Tuesday, July 5, 2011

The $75,000 question

Never mind the fireworks. The boom that should’ve had restaurant executives covering their ears last week was the bombshell observation by the company that runs Olive Garden.

The comment slipped past almost unnoticed during a routine presentation to Wall Street analysts. That’s ironic, since the aside was a DefCon 4 alert for casual dining to reassess what market it serves.

Most of that sector stands in awe of Olive Garden, a concept whose middle American take on Italian fare generates $4.8 million in sales per restaurant, much of it from high-margin pasta choices. But lately, the bloom has been off the rosè.

Sales have uncharacteristically stagnated for the brand, while sister concepts like Red Lobster, LongHorn and Capital Grille have enjoyed the sort of same-store sales increases (3.8%, 6% and 7.9%, respectively) that make you suspect steroid use.

“It’s worth noting,” observed Darden president and COO Drew Madsen, “that we’re continuing to see a narrowing in the casual-dining user base.”

He explained that the percentage of customers from households with an annual income of at least $75,000 “has significantly increased their share of traffic, both during the recession and after.” Not coincidentally, patrons from homes with paychecks of $60,000 now account for an appreciably smaller part of Darden’s clientele.

Madsen didn’t specify if the rising share of traffic was the result of an increase in visits by the higher-income group, or of a drop-off by the lower-income crowd. Even when pressed by financial analysts participating in the call, he and other Darden officials would only talk in terms of “share of traffic,” not absolute changes in visits by either group.

They were more forthcoming about the implications of the shift. To appeal to both the higher-income customer and the one with less than $60,000 in annual income, Olive Garden will strive to deliver what the execs termed “price certainty,” or a clearer idea of what a customer will pay.

“Customers aren't looking for a discount,” explained Clarence Otis, Darden’s CEO. “But they want to kind of know a little bit more, with a little bit more precision, what they're going to spend when they choose to go out.”

The execs noted that a similar strategy has worked well for Red Lobster. They cited the example of the seafood chain’s current promotional deal, a four-course meal for $15 per person.

Madsen noted that Olive Garden will take a more tactical approach with its advertising in the near future, delivering more of a “short-term call to action” than “longer-term equity building.” Deals will also give a set price, rather than the “starting at” level of past promotions.

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