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  • When you think of free breadsticks, unlimited salad, and pounds of pasta,

  • one name comes to mind Olive Garden.

  • For generations, diners have been flocking to the Tuscan style theme

  • restaurant for its signature Fettuccine Alfredo and classic tour of Italy

  • entrees. You can't afford not to eat there.

  • It's actually, it competes with a supermarket meal because you can bring

  • enough food home to feed yourself a second time or your family a second.

  • That's value. But the Italian eatery known for its five dollar take home

  • meal has fallen on hard times as the coronavirus pandemic has wreaked

  • havoc on the restaurant industry.

  • According to the National Restaurant Association, as of December 2020,

  • more than 110,000 bars and restaurants in the U.S.

  • have closed permanently or long term due to covid-19 and lost sales this

  • year are expected to reach $240 billion.

  • Your restaurants are not going to last at these kind of numbers, OK?

  • Anybody who has a restaurant in New York that's full service, casual

  • dining, at 25% is going to go out of business.

  • Olive Garden's Times Square location alone.

  • The chain's best performing restaurant saw sales plummet by 94% as of

  • September 2020.

  • In response, the casual dining chain, pivoted to takeout, trimmed its menu,

  • and cut costs.

  • But are those changes enough for Olive Garden to survive the pandemic and

  • offset the overall decline of the dining restaurant experience?

  • Olive Garden, the nation's first Italian restaurant chain, got its start in

  • the early 1980s in Orlando, Florida.

  • In 1982, General Mills, home of Lucky Charms and Cocoa Puffs, decided to

  • expand its restaurant portfolio beyond its Red Lobster business by

  • launching the Italian eatery.

  • There was a trend in the 60s and 70s for large

  • food companies, General Mills, Purina, they all decided that they could

  • virtually integrate by owning restaurants.

  • If you think about General Mills being in the cereal and grain business,

  • that's where the mills are, that Olive Garden being a pasta driven

  • restaurant using lots of grains makes complete sense, vertically

  • integrate. In 1988, Olive Garden went national.

  • At the time, reckless lending led to a meltdown in the savings and loan

  • industry, bankrupting hundreds of financial institutions, according to one

  • analyst sensing an opportunity.

  • General Mills uses economic muscle to purchase prime real estate for its

  • restaurants across the Sunbelt for 25 to 30 cents on the dollar.

  • One of the reasons they did this was both aggressive and defensive in its

  • strategy. Aggressive, go out and find new units defensive, knowing that

  • the market was going to come back at some point.

  • No competitors could then have new sites.

  • They would they would lock up a generation of restaurant sites for 10 or

  • 20 years. And in fact, that's what happened.

  • By 1994, Olive Garden had 450 restaurants with dinner entree prices ranging

  • from $6.95 to $13.95.

  • Americans were flocking to the eatery after facing a slowdown in the brand

  • name cereal and food business.

  • General Mills decided in 1995 to sell off its restaurants, moving Olive

  • Garden, and Red Lobster into a new company called Darden Restaurants.

  • By the early 2000s, the Italian casual dining market in the U.S.

  • was a $4.4 billion business, with Olive Garden taking a 34% share and with

  • business booming. In 2008, Olive Garden posted its 55th consecutive

  • quarter of U.S.

  • same store sales growth.

  • But by the early 2010s following the Great Recession, Darden's was

  • starting to struggle like other full service restaurants the chain was

  • facing increased competition from fast casual restaurants like Chipotle

  • and Panera Bread that offered a similar experience but at a fraction of

  • the cost. And with sales declining in May 2014, Darden announced it was

  • selling off its Red Lobster restaurants to a private equity firm for $2.1

  • billion. Olive Garden was facing headwinds too.

  • In October 2014, Darden's entire board was ousted by activist investor

  • starboard value after complaints that the chain's pasta was mushy and the

  • breadsticks were like hot dog buns.

  • Fixing Olive Garden was really the key to fixing Darden overall and to

  • maximizing that value for shareholders.

  • So they went in, they did a lot with the menu.

  • In response, Olive Garden announced plans to remodel restaurants, upgrade

  • its logo, and retool the website.

  • And according to analysts, the restaurant had another big advantage over

  • its competitors: technology.

  • Darden has always been a technology company.

  • They have their own internal technology folks that write software, that do

  • customer profiling, that actually do time and motion study so they know

  • more about what happens in the restaurant than any other company and they

  • own it. It's all proprietary.

  • By the end of fiscal year 2019, Olive Garden had sales of $4.3 billion, up

  • 5% from a year earlier.

  • As of May 2020, the chain at 868 company owned restaurants in North

  • America and three dozen franchises at home and abroad.

  • The casual dining industry in the U.S.

  • is a $185 billion business and includes restaurants like Applebee's,

  • Chili's, Outback Steakhouse, The Cheesecake Factory, and of course, the

  • Olive Garden. Prior to covid-19, casual dining restaurants faced an

  • onslaught of competition from quick service restaurants like Chipotle and

  • Shake Shack. Casual dining has been a slow growth, somewhat mature part of

  • the business and the excitement and the growth has really been in fast,

  • casual covid-19 has only accelerated those problems.

  • The pandemic has absolutely devastated the casual dining segment.

  • Chili's parent company, Brinker International, announced in October 2020

  • that first quarter 2021 revenue was down 6% from the year prior.

  • Same store sales during that same period at Chili's fell 7%.

  • With fewer dine in customers, casual dine in chains like Chili's have been

  • forced to pivot from dine in customers to take out delivery.

  • Prior to the pandemic, only about 20% of Brinker sales came from its off

  • premise business. To get meals out the door quicker in the summer of 2020

  • the company launched It's Just Wings, a delivery only brand in partnership

  • with DoorDash. One of the things that's been able to help us as we've

  • built a very strong carry out and delivery business during this time.

  • I mean, our delivery and carry out system delivery sales have peaked three

  • times what they were before all this started.

  • And our goal is to keep a large share of that as dine in restaurants open.

  • It's a similar story for Bloomin' Brands, the owner of Outback Steakhouse.

  • In October 2020, the company reported a drop in 3rd quarter 2020 revenue

  • by 20%. During the same period, same store sales at U.S.

  • company owned outback restaurants decreased 10%.

  • With more consumers stuck at home, in May 2020 pick up orders at Bloomin'

  • Brands tripled. None of these restaurants were really built to be fast

  • food restaurants to focus on takeout or to focus on delivery, right.

  • And so I think that's been the challenge for a lot of these guys is they

  • just need to figure out how to do it.

  • But Olive Garden might have taken the hardest hit from covid-19.

  • In December 2020, Darden reported second quarter 2021 revenue at Olive

  • Garden fell 19%.

  • But the brand is seeing some relief from earlier investments.

  • In the years leading up to 2020, Olive Garden launched a TOGO service

  • allowing customers to pick up meals at restaurants, a catering delivery

  • business for orders of $125 or more, and began testing with third party

  • delivery companies.

  • In a Q1 2021 earnings call, Darden Restaurants CEO Eugene Lee said Olive

  • Garden saw off premise sales increase 123% in the first quarter making up

  • 45% of total sales.

  • CNBC reached out to Olive Garden but they denied our request for an

  • interview. As of December 22nd

  • 2020, Darden's stock price had climbed to close at $119, 357% higher than

  • its March lows, the company have reinstated a quarterly dividend and in

  • August 2010, repaid a $270 million loan.

  • With fewer people eating out, and some states limiting indoor dining room

  • capacity, independent mom and pop restaurants, as well as some larger

  • chains are struggling to make ends meet.

  • So how was Olive Garden able to weather the coronavirus storm?

  • According to analysts, besides its early investment in takeout and

  • delivery. The brand began cutting costs like reducing its marketing spend,

  • trimming executive pay, furloughing staff, and streamlining its menu.

  • Garden has been really smart about cutting costs well during the pandemic,

  • and that only helps to serve Olive Garden.

  • And Olive Garden has also been smart about trimming down its menu and all

  • the typical things that we've seen from restaurants.

  • So they're taking this as a chance to also look at the restaurant company

  • as a whole and say, OK, what can we improve on?

  • How do we keep improving on this takeout?

  • This kind of experience that we want to keep these kinds of digital sales

  • and takeout sales past the pandemic.

  • And because of its economic strength, well capitalized restaurant companies

  • like Darden also have significant negotiating power with their food and

  • beverage suppliers and distributors.

  • What this pandemic has shown is that companies that are in a strong

  • financial position are probably well positioned to take advantage of

  • certain things like those A locations that you've probably been covering

  • for 5 or 10 years.

  • That suddenly are available because the restaurants that were in them have

  • gone out of business. There's one estimate where we call the restaurant

  • apocalypse that possibly as much as 50% to 75% of independent restaurants

  • will not make it. We saw the first wave of closures back in the spring,

  • in March, and we saw another wave of closings in early September and still

  • happening. We're going to see that third wave after Christmas.

  • People in small restaurants and many chains are just not going to be able

  • to survive. And once the pandemic ends, analysts say there will most

  • likely be pent up demand for consumers who are ready to dine out again.

  • And that could be welcome news for Olive Garden.

  • Fast forward 12 to 18 months post pandemic, the restaurant industry and

  • especially casual dining looks a lot different.

  • We'll have lost a fair number of the independent, boutique, smaller mom

  • and pop restaurants, many of which are Italian.

  • And we're going to have much more of a chain dominated landscape.

When you think of free breadsticks, unlimited salad, and pounds of pasta,

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B1 US olive garden restaurant casual dining delivery

Why Olive Garden Is Struggling

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    joey joey posted on 2021/05/15
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