Olive Garden's Garlic Rosemary Chicken

Olive Garden

Olive Garden continues to cut back on incentives.

Olive Garden's Menu Strategy is Tough to Rival

Few brands at this scale, if any, can counter the value proposition.

To say Olive Garden has landed on an effective menu strategy wouldn’t do it justice. Let’s just take a two-quarter sample into consideration. Last quarter, the 860-unit chain saw comparable guest counts decline 0.8 percent as it pulled back incentives, primarily email promotions. It ran 16 fewer weeks during the quarter and that included some weeks where Olive Garden presented multiple offers in the comparable period.

What made this so unique, at least from the perch of casual dining, was that Darden essentially took the hit on purpose because it could. It wanted to shift focus to sales profitability and move away from the seasonal fluctuations that accompany promotional spikes. And, not to mention, put an ace in its pocket for future use. If—and when—the industry and consumer shifts again, Olive Garden would have a powerful sales driver at the ready. It could quickly buzz the top line far more effectively than if it was trying to lap and build on previous deals. All that said, same-store sales still rose 3.5 percent that quarter.

Accelerate to the present and Olive Garden just reported its 18th consecutive period of same-store sales growth in the third quarter that ended February 24.

Total sales upped 5.3 percent as same-store sales grew 4.3 percent and comparable guest counts returned to positive territory at 0.1 percent. Also worth noting: Q1’s comps of 5.3 percent were Olive Garden’s best since at least 2008.

Darden CEO Gene Lee’s belief that Olive Garden could thrive without a heavily incentive-laced strategy was spot on. The brand continued to reduce deals this past quarter and still sailed industry benchmarks across the most critical metrics. Excluding Darden, the industry’s total sales rose 2.1 percent in Q3; same-store sales lifted 0.8 percent; and industry traffic declined 1 percent.

Olive Garden’s comps in Q3 were fueled by a check average increase of 4.2 percent. But how that unfolded tells the bigger story. It was comprised of just 1.8 percent pricing. The rest was a 2.4 percent menu mix.

What that means is consumer preference drove the result. Lee said guests reacted positively to Olive Garden’s menu, and its Chicken Alfredo entrée that now contains 50 percent more chicken. The reduced incentives also had a positive impact on mix. An example of this change: Olive Garden chose to shift from nine to six deals last March, including removing the Buy One, Take One deal for the time being. It then took a $1 price increase for the Never Ending Pasta Bowl that didn't deter guests, Lee said, and pushed an everyday value proposition over a value-seeker one. Olive Garden redesigned its menus to more prominently showcase two platforms that fit the bill: unlimited soup, salad, and breadsticks, and Cucina Mia! The brand also launched a 5 for $5 beverage platform.

Olive Garden didn’t kill promotions—there have simply been less of them lately. Does that also create pent-up demand for the ones that do run? Lee said Olive Garden’s Oven Baked Pastas and Never-Ending Stuffed Pasta deals hit all-time highs for overall guest satisfaction in the quarter.

“I do think that consumer demand for convenience continues to grow, and I think that we're meeting that need. And I do think that the value proposition and what we do in Olive Garden is spectacular, and the execution and the thought that went into this over the last four years has helped them continue to gain market share.” — Gene Lee, Darden CEO.

The chain’s value ratings also climbed to record levels, he said, as Olive Garden continued to stress that everyday value message over a fleeting one. Offers such as Lunch Duos, Early Dinner Duos, and Cucina Mia!

Olive Garden is in the second year of its Early Dinner Duos and didn’t really advertise it heavy out of the gate. So it’s matured. The flexibility of its Lunch Duo section has allowed Olive Garden to keep offerings fresh and pulse new news into an everyday platform. And it gives the company price certainty at lunch, which is a key driver of repeat business at what’s typically a challenged daypart for sit-downs. Guests know what to expect price wise, while Olive Garden has kept the platform appealing through continual innovation. Cucina Mia!, meanwhile, is approaching 10 percent of sales. The create-your-own, 4-year-old program continues to report strong preference, Lee said.

Lee added Olive Garden’s is seeing a very strong customer right now overall—one who is upgrading in the promotional constructs the chain created. Also, given the fact that most of the added mix is coming from entrées, not the add-on sales side, Olive Garden was able to continue improving throughput. The mix hasn’t extended the meal period or complicated execution.

All these layers result in a very strong value proposition for Olive Garden few chains can rival. And it works for the core consumer on multiple fronts—price, abundance, and Olive Garden's brand promise.

“The consumer continues to utilize the full menu in Olive Garden and has surprisingly, in some ways, bought up into the promotions, and it's really been a confluence of a lot of small individual things coming together that has drove the mix,” Lee said.

Lee admitted Q3's mix, with check driving results, is not necessarily sustainable long-term or how Olive Garden sees the big picture.

The brand’s overarching strategy has long been to use scale to underprice competition over the long haul, and to devise productivity enhancements on the operations side to offset inflation.

So with the incentives cutback, could there be an opportunity for Olive Garden to take further traffic share given how many brands are reacting to the inflationary pressures we’re seeing, like labor? Which is to say restaurants are raising prices to guard margins. The traffic versus margin trade-off conversation, in other terms. Or will Olive Garden raise the pricing umbrella as well?

Olive Garden

Olive Garden's value proposition is top of class in the industry.

“I think it's going to be a combination of both,” Lee said. “… Depending on what others do, then we'll react to that. Hopefully, it'll be an opportunity for us to be able to maybe pass on a little bit more pricing than we have in the past, but maintain our strategy of underpricing the competition, but also use it as an opportunity to gain some share.”

And as far as the incentives themselves, Olive Garden is leaving the door open.

“The incentives are just one piece of our overall advertising and marketing strategy. And we'll continue to try to optimize how we spend our advertising dollars and how we interact with our consumers,” he said. “And so depending on the environment and the competitive situation, we will make adjustments as needed to try to continue to grow our share and increase same-restaurant sales, but this is just one piece of our marketing and advertising strategy.”

Other levers

Lee has often said Olive Garden, and Darden in general, would skirt large-scale delivery until it made sense. Right now, the brand is having plenty of success generating off-premises business from platforms it can control—like catering and to-go. In this past quarter, Olive Garden’s off-premises business jumped 13 percent and represented 15.9 percent of total sales.

On just Valentine’s Day, which is traditionally Olive Garden’s second busiest day, off-premises sales hiked 20 percent. The chain also saw an eye-opening 52 percent increase in online orders as “more guests took advantage of the convenience of online ordering,” Lee said. This reflects a changing industry, one where more guests are choosing to eat at home, and millennials are pushing the convenience debate into uncharted territory. This is also a prime example of a restaurant chain meeting that demand instead of being buried by it.

Like always, Lee didn’t offer up a convoluted reason why this is working at Olive Garden. It’s simply another tenet of the company’s “back-to-basics” operating philosophy instituted four years ago. “Our consumers know they can count on Olive Garden to be on time and to be accurate,” he said. “When you put that on top of an awesome value proposition to the consumer, especially around pans of lasagna or pans of fettuccine Alfredo, our bulk salad or our bulk soup, our offering is compelling and our execution is really high. And what that tells me is the consumer is really engaged in that experience.”

“We're doing a normal level of communication to our guests to remind them of the experience, but the repeat business there is extremely strong,” Lee added. “And, to me, it's one of the best values out there in the marketplace and executed at an extremely high level.”

Value. Execution. A distinctive and authentic proposition guests can count on.

“I do think that consumer demand for convenience continues to grow, and I think that we're meeting that need,” Lee said. “And I do think that the value proposition and what we do in Olive Garden is spectacular, and the execution and the thought that went into this over the last four years has helped them continue to gain market share.”

The off-premises strategy mirrors the four-wall one for Olive Garden. And to get there, Lee said, the chain needs to add employees to offset expansion, not try to rearrange or overload current staff. “ … that's going to provide us the opportunity to add more people to make sure that we actually get the food on time and accurately to the consumer as they walk in the door,” he said.

Management turnover is actually lower today than a year ago, Lee said. The goal: get to less than 10 percent.

Olive Garden

Olive Garden just keeps churning out industry-leading results.

The state of the industry, and Darden’s take on buying another brand

Lee often comments on the restaurant climate and where Darden slots in. He said the consumer environment continues to be strong, confidence remains high, and wages are growing.

“I think the consumer today, folks, is really strong, and I really like the position that we're in,” he said. “I think we're seeing it in all of dining. When you look back at our last quarter, with Darden, the industry grew approximately 3 percent total growth, and that's a really good number. I'm excited about that. I think we're going to continue to be able to grow share in that environment.”

Lee also said Darden was focused on its most recent acquisition—$780 million Cheddar’s Scratch Kitchen—and not on playing the crowded M&A field. He didn’t squash the idea entirely but said, “I think it’s important to reinforce that we do not need to do an acquisition in the foreseeable future to be able to achieve our long-term framework.”

The sales picture

As a whole, Darden’s total sales increased 5.5 percent to $2.25 billion in Q3. The company added 39 net new restaurants and achieved blended same-store sales of 2.8 percent. LongHorn Steakhouse recorded a lift of 3.8 percent; The Capital Grille rose 4.3 percent; Eddie V’s 3.7 percent. Cheddar’s (–2.7 percent), Yard House (–2.1 percent), Seasons 52 (–1.3 percent), and Bahama Breeze (–3.7 percent) tracked negative, year-over-year. Lee credited weather challenges for the lagged results at some of its smaller brands.

The company also lifted guidance on total sales to 5.5 percent from 5–5.5 percent and same-store sales to 2.5–2.7 percent from 2.5 percent.