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A Price Rush in Casual Dining? Not So Fast, Darden Says

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Restaurant prices in the full-service sector lifted 4.9 percent in August compared to last year, according to BLS data. The general conviction, thus far, is that customers haven’t cared. Stimulus checks and a higher-wage market have opened wallets, as has pent-up demand. Often that bridge back to experience for people starts with dining out.

Even with concerns over the Delta variant festering, restaurant sales were flat last month, as “food services and drinking places” collected a touch under $72 billion. It was 32 percent higher than the year-ago measure and 10 percent or so above 2019 levels. Importantly, however, sales were $71.9 billion in July and $71 billion in June.

Why restaurants are rising prices isn’t tied entirely to a consumer’s willingness to spend—it’s a reaction to inflationary pressures trigged by an ongoing labor shortage that’s affecting everything from supply to delivery to the staffing inside restaurants. Operators are spending more on wages, benefits, recruitment, and PPE. Not to mention what it’s taking some to secure more product than usual on the spot market as locations exceed expectations and stress supplier’s capacity.

A full 82 percent of operators told Black Box Intelligence in a survey they’re offering higher base pay as an incentive compared to 64 percent in 2019. Fifty-four percent are offering sign-on bonuses versus just 21 percent two years ago. And yet rolling 12-month turnover was 105.7 percent for full-serves, higher than 101.5 percent in 2019. Restaurants claimed to be down, on average, 6.2 employees per unit in the front of the house and 2.8 in the back.

So is it all systems go for restaurants hoping to counter inflation with higher prices? Darden CEO Gene Lee isn’t so sure. Increases in inflation are going to disproportionately affect lower-income consumers, he said Thursday during a conference call. That’s a point everybody can agree on.

And so is the fact this group makes up a significant portion of the casual-dining base. In many ways, it’s the heart of why casual dining, or at least the modern version of it, emerged in the first place, led by Norman Brinker’s genius. It exploited a niche between fast-food and upscale dining, especially in rural markets across America.

Lee understands the short-term realities, and what that might require of brands to navigate COVID setbacks. Darden, though, remains “incredibly focused on the longer-term pushback,” he said.

“People are saying, well, we’re pushing this off [price] and I guess, no one is pushing back. Eventually, it’s going to be pushed back,” he said.

Darden choose to be cautious with pricing in spite of competitive trends, especially at Olive Garden and Cheddar’s. Olive Garden notched two-year check growth of only 2.4 percent. The rest of the industry? More than 5 percent.

“We want to make sure this big group of consumers that we service feel as though they can still come into our restaurants and get extremely great value for what they have to pay,” Lee said. “And so, I think that those who manage through this prudently, those who really take a longer look, we’ll get through this.”

“I think those who pass through a lot of price, they aren’t really managing their costs effectively,” he added. “I think we’ve got to really think about how we manage our costs going forward, because at some point, your average consumer could get priced out of casual dining if it costs too much.”

Olive Garden’s same-store sales in Q1 climbed 37.1 percent, year-over-year, against the COVID downturn. On a more telling, two-year look, the 877-unit chain’s comps were flat over pre-coronavirus days. Segment profit margin increased 220 basis points, however, and off-premises accounted for 27 percent of total sales, with digital transactions mixing 60 percent of that take.

Compared to some casual peers, Olive Garden’s flat two-year stack appears muted. Texas Roadhouse’s same-store sales rose 21.3 percent versus 2019 in its most recent quarter, while Outback was up 11.3 percent, and Chili’s 8.5 percent.

Yet Lee called Olive Garden’s performance “unbelievable,” noting it isn’t so black-and-white these days as lining comps up side-by-side. The chain posted a 23.2 percent restaurant-level earnings percentage and saw profit hike $25 million over pre-COVID.

Essentially, the fact Olive Garden is getting such results and not raising prices has Lee feeling optimistic about its path forward. “With this inflation going through, longer term… [the winners are] going to be the ones who provide exceptional value to the consumer. And we’re trying to position Olive Garden to be that brand. It’s historically done well in downturns. And if we have a downturn, we want to position it just to do really well.”

You also have to consider Olive Garden is measuring up against a 2019 quarter where it’s famed “Buy One, Take One” deal was surging traffic into stores. Naturally, it’s a promotion that wouldn’t made a ton of logistical sense in an off-premises-fueled arena. Darden is operating Olive Garden more today on a bottom-line perspective than a top one. Also, if you factor a breakeven on advertising, the chain would be up double-digits, Lee said.

There’s another key element at play as well: Lee said Darden doesn’t want to run promotions that flood restaurants until it’s 100 percent sure it will have the staffing to deliver a great experience.

“It just makes no sense to me,” Lee said of trying to push people into restaurants. “And so, when I look at what we’re doing in Olive Garden, I continue to just be thrilled, and they continue exceeding my expectations. And it seems as though we continue to disappoint the sell-side expectations on this. But this is a very, very difficult operating environment.”

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