Operations

Lower-income consumers remain a problem for Olive Garden

The Italian restaurant chain said it’s keeping prices low and doing more to promote value, including its bottomless breadsticks. But it refuses to jump on the discounting bandwagon to drive traffic.
Olive Garden restaurant
Olive Garden's same-store sales fell 1.8% in its most recent quarter. | Photo: Shutterstock

Lower-income consumers are continuing to cut back on visits to Olive Garden.

Same-store sales at the nation’s largest casual-dining chain fell 1.5% year over year during its fiscal fourth quarter, which ended May 26.

The company attributed the decline to fewer visits from people with household incomes of less than $75,000, and especially those below the $50,000 mark, as the rising cost of things like rent, utilities and childcare eat into Americans’ discretionary spending.

As a result, Olive Garden trailed the industry same-store sales benchmark of negative 0.8%. But it did outperform the industry traffic average of negative 3.5% by 60 basis points.

That was in part because the chain raised prices just 1% in the quarter, which was behind the rate of inflation. 

“If we would have taken the pricing that the industry took in the fourth quarter, Olive Garden would have been positive [on sales] and would have outperformed even more,” said Rick Cardenas, CEO of Olive Garden parent Darden Restaurants, during an earnings call Thursday.

The 920-unit chain has chosen to keep prices low and promote its built-in value rather than appeal to guests with limited-time discounts as many of its competitors have done. It does not plan to change that strategy, even as discounts have proven popular with inflation-weary consumers.

But it is making a clear push to better communicate value to customers. It’s currently running ads promoting create-your-own pasta for $12.99, for instance, and Cardenas said it will do more to highlight its standing offer of unlimited breadsticks and soup or salad with every entree.

“We think that everyday value and continuing to focus on our core equities is more sustainable than deep discounting,” he said. “Others can do that, and we'll continue to play this long game.”

He noted that while discounting is effective at generating short-term gains, it can be difficult to improve upon that year after year without further discounting. “We just think we'd rather do more great food, more great service, and let's wrap that,” he said, adding that the brand still has “more marketing to pull if we want to.”

Nonetheless, those efforts have not quite delivered for Olive Garden. The brand has historically done well in challenging economic environments but has now seen same-store sales decline for two consecutive quarters.

Cardenas acknowledged that some consumers may be eating more meals at home as restaurant inflation continues to outpace grocery prices. He also noted that competitors offering discounts appear to be winning customers from quick-service restaurants, which has helped their numbers.

“That might be where they're trying to take some share from us,” he said.

The tough environment was reflected in Darden’s guidance for the coming fiscal year. The company is expecting same-store sales growth of 1% to 2% across all of its brands, excluding Ruth's Chris, indicating that traffic will remain negative for the foreseeable future.

For the fourth quarter, same-store sales at Darden’s non-Olive Garden brands were as follows: LongHorn Steakhouse, up 4%; fine dining (excluding Ruth’s Chris), down 2.6%; other business, down 1.1%.

Despite its top-line struggles, Olive Garden notched a profit margin of 22.8% in the quarter, a mark that, while lower than a year ago, continues to lead the industry. And margins across Darden’s other segments improved, including a 50-basis point jump at LongHorn, to 19.1%. Darden’s stock was up nearly 2% midday Thursday.

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