Olive Garden has lived by this creed for the better part of a year: Give up traffic, but make decisions with the long-term health of the business in mind.
And it boils down to the state of the industry, Darden CEO Gene Lee said during the company’s latest quarterly review. The luxury to plan ahead instead of reaching for the discounting panic switch when dining habits shift and costs rise.
“There are times when you look at the business and you say, I’m OK with losing 10 or 15, 20 guests a week and being able to protect our business model,” he said.
“I don’t think you can just have, let’s do everything we can to grow traffic, or let’s do everything we can to protect our business,” Lee added. “I think it has to be done in balance.”
Olive Garden’s same-store sales lifted 2.2 percent in the first quarter of fiscal 2020—the brand’s 20th consecutive period of comps growth. Total sales upped 3.6 percent, with 1.4 percent added in from new restaurants (Olive Garden had 867 restaurants as of August 25 compared to 858 last year).
It’s important to tack on that Olive Garden’s 2.2 percent top-line result builds off Q1 2018’s 5.3 percent, which marked the chain’s best performance since at least 2008. That came with positive comparable guest counts of 1.5 percent, year-over-year.
While this paints an impressive two-year stack, and enviable to the category, Olive Garden has shifted course a bit in recent quarters.
You can see it in the results:
- Q1 2020: 2.2 percent
- Q4 2019: 2.4 percent
- Q3 2019: 4.3 percent
- Q2 2019: 3.5 percent
- Q1 2019: 5.3 percent
- Q1 2020: –0.8 percent
- Q4 2019: –0.4 percent
- Q3 2019: 0.1 percent
- Q2 2019: –0.8 percent
- Q1 2019: 1.5 percent
Traffic has been negative in three of the last five periods, with one (Q3 2019) just scratching positive territory.
This is far from a sour narrative, however. Following Olive Garden’s blazing start to 2019, Darden ran 16 fewer weeks of incentives, primarily email, compared to the year-over-year quarter. And that included some weeks where Olive Garden pulsed multiple offers in fiscal 2018. In Lee’s words, “We really didn’t have any offers out there this year.”
The logic was measured and straightforward—in typical Darden style. The demand environment was strong, so it marked a good opportunity to remove some incentives and save them for harder times. In the future, if Olive Garden needed them, it could add back in. The near-term result: Sales profitability jumped to the front while traffic moved to the back seat.
Here’s another way to look at it. Olive Garden’s same-store sales gap versus competitors in Q1 (2.2 percent) was 340 basis points, according to Knapp-Track, excluding Darden. Per the restaurant tracker, the industry’s total sales growth was flat this past quarter. Comps fell 1.2 percent and guest counts declined 3.3 percent.
So, while Olive Garden’s sales didn’t jump off the chart, the distance from mainline competitors was its widest since Q1 2019, when the figure bumped 5.3 percent. That says as much about the industry’s overall dynamic (heavily marketed discounts, a push for off-premises to cover dropping guest counts) as it does Olive Garden. And also, Darden’s ability to survey the broad view instead of narrowing its focus to a quarter-to-quarter window.
On a two-year basis, Olive Garden’s total sales are up nearly 10 percent, which sails the industry benchmark by 840 basis points. Lee’s notion of striking a balance between traffic growth and guarding profitability? Olive Garden is simply doing it better than most. (In Q1, segment profit margin increased 40 basis points by leveraging the same-restaurant sales growth and managing costs effectively, the company said).
Additionally, half of Olive Garden’s negative traffic in the previous quarter was due just to catering delivery. Darden doesn’t give itself guest counts for that side of its business. If it adjusted methodology, the brand would have posted positive numbers, Lee said.
How Olive Garden is besting industry norms is a three-pronged discussion: execution through simplification (a Darden staple that’s been four years in the making), everyday value, and convenience. And on the latter point, doing so by inspiring off-premises visits through four-wall experience, not by broadening reach via aggregator platforms.
Lee said Olive Garden’s catering delivery metrics reflected the highest intent to recommend within the brand in Q1, “giving us confidence that our teams are delivering great experiences inside and outside the four walls of our restaurants.”
What Olive Garden did in regards to promotional activity in Q1 also provides a peek behind the company’s strategic curtain. It decided to separate its two strongest value promotions—the Buy One, Take One and Never Ending Pasta Bowl—to more evenly deliver the value messaging throughout the year. That change, along with associated media shifts and “weakening industry trends,” resulted in lower traffic than last year. But, again, “it was the right strategic decision for the long term,” Lee said.
In August, Olive Garden removed the “never ending” limits on its Pasta Pass with the introduction of a Lifetime Pasta Pass. The company offered 24,000 of its buzzy deal for $100. But at time of purchase, the first 50 people could upgrade to the lifetime offer for an additional $400. This year, guests got nine weeks of unlimited pasta, one more than 2018. Also, throughout the promotion, which started September 23, customers who didn’t win a pass could order unlimited pasta, soup, and salad starting at $10.99.
“We’ve been saying for a while that the consumer didn’t want to be told what they had to do, what they had to buy to get that value.” — Darden CEO Gene Lee.
Splitting the Buy One, Take One and Never Ending deal helps Olive Garden spread the transactional wealth throughout the fiscal calendar and anchor its menu balance period to period. The time-tested approach of getting customers through the door with value, supported by marketing spend, and then letting them ladder up in-store to drive check. It lets Olive Garden build off the specific promotions, too, instead of just enjoying a wealth of burst traffic.
For instance, Olive Garden recently added $5 take-home entrées to its everyday value lineup, which it pushed with national advertising to drive awareness. “It has been met with strong guest demand,” Lee said. “And it will be a catalyst to continue to grow the off-premises business.”
The move was inspired by the strength of Olive Garden’s Buy One, Take One offer. Lee said the two shouldn’t cannibalize each other. In fact, if done right, they’ll do the opposite—provide support. “After you run the Buy One, Take One, that should be the springboard for $5 take-home for the rest of the year,” Lee said. “And you can reenergize the promotion each year. … It should be additive. It shouldn’t be dilutive at all.”
Olive Garden pushed further into everyday value by launching a new weekday lunch menu with 21 options under $10, including guest favorites like Chicken Parmigiana and items from the Tastes of the Mediterranean menu like Chicken Margherita. Olive Garden introduced this to guests through integrated marketing, and produced stronger weekday lunch traffic and guest preference as a result, Lee said.
Everyday value strength has been critical to Olive Garden’s ability to rely less on incentives. In Q4, the brand refreshed its 5 for $5 value drink platform and increased awareness on everyday deals through secondary TV advertising. Instead of LTOs, Olive Garden promoted options like its Lunch Duos at $6.99, everyday Early Dinner Duos at $8.99, and Cucina Mia! Starting at $9.99.
Lee had this to say last quarter about the decision to go heavy on embedded value over pulsed, high-profile deals. “We’ve been saying for a while that the consumer didn’t want to be told what they had to do, what they had to buy to get that value,” Lee said.
In other terms, a way to inspire repeat visits is to let guests control their value experience. And to create a menu they can count on and explore, trade up, and access to their own occasion needs.
That’s why bringing a broad lunch menu with an affordable, set price structure has resonated so strongly with Olive Garden’s customers.
What’s happening overall
When Darden looks at the data and customer behavior, Lee said, it shows an uncertain environment for restaurants. It’s impacting confidence and consumer spending, which was anchoring business for a while. This is somewhat surprising considering unemployment continues to hit record lows and wage growth is strong. Historically, that was a positive equation for restaurants. But it doesn’t appear to be producing the same effect today.
The solution, Lee added, is to “create compelling guest experiences and come up with and reinforce our value propositions.”
Few things are more effective at doing so than sticky value. However, just saying Olive Garden has shed promotional activity in favor of everyday items wouldn’t be a complete definition.
“As far as discounting, we’re going to continue to use whatever levers we can use to grow our business. When we look at incentives, we don’t look at them just as one piece,” Lee said. “We have to look at our overall advertising program, what is going on from a television standpoint, what’s going on from a digital and online, what are we doing from an incentive standpoint.”
“We have multiple ways to put incentives out there,” he added. “And so, we have a lot of leverage that we can pull over time depending on the environment, and we will use those appropriately to drive our business in a profitable way.”
Basically, expect Olive Garden to adjust as the customer and the industry does. And to try to do so a few steps ahead thanks to its own healthy results. That’s the benefit of planning long term—the ability to be proactive instead of reactive to trends when it comes to operational decision making.
“The one thing that I think that we are proud of, and I’m very proud of our teams, is that we continue to drive our business while protecting our margins. And we continue to invest in our business, invest in quality, invest in food, invest in portion size, invest in our people,” Lee said. And we’re able to do that in a way that has protected our margins, and, as [CFO Rick Cardenas] talked about, our [8.1] percent EAT margins are incredibly impressive in this environment. And so, when we think about incentives, we think about it holistically in all that we’re doing to build our brands over the long term.”
Food and beverage costs were flat at Darden in Q1 compared to last year as pricing of 2 percent (2.2 percent at Olive Garden) and cost savings initiatives offset commodity inflation of about 1.5 percent. Labor was also flat. Total labor inflation of 4 percent was offset by pricing, check mix, and productivity improvements.
The 2.2 percent pricing mark was on the high end for Olive Garden. The chain’s goal in the future is still to take price at less than 2 percent, Cardenas said, to keep it below inflation and competitors and to cement the brand’s value perception.
Olive Garden continues to buck third-party delivery due, in many ways, to this same value concept and aforementioned trends. The brand isn’t quite comfortable with the value-proposition just yet. Yet Olive Garden isn’t ignoring convenience. A key unlock has been optimizing the digital sales channel for mobile and desktop, Lee said.
In Q1, digital sales leapt by more than 30 percent and represented roughly 40 percent of to-go business. Overall, off-premises sales grew 12 percent, mixing 14 percent of total sales. Some units push north of $1 million in off-premises sales.
“To me, it’s really about making that experience as compelling as we possibly can with great value, right?” Lee said. “That’s been our strategy—make sure we have strong value on the off-premises and have the consumer be willing to come pick it up versus it being delivered.”
Olive Garden recently debuted a prototype in Orlando that features a full dedicated off-premises area. LongHorn has a similar setup in more than half of its restaurants.
Lee said Darden is watching third-party delivery closely and acknowledged that the cost burden appears to be shifting from the company to the consumer. “But I think I have a lot of concerns about that,” he said. “It’s all about value and how much of the overall experience are you willing to dedicate toward convenience.”
“… But I want to put it back to what I said earlier: Our job is to create a compelling off-premises experience right now, with so much value, that the consumer is willing to come and get it.”