Olive Garden, Red Lobster opposition to Obamacare backfires

NEW YORK (AP) - After new ad campaigns touting the quality of its food failed to spark sales, the parent company of Olive Garden and Red Lobster is retooling its strategy to attract diners with more promotional deals...

Adam Howard

Dec 20, 2012

NEW YORK (AP) — After new ad campaigns touting the quality of its food failed to spark sales, the parent company of Olive Garden and Red Lobster is retooling its strategy to attract diners with more promotional deals.

The shift comes after Darden Restaurants Inc. earlier this fall moved to update the image of its flagship chains and appeal to younger diners in their 20s and 30s, who increasingly prize fresh, high-quality ingredients. The problem is that many of those same diners also want cheaper prices and convenience, reflecting the rise of chains such as Chipotle Mexican Grill Inc. and Panera Bread Co., which offer food that’s a step up from traditional fast-food for slightly higher prices.

In addition to those shifting tastes, Darden and other casual dining chains such as Applebee’s are dealing with customers who are being more careful about where and how often they eat out in the weak economy.

In a conference call with analysts Thursday, the company also stressed that none of its full-time employees would be put on part-time status as a way to limit costs tied to new health care regulations. Darden noted a publicity backlash over its tests to use more part-timers hurt sales in the latest quarter.

To address the “affordability many guests need right now,” Darden plans to dial back on its efforts to build revamp the image of its chains for now and increase the frequency of promotions that underscore value, said Drew Madsen, the company’s chief operating officer. He declined to specify the exact nature of the revamped strategy, however, noting that the element of surprise is critical in a “highly competitive” industry that is once again expected to see only modest growth in the year ahead.

He also noted that Darden had been “pre-empted” by competitors in the past by revealing its hand too early.

The remarks came in a conference call with analysts to discuss Darden’s fiscal second-quarter results, which showed a 37 percent drop in net income. For the three months ended Nov. 25, the company said it earned $33.6 million, or 26 cents per share. That’s compared with $53.7 million, or 40 cents per share, a year ago.

Analysts predicted slightly higher earnings of 27 cents per share, according to FactSet.

Earlier this month, the company had warned that revenue would fall 2.7 percent at U.S. restaurants open at least a year for its three biggest chains; it fell 3.2 percent at Olive Garden, 2.7 percent at Red Lobster and 0.8 percent at LongHorn Steakhouse during the quarter. The figure is a key metric because it strips out the impact of newly opened and closed locations. For the year, Darden expects that figure to be flat or down 1 percent.

At Olive Garden, executives noted that a “Dinner Today, Dinner Tomorrow” promotion didn’t clearly communicate the nature of the deal, which gave customers who ate at the restaurant a free second meal to take home.

At its specialty restaurant group, which includes smaller chains such as The Capital Grille and Bahama Breeze, the figure rose 0.7 percent. When including results from newly opened restaurants, Darden said total revenue for the quarter climbed 7 percent to $1.96 billion for the period, meeting Wall Street’s forecast.

In cutting its forecast for the year earlier on Dec. 4, Darden also said that it was hit by a publicity backlash from tests intended to gauge how it could limit costs for workers’ health care. Starting in 2014, big employers such as Darden will be required to provide health insurance to full-time workers. The company had tested hiring more part-time workers and replacing full-time workers who left with part-time workers in select markets to gauge how it could mitigate those costs.

Darden CEO Clarence Otis said the media coverage was a “secondary issue” that hurt the quarterly results. He said the coverage “misinterpreted our actions as a stand against health care reform.” The company has since said it will not move any full-time workers to part-time status as a result of the regulations.

With the topic set to remain an issue the coming year, he said it could continue to be a factor on the company’s results.

Darden has about 2,000 locations in North America; roughly 1,500 of them are Olive Garden and Red Lobster restaurants. The company plans to scale back slightly on new openings, with about 95 new locations planned for the year, down from 100 to 110. The figures do not reflect locations for Yard House, one of the company’s smaller chains.

The company’s shares were down $1.52, or 3.3 percent, to $45.29 in afternoon trading.

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