 LongHorn stores. The company opened 19 net new restaurants in the quarter.
Expectations for Biden Administration
Lee said the primary pieces of legislation the restaurant industry will have to deal with are the $15 minimum wage and elimination of the tip credit.
President-elect Joe Biden’s administration has previously said it plans to back both measures once he takes office on January 20.
The Darden CEO said restaurants would see some wage pressure with a potential $15 minimum wage, but he thinks the industry in general can handle those pressures.
“In this kind of environment, I’m not so sure how we can deal with that in the short term,” Lee said. “How can we put more pressure on businesses by raising minimum wage this year in the short term? I think it’s more of a mid-term thing that we’re going to have to deal with. But Darden, we’re situated in a position to better handle that than most.”
Regarding the elimination of the tip credit, Lee said it’s a rule that politicians and activists want to make, but neither the consumer or employee want the relationship to change. The CEO added that it’s hard to communicate that because it’s not a good “bumper sticker,” whereas the activists and politicians can say “$2.13 is not a fair wage.”
Lee said an average Olive Garden server makes somewhere between $16 and $17 per hour and a serve at Capital Grille makes well over $40 per hour.
The Darden CEO referenced Danny Meyer’s Union Square Hospitality Group’s strategy of increasing menu prices and eliminating tipping. Union Square decided to return to tipping in July after instituting the no tipping policy back in 2015.
Lee said both employees and consumers pushed back at the no tipping strategy and that “we’re trying to solve a problem that really doesn’t exist, and that usually is not a good thing.”
“No one’s making $2.13, but we need more than a bumper sticker to communicate that, and that becomes very hard for us to do,” Lee said. “I’m hoping that we can have the National Restaurant Association and some of the larger chains have conversations with the powers to be and explain how that works. … I think there’s a big misunderstanding out there, and we’re going to have to try to do as much education as we possibly can.”
Darden is currently conducting a test in California where it’s paying a much higher base wage to servers. Lee said the strategy is simple—fewer restaurants per capita allows restaurants to price much higher. The P&L looks different, but the end outcome is more favorable, he noted.
The CEO said labor availability hasn’t been as strong as he anticipated because human capital has been absorbed into other areas. But he believes that one positive under the Biden administration will be changes to immigration, which should benefit the industry.
“We have the best employment proposition out there. In certain markets we’re going to have to work harder than others, but I think we’re pretty adept at getting our restaurants staffed,” Lee said. “We do a good job with the training, and I’m pretty confident that we can handle what’s ahead of us.”