Inflation is causing lower-income consumers to spend less at Olive Garden.
Executives for parent company Darden Restaurants on Thursday said inflation during its fiscal first quarter led to “softness” among guests earning less than $50,000 a year. That had a particular impact on its Olive Garden and Cheddar’s Scratch Kitchen brands, which have a higher proportion of those customers.
Olive Garden’s same-store sales rose 2.3% year over year in the period ended Aug. 28, and traffic was down 9% compared to pre-COVID levels.
“We’ve seen some check management a little bit,” Darden CEO Rick Cardenas told analysts Thursday. “That doesn't mean that we're worried about the below $50,000 consumer because it hasn't been a significant move in traffic from that.”
He would not reveal what portion of Olive Garden’s guests fall into the lower-income group, but said it’s not the majority.
The headwinds in that customer segment have come even as Darden has made a point of keeping prices below inflation. In the first quarter, for instance, its menu prices were 6.5% higher than last year even as its costs were up 9.5%. Executives said that gap will close as the year goes on.
However, it has also not reached for deep discounts, like its Never-Ending Pasta Bowl, to help lure more customers. Instead it wants to focus on serving fewer, more profitable customers with a better experience.
“We are better off with a loyal guest that doesn't need all of those discounts to come in,” Cardenas said.
He added that as lower-income guests have pulled back, higher-earning customers have held strong. That showed up in the results of its fine-dining concepts, where same-store sales rose 7.6%, and LongHorn Steakhouse, up 4.2%.
“When one segment of the population isn't doing as well, the other segment is, then we are still OK,” Cardenas said. “Right now, there's just one segment of the population that's being hurt a little bit more by inflation than others.”
The pain might not go away anytime soon. As the Federal Reserve looks to slow spending, lower-income people and the restaurants that serve them will be most acutely impacted.
“It is the middle and lower incomes we anticipate that will cut back on demand, thereby creating a K-shape in foodservice demand for months to come,” according to a report this week from Rabobank.
It’s not just consumers who are grappling with higher prices. Inflation also had a major impact on Darden’s bottom line. Commodity costs were up 15% in the period, 280 basis points higher than last year. Labor costs increased by 7.5%, including 9% hourly wage inflation.
More expensive chicken, wheat and cheese hit Olive Garden’s profits particularly hard.
All told, the costs contributed to a 16% year-over-year decline in Darden’s net earnings.
The top- and bottom-line results were worse than analysts had expected, and Darden’s stock price was down about 5% Thursday afternoon.
Nonetheless, the company reiterated its expectations for the rest of the fiscal year, including total inflation of about 6%, indicating it expects costs to start coming down over the next three quarters.
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