Some visitors to Olive Garden and LongHorn Steakhouse appear to be watching their spending, but the casual-dining brands are nonetheless faring better than most during the industry's ongoing traffic downturn.
That was one of the big takeaways from parent Darden Restaurants' earnings call Thursday, a wide-ranging affair that also touched on student loan payments, California's new fast-food bill and weight-loss drugs.
The company's quarterly check-ins, which happen about a month before other public chains start reporting, are always closely watched, and this latest installment provided plenty of fodder for the upcoming earnings season. Here’s where the company's brain trust stands on five pressing restaurant issues.
What’s going on with consumers?
It’s no secret that restaurant traffic has slowed this year as consumers keep closer tabs on their spending.
Darden’s brands have fared better than most, as year-over-year traffic remained slightly positive at both Olive Garden and LongHorn Steakhouse. The company continues to view customers as resilient, “but they seem to be a little bit more selective,” CEO Rick Cardenas said.
For instance, they are spending less on alcohol, particularly at Darden’s fine-dining brands.
Some are trading down to lower-priced entrees.“We’re only seeing it at Olive Garden and LongHorn, and it’s not alarming,” said CFO Raj Vennam. “But it was a little bit worse than we expected.”
Darden has observed the biggest behavioral change in its wealthier customers—those earning $125,000 per year or more. That had an outsize impact on its fine-dining concepts, where same-store sales fell 2.8% year over year.
Executives chalked that up to tough comparisons to last year, when consumers were emerging from the omicron wave of COVID-19 and willing to spend more freely.
“This feels like it goes back to the exuberance we experienced from a year ago that we’re wrapping on,” Vennam said, noting that the results were roughly in line with pre-pandemic numbers.
Cardenas also suggested international travel this summer drew some of its higher-income guests overseas.
Generally, Darden believes its relative value and its focus on staffing and operations have helped it weather some of the traffic problems encountered by other chains. But it still views consumer uncertainty as its “primary biggest risk” going forward, Vennam said.
Will student loan repayments pinch restaurants?
Student loan bills are coming due again after a long pandemic pause, which has added to the financial burden for many consumers.
However, Darden has seen no effect from that pressure and doesn’t expect it to make a material difference long-term. “The restaurant industry is impacted really more by discretionary spending” than mandatory payments like loans, Cardenas said, noting that consumers repaid some $4 billion worth of student loans in August.
Vennam added that consumers under the age of 35—those most likely to have student loans—are becoming a bigger part of Darden’s customer base.
“It feels like from a mix perspective, we’re seeing more younger consumers,” he said.
Could California’s new fast-food law hurt full-service chains?
California is on the brink of passing a law that would raise the minimum wage for fast-food workers to $20 an hour by April.
Though it will apply only to QSR chains with more than 60 locations, some have predicted that the law will have a ripple effect on restaurants all over the country.
Darden believes its scale will help insulate it from any potential fallout. Its size allows it to keep costs down and thus pay employees more: Its average wage, including tips, is $22 an hour nationally, and even higher in California, Cardenas said.
“If inflation is higher, others are going to have to price more, and we'll be able to gain share by taking a little less price,” he said. “We're going to stick to our strategy.”
He added that if the law does end up hurting restaurants, “it’s probably going to impact the ones that have a little less capital and a little less ability to withstand that.”
Has discounting gotten out of hand?
Industry observers have noted a rise in restaurant discounts and promotions just as inflation appears to be easing.
Darden reminded analysts that inflation is still high, particularly on the labor front, where its costs were up 6% in the quarter. It also said it has seen only a “slight increase” in promotional activity among its competitors, with one chain in particular—Chili’s Grill & Bar—beginning to ramp up its marketing most aggressively.
Darden will continue to take a conservative approach to promotions. Olive Garden is bringing back its Never-Ending Pasta Bowl this fall, for instance, but at a $13.99 price point that it says will keep the bottomless offering margin-friendly. In general, it prefers to differentiate itself on abundance rather than price.
“Our message is about more, more, more,” Cardenas said. “Come and try Olive Garden for more food, more value, more refills. And that’s what we’re talking about. And as I said, we’ll stick to our strategy.”
Could weight-loss drugs spoil diners’ appetite?
The popularity of Ozempic, the diabetes drug that makes users less peckish, had at least one analyst wondering about its potential implications for restaurants. But Cardenas said he didn’t think the medication would prevent people from dining out.
“Full-service dining occasions are driven by a desire to connect with family and friends,” he said. “I don’t think it’s going to be a meaningful impact for us because of the celebratory nature of why people come out to eat.”
He added that Darden’s menus offer a wide range of choices for all appetites and dietary needs.
“If it suppresses appetite a little bit, they're still going to eat,” he said. “So we're going to be there for them when they do.”
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