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Amid pandemic uncertainty, Darden finds less is more

Olive Garden’s parent has hit on a more streamlined business model that it intends to take beyond the COVID era.
Photo courtesy of Darden Restaurants

Here’s one way to solve the restaurant labor problem: Staff fewer workers.

Darden Restaurants, the parent of Olive Garden and LongHorn Steakhouse, believes that it will be able to do just that coming out of the pandemic by investing in technology and training intended to make employees more productive.

“We don't believe that we would need the same number of people that we did before COVID at the same volume levels,” said COO Rick Cardenas on the company’s first-quarter earnings call Thursday.

It’s among the many ways Darden has streamlined its business during the lean days of the pandemic. And while it is still searching for stability, or what CEO Gene Lee called a post-COVID “equilibrium,” the fundamentals of its transformation appear to be permanent.

“This is the base business,” Lee told investors. “Once we figure out where equilibrium is, we will develop a strategy and implement tactics to be able to drive the business profitably.”

The changes include smaller menus and a pullback on marketing, all tying back to a maniacal focus on value that the company believes will help it weather a potential economic downturn. 

The strategy appears to be working, for now: Darden posted record profits across all of its segments for the second consecutive quarter. LongHorn Steakhouse and Darden’s fine-dining concepts were the biggest winners, generating same-store sales increases of 26% and 24%, respectively, compared to pre-COVID levels as consumers continued to indulge in steak and celebratory outings. 

Olive Garden’s sales were flat compared to where it was before the pandemic, a result executives pinned largely on staffing exclusions related to the virus. Lee estimated that most of Darden’s restaurants have one or two sections closed every night, accounting for six or eight tables. 

“Especially in Olive Garden, that's putting a cap on what we can do for sales,” he said.

But its quest for efficiency has made those sales more profitable than before the pandemic. Olive Garden generated a $253.3 million profit for the quarter ended Aug. 29, an increase of about $25 million compared two years ago, and a 23.2% restaurant-level sales margin.

“I just think that we're doing unbelievable,” Lee said.

Part of that is the result of a $45 million cut to promotional spending. Lee explained that it makes no sense to drive people into understaffed restaurants that aren’t prepared to serve them. The company will promote again, he said, but differently, with value as a guiding factor.

“If we want to be value and focus on value, we don't want to be discounting off a value platform,” he said.

The same strategy applies to Darden’s off-premise business. It has chosen not to offer discounts to incentivize the somewhat lower-labor channel—and demand is already outstripping its ability to fulfill those orders anyway. On weekends, restaurants are limiting the flow to four to-go orders every 15 minutes.

“We know we have excess demand, but we've got to be able to service the dine-in and service the off-prem,” Lee said.

The company has also derived profits from a pared-down menu at its flagship brand, a strategy it intends to continue. And it plans to leverage its scale to keep those menu prices low. Expecting overall inflation to hit 4% for the rest of the fiscal year, Darden said it will raise prices by about half of that. It hopes that will keep its core customers—typically the lower-income consumers most impacted by inflation—coming back.

“We think that with this inflation going through … the winners are going to be the ones who provide exceptional value to the consumer,” Lee said. “We're trying to position Olive Garden to be that brand.”

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