Like virtually every restaurant, Olive Garden has raised menu prices over the past year. But it hasn’t raised them quite as much as its peers, and that has given it an advantage.
Same-store sales at the 893-unit Italian brand rose 11.7% in its fiscal third quarter ended Feb. 26, outpacing the industry on both sales and traffic, executives said Thursday.
They attributed some of the growth to the fact that parent company Darden Restaurants has kept price hikes about 400 basis points lower than overall inflation, and about 600 basis points lower than other full-service restaurants.
Full-service menu prices were up about 8% year over year during the quarter, according to the Bureau of Labor Statistics, while prices at Darden’s eight concepts were up just over 6%.
“We created a significant gap between our competitors,” CFO Raj Vennam said on an earnings call.
Not only that, but Olive Garden and its fellow brands are getting better at serving customers. Darden has more managers per restaurant than any other time in its history, and staff turnover is getting closer to pre-COVID levels. Guest satisfaction scores are up across the board, hitting record highs at Cheddar’s Scratch Kitchen and Yard House in the quarter.
Attractive prices and improved operations are translating to better margins. Olive Garden’s segment profit for the period was 22.5%, a 150-basis point increase over last year, thanks to sales leverage and labor efficiencies. That’s even as it has held back on pricing and put more food on customers’ plates.
“If you look at contribution to margin in Olive Garden, it's lower today than it was before COVID. But their margins are up,” CEO Rick Cardenas said. “So our consumers are seeing that they're getting more value when they come into the restaurants.”
Profits rose at LongHorn Steakhouse and Darden’s “Other” restaurants, which include Cheddar’s and Yard House, but fell at its fine-dining concepts because of higher commodity costs, particularly for beef.
Some other factors contributed to the company’s stellar quarter. It was lapping the omicron wave and severe weather from last January, for instance. And restaurants in general jumped out to a fast start to 2023.
Darden expected things to come back to earth a bit in Q4. Same-store sales are projected to land in the 3% to 5% range. But executives remained confident in consumers’ willingness to pay for full-service dining overall.
“Now, that doesn't mean there aren't any customers shifting from full service to limited service. But most aren't,” Cardenas said. “And we're not really seeing that in our results.”
He explained that consumers looking to save money will generally start by managing their restaurant checks before they start actually cutting back on visits. “And so far, we really haven't seen a whole lot of check management,” he said.
A broad shift in consumer spending from goods to services, like restaurants, has helped Darden, as have low unemployment rates. And while consumers may be paying closer attention to their pocketbooks, “food-away-from-home is one of the most difficult expenses to give up because going out to a restaurant is still an affordable luxury for them,” Cardenas said.
Diners can continue to expect a good deal from Darden, which intends to wind down price hikes as the year progresses. In Q4, prices will be 5.5% to 6% higher than a year ago.
“Peak pricing for us on an annual basis is behind us,” Vennam said. “Unless something dramatically changes, we see pricing coming down.”
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