Don’t expect the parent of Olive Garden and The Capital Grille to join the pack of chains launching so-called virtual restaurant concepts.
“For us, this is not the right approach,” Gene Lee, CEO of Darden Restaurants, told financial analysts Thursday morning. “We want to focus on brands that we've got 20-plus years and hundreds of millions of dollars invested in trying to build. And we want to make sure that they're executing at a high level.”
Virtual restaurants were one of the trends that Lee addressed in a discussion of the company's performance during the first quarter ended Aug. 30. He and fellow executives also touched on the realities of outdoor dining; pandemic-related changes in the real estate market; and the agony of waking up every day with the realization you’re already down hundreds of thousands in sales at just four restaurants in New York City.
Lee said he was shocked that he hasn’t been asked earlier about virtual restaurants, given how many competitors have charged into that arena. Arch-rival Brinker International, for instance, plans to build a stable of brands, starting with its current venture, It’s Just Wings. Dine Brands Global, the franchisor of Applebee’s and IHOP, has Neighborhood Wings by Applebee’s.
Virtual brands exist only as a listing on the apps and websites used by consumers to place delivery orders. The wings or burgers being ordered actually come from the kitchens of places operating as another brand—Chili’s and Maggiano’s, in the case of It’s Just Wings.
The brands are invented so they come up high in the search results for whatever item a customer might want to be delivered. Applebee’s offers wings, but Neighborhood Wings is more likely to be discovered when a delivery patron searches for the popular finger food.
But those concoctions don’t meet Lee’s definition of a brand, and “I think brands are going to matter,” he told the analysts on today’s call.
“Brands are developed over a long period of time around delivering a promise, a consistent promise to a consumer” he continued. “I think you have to have a functional need and emotional need.”
Lee also provided a reality check of sorts on outdoor dining, the salvation of many casual chains like his while dining rooms are still subject to capacity limits. “Outdoor capacity is really de minimis for us overall as a system,” he said, explaining that Florida, where many of the company’s restaurants are located, has seen six straight weeks of unrelenting rain. “It's really not that meaningful for us.”
He also skewered the common assertion that widespread restaurant shutdowns are bringing down the cost of real estate thus far in the pandemic, a theory he himself has espoused.
“I've been a little bit off,” he acknowledged. “We've yet to see a meaningful change in what we can acquire real estate at.
"I thought that being one of the only bidders out there that we would see costs come down. We’ll see how that plays out long term.”
A recurring theme in Lee’s conversations with analysts was the impact of capacity caps on restaurant dining rooms. He noted that the company is installing partitions between tables to squeeze in more seats where a 25% or 50% limit is in place, and that it plans to double its use of those virus barriers near-term.
But that remedy hasn’t applied in New York City, where all indoor dining is still forbidden. Until the ban is lifted on Sept. 30, Darden is losing $1.3 million per week in sales per week from four of its restaurants there, three Capital Grilles and the Olive Garden smack in the middle of Times Square. That Italian restaurant generates $15 million annually, Lee noted.
Nationwide, Olive Garden’s same-store sales for Q1 were down 21.9%. Comps were down 11.3% for LongHorn.
Net income fell 78.2% from the year-ago quarter, to $36.1 million, on a 28.4% drop in revenues, to $1.53 billion.
Darden ended the quarter with 1,807 restaurants within its fold.