A Price Rush in Casual Dining? Not So Fast, Darden Says

Could brands price out a key guest base? It's a question Olive Garden is asking.

September 24, 2021 Danny Klein

Restaurant prices in the full-service sector lifted 4.9 percent in August compared to last year, according to BLS data. The general conviction, thus far, is that customers haven’t cared. Stimulus checks and a higher-wage market have opened wallets, as has pent-up demand. Often that bridge back to experience for people starts with dining out.

Even with concerns over the Delta variant festering, restaurant sales were flat last month, as “food services and drinking places” collected a touch under $72 billion. It was 32 percent higher than the year-ago measure and 10 percent or so above 2019 levels. Importantly, however, sales were $71.9 billion in July and $71 billion in June.

Why restaurants continue to raise prices isn’t tied entirely to a consumer’s willingness to spend—it’s a reaction to inflationary pressures triggered by an ongoing labor shortage that’s affecting everything from supply to delivery to staffing inside restaurants. Operators are spending more on wages, benefits, recruitment, and PPE. Not to mention what it’s taking some to secure more product than usual on the spot market as locations exceed expectations and stress supplier’s capacity.

A full 82 percent of operators told Black Box Intelligence in a survey they’re offering higher base pay as an incentive compared to 64 percent in 2019. Fifty-four percent are offering sign-on bonuses versus just 21 percent two years ago. And yet rolling 12-month turnover was 105.7 percent for full-serves, higher than 101.5 percent in 2019. Restaurants claimed to be down, on average, 6.2 employees per unit in the front of the house and 2.8 in the back.

So is it all systems go for restaurants hoping to counter inflation with higher prices? Darden CEO Gene Lee isn’t so sure. Increases in inflation are going to disproportionately affect lower-income consumers, he said Thursday during a conference call. That’s a point everybody can agree on.

And so is the fact this group makes up a significant portion of the casual-dining base. In many ways, it’s the heart of why casual dining, or at least the modern version of it, emerged in the first place, led by Norman Brinker’s concept creation. It exploited a niche between fast-food and upscale dining, especially in rural markets across America.

Lee understands the short-term realities, and what that might require of brands to navigate COVID setbacks. Darden, though, remains “incredibly focused on the longer-term pushback,” he said.

“People are saying, well, we're pushing this off [price] and I guess, no one is pushing back. Eventually, it's going to be pushed back,” he said.

Darden choose to be cautious with pricing in spite of competitive trends, especially at Olive Garden and Cheddar’s. Olive Garden notched two-year check growth of only 2.4 percent. The rest of the industry? More than 5 percent.

“We want to make sure this big group of consumers that we service feel as though they can still come into our restaurants and get extremely great value for what they have to pay,” Lee said. “And so, I think that those who manage through this prudently, those who really take a longer look, we'll get through this.”

“I think those who pass through a lot of price, they aren't really managing their costs effectively,” he added. “I think we've got to really think about how we manage our costs going forward, because at some point, your average consumer could get priced out of casual dining if it costs too much.”

Olive Garden’s same-store sales in Q1 climbed 37.1 percent, year-over-year, against the COVID downturn. On a more telling, two-year look, the 877-unit chain’s comps were flat over pre-coronavirus days. Segment profit margin increased 220 basis points, however, and off-premises accounted for 27 percent of total sales, with digital transactions mixing 60 percent of that take.

Compared to some casual peers, Olive Garden’s flat two-year stack is muted. Texas Roadhouse’s same-store sales rose 21.3 percent versus 2019 in its most recent quarter, while Outback was up 11.3 percent, and Chili’s 8.5 percent.

Yet Lee called Olive Garden’s performance “unbelievable,” noting it isn’t so black-and-white these days as lining comps up side-by-side. The chain posted a 23.2 percent restaurant-level earnings percentage and saw profit hike $25 million over pre-COVID.

Essentially, the fact Olive Garden is getting such results and not raising prices has Lee feeling optimistic about its path forward. “With this inflation going through, longer term… [the winners are] going to be the ones who provide exceptional value to the consumer. And we're trying to position Olive Garden to be that brand. It's historically done well in downturns. And if we have a downturn, we want to position it just to do really well.”

You also have to consider Olive Garden is measuring up against a 2019 quarter where its famed “Buy One, Take One” deal was surging traffic into stores. Naturally, it’s a promotion that wouldn’t made a ton of logistical sense in an off-premises-fueled arena. Darden is operating Olive Garden more today on a bottom-line perspective than a top one. Also, if you factor a breakeven on advertising, the chain would be up double-digits, Lee said.

There’s another key element at play as well: Lee said Darden doesn’t want to run promotions that flood restaurants until it’s 100 percent sure it will have the staffing to deliver a great experience.

“It just makes no sense to me,” Lee said of trying to push people into restaurants. “And so, when I look at what we're doing in Olive Garden, I continue to just be thrilled, and they continue exceeding my expectations. And it seems as though we continue to disappoint the sell-side expectations on this. But this is a very, very difficult operating environment.”

Olive Garden

"We are going to lead the full-service restaurant space in technology for guest facing,” Darden COO Rick Cardenas said.

With value, Olive Garden was building in an everyday strategy (as opposed to deep discounting) well before COVID, with promotional levers ready to go as needed. Its coupon business was roughly 1 percent of sales.

Lee said Olive garden will continue to think more about “the opportunity cost around the value of that table,” when stores are busy. And how not to have people sitting there, paying less than full price.

“Even though it's a value proposition, if we want to revalue and focus on value, we don't want to be discounting off of a value platform,” Lee said. “And I think that's really important. And so, we got to figure that out once we get there. We've got contingency plans right now. We think we know we want to do, but we need to see what the competitive environment is, and we need to see what the economic backdrop is.”

This past quarter, Darden’s No. 1 priority was staffing, COO Rick Cardenas said. It launched a talent acquisition system that helps increase the pool of candidates by allowing applicants to apply and schedule interviews in five minutes or less. Darden ramped up social media efforts and netted more than 1,000 new employees per week. It’s currently at about 90 percent of pre-COVID marks, Cardenas said.

However, labor today is a more nuanced task than building rosters. Darden’s biggest operational challenge of late has been the temporary exclusion of employees identified through contact tracing, Cardenas said.

“Given our commitment to health and safety, we are diligent about exclusions, but they create sudden staffing disruptions for our operators,” Cardenas said.

Darden can be appropriately staffed in the majority of restaurants, as it nearly is, and still face significant shortages on any given night. These exclusions, Cardenas said, reduce the number of available workers “with little notice for our operators to prepare.”

“This volatility can negatively impact sales in these restaurants for the duration of the exclusion period,” he said. “Getting and staying staffed also requires a strong focus on training. As we continue to hire, it is critical that we have the right training in place to ensure we continue to execute at a high level.”

For Olive Garden specifically, Lee guessed there’s one or two sections closed “in most of our restaurants, most nights.” That’s somewhere in the ballpark of 60 tables. It simply puts a cap on what the brand can do, sales wise, until things improve.

“All of sudden, you’re seven people short for the night. You’ve got to adapt and try to overcome those challenges,” Lee said. “…Where we're at right now, we are doing some things off-premises without discounting. And on the weekends, we have to throttle the off-premises business. In other words, we've got to control how many orders we do every 15 minutes.”

Lee said he believes the labor shortage is a national problem, not a restaurant one. It’s flashing among vendors, too. “So I do think we think about the restaurant proposition, I think we have to all understand what do restaurant team members want? I mean, they want an opportunity to be able to work in an environment that is well run. They want flexibility. They want growth, depending on what they're using the job for. And a lot of restaurant jobs are pass-through. They're kind of, let's get from point A to point B. And I think we have to continue to find ways to improve that proposition.”

In the last three of four months, Darden moved roughly 500 employees from the hourly ranks to management.

“Those who have resources that can create employment proposition that's stronger than others will attract people,” Lee said. “There's no doubt that I think that we're in a lot better shape than others with labor at this point in time. I think it's going to come down to an individual situation, which company and, more importantly, it gets down to the restaurant manager, the GM, and inside each of that box, can they create an environment where people want to work? And that's how we'll attract people.”

Darden paused new initiatives in Q1 to “further eliminate distractions” for employees and allow them to focus on what it takes to run 14 great shifts a week, Cardenas said. Olive Garden is sticking to a limited menu Lee noted is not impacting sales at all. “As far as independents adding menu items, more power to them if they think that's what's going to drive their business. Let them make those decisions,” Lee said. “We're very comfortable where we are with our menus at this point in time.”

Olive Garden added Apple Pay and Google Pay to its website and already had PayPal in place. These digital wallets account for more than 25 percent of mobile app transactions. Darden also updated the “Curbside I’m Here” function and will soon layer in geofencing. It recently started testing online recommendations for items.

“Will we lead the restaurant industry? No, the quick service players are going to probably spend more and do more things in technology, but we're going to learn what they're doing and see what we can bring to our space,” Cardenas said. “But we are going to lead the full-service restaurant space in technology for guest facing.”

None of this will slow Olive Garden’s growth. Lee said the brand could get to more than 1,000 stores “fairly easily.” And if it can maintain more than 20 percent off-premises sales, additional trade areas will open up.