Darden Plans To Focus On Value In New Olive Garden Campaign

Darden Restaurants Inc. (DRI) plans to focus more on value in promotions for its Olive Garden chain as the company tries to extend the recent growth it is seeing in the casual-dining industry.

Casual-dining restaurants have been hurt by the economic downturn and higher commodity costs; however, Darden noted that recent industry data suggest restaurant sales are improving. To help build on that trend, Darden unveiled a plan Friday to target households with annual incomes below $60,000, a group that has pulled back on its share of casual-dining visits in recent years.

"We believe the ability to offer greater affordability to guests without eroding margins will continue to be very important going forward," President and Chief Operating Officer Andrew Madsen said Friday on a conference call following the company's quarterly report. Late Thursday, Darden reported a 19% increase in fourth-quarter earnings on a 6.8% increase in revenue.

Throughout the recession, Darden refrained from offering the extensive deep discounts of its competitors, saying it didn't want to hurt its business model or the long-term image of its brand. The strategy helped the company outperform the industry.

This week, though, Olive Garden began promoting two new "twist on classics" dishes that offer more price certainty, Darden said, and that have a more "short-term, call-to-action" marketing approach than it has used in the past. The new ads represent a change from the chain's promotions the past two quarters, which the company said proved to be too "culinary forward" for its customers and hurt sales.

Darden's changes at Olive Garden come after a similar focus on value at Red Lobster showed initial success. In June, Darden launched a $15 "four-course feast" at Red Lobster. Madsen said the company is able to "do so at a margin that contributes to profit growth in absolute and percent terms with appropriate guest count growth."

"Through the first four weeks of the promotion," Madsen said, "we are generating substantially more incremental traffic than we require." Darden didn't break out Red Lobster's June results, but said the chain led the company's combined growth of 5% to 6% in sales at restaurants opened at least 16 months.

Despite the focus on value, Darden is preparing to raise prices at Olive Garden after refraining from taking its annual increase there in the fourth quarter. Darden said Olive Garden's sales were flat for the second quarter in a row, in part because it raised prices there early in the fourth quarter of 2010 but didn't do so in 2011.

Historically, the company had made a 2%-to-3% annual price increase. Darden said Friday that the coming rise will probably be on the low end of that, recognizing consumers' demand for value.

Friday, Darden shares set an all-time high at $53.57, helped by the company's comments about Olive Garden's strategy and its strong guidance for fiscal 2012. Darden said it sees same-restaurant sales rising 2.5% and earnings growing 12% to 15%, which is at the high end of its long-term target of 10% to 15% growth.

Darden shares recently rose 6.6% to $53.02.

Darden's bullish view of the casual-dining industry--comments that also lifted the stocks of rivals Brinker International Inc. (EAT), P.F. Chang's China Bistro Inc. (PFCB) and Ruby Tuesday Inc. (RT)--also contributed to its gains Friday.

Darden said the casual dining industry is holding up well despite elevated gas prices, higher commodity costs and other economic headwinds. "We are encouraged by the gradual and sustained improvement of our industry, and we anticipate continued modest recovery during fiscal 2012," Madsen said.

The company noted that according to recent industry data, casual-dining restaurants had their best quarterly growth in same-restaurant sales in more than five years and their best performance in same-restaurant guest counts in six years.

Darden said it expects commodity costs to be up for the fiscal year, but that food prices will begin to decline in the second half of fiscal 2012.

-By Annie Gasparro, Dow Jones Newswires; 212-416-2244; annie.gasparro@dowjones.com

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