Olive Garden Is the Hill Darden Wants to Die On

PORTLAND, Ore. (TheStreet) -- The Olive Garden is now an open-floored, art-strewn replica of a Panera Bread  (PNRA) location instead of a muted, grapevine-laden replica of a Tuscan eatery.

This is Darden Restaurants'  (DRI) big plan for saving what is now its flagship chain: Stripping the faux-Italian elements, speeding up service, adding online ordering and swapping out its old logo for one that looks as if it was stolen from a short-lived mid-2000s cupcake boutique. The "Italian Restaurant" is now an "Italian Kitchen" as Darden attempts to convince customers that Olive Garden isn't the '90s strip mall parking lot casual dining establishment they remember.

This assumes that any of the above changes -- the chain's first aesthetic tweaks in 15 years -- were what was plaguing Olive Garden or Darden. Unfortunately, restaurant industry market research group NPD Group notes that casual dining has been losing customers steadily for the last five years. Since 2009 casual dining traffic has dropped 2% each year, taking roughly 7.1 million visits off the table during that span. Olive Garden's old "When You're Here, You're Family" slogan was turned into an outright lie as families with children made 1 billion fewer visits to U.S. restaurants over the past six years, compared to 306 million fewer visits by adult-only parties.

As of February, visits to casual dining establishments like Olive Garden are at a six-year low. Those visits dropped another 2% in the first quarter of 2014 despite casual dining restaurants slashing prices on their food routinely since the economic downturn. In the past six years, big casual dining chains relied on their promotional offers -- including 2-for-$20 meals -- so heavily that they accounted for 29% of all visits in 2013. That's nearly a third of customers who ate at places like Olive Garden simply because they were ridiculously cheap.

Consider that fast-food chains got roughly 27% of their business from such discounts, while independent restaurants only received about 17% of their visits through price cuts since 2006. That's dropped casual dining spending each quarter since spring of 2010 at the same time as people ages 18 through 47 have started shunning these roadside restaurants.

It not only hasn't helped traffic, but it's crushed the perceived value of those all-you-can-eat breadsticks and Tour Of Italy platters. The cost of dinners out rose nearly 3% over the last year, according to the Consumer Price Index. That's more than the overall rate of inflation and isn't helped when a $10 promotional meal jumps to $12 or $14, jacking up the price 20% to 40%. Combined with drops in casual-dining spending reported by NPD Group every quarter since spring of 2010 and the gradual shunning of roadside chains by people ages 18 through 47, casual dining is having a tough go of it.

"It appears casual dining operators' promotional offers have been in place for too long. For example, the 'two for $20' craze is now available in some variation at nearly every casual dining chain," says Bonnie Riggs, NPD restaurant industry analyst. "Some liken it to an echo chamber because there's no competitive differentiation. Relying on existing promotional tactics may no longer be a viable option."

Darden learned that earlier this year when its long-suffering and recently revamped Red Lobster chain not only couldn't match competitors' pricing, but got clobbered by rising shrimp prices. Darden sold the chain to private equity firm Golden Gate Capital in May for $2.1 billion. The ongoing troubles of competitors including Ruby Tuesday  (RT) ; Chili's and Maggiano's Little Italy parent company Brinker International  (EAT) ; Applebee's and IHOP owner DineEquity (DINE); and Outback Steakhouse and Carraba's owner Bloomin' Brands  (BLMN) only support the idea that casual dining's business model may be fundamentally broken.

Folks who own Darden shares know this and have begged the company to give Olive Garden the Red Lobster treatment and spin it off or sell it and keep only its higher-end chains including LongHorn Steakhouse, Bahama Breeze, Yard House and Capital Grille. Their worst fears were confirmed in June, when Darden reported that revenue had only increased 1% over the last year, while earnings dropped a whopping 36%.

There's only one restaurant to blame for this mess and it's the spaghetti shop masquerading as a cafe. With the Olive Garden accounting 837 restaurants and 56% of all Darden's revenue, Darden has everything riding on its transformation. If it was hoping for growth, a 3% drop in Olive Garden revenue from last year and a continued slide in same-store sales can't be sitting well.

It would be one thing if Olive Garden was getting its clock cleaned by competitors, but Carrabba's has become the lead weight sinking Bloomin' Brands while Romano's Macaroni Grill has posted declines for Ignite Restaurant Group  (IRG) over the last year. The only really successful Italian chain -- Brinker's Maggiano's, with 17-straight quarters of improved same-store sales -- is more upscale than any of those mentioned above.

And there's the issue: Casual dining is just a bad fit. It's more expensive and less efficient than fast casual competitors such as Panera and Potbelly and it doesn't offer as much value or ambiance for the money as more upscale chains. It's a dinosaur and unless you're willing to place all of your hopes on beer and sports, as casual dining spots Buffalo Wild Wings (BWLD) or Ignite's Brick House Tavern + Tap have, you're sunk.

The Olive Garden lost families who are getting more of a bargain at quicker competitors and gave given fast casual restaurants an 8% boost in visits and a 10% bump in business over the last year. However, they're also hemorrhaging customers who would rather turn two casual dining trips into one fine dining outing. Darden's pricer options including LongHorn, YardHouse and Bahama Breeze succeed because they offer better food and drink options with a casual dress code and decor. As adult patrons and business travelers take note, fine dining establishments saw visits increase 5% last year compared to casual dining's losses. Meanwhile, the average fine dining patron spent $28.55 per visit last year compared to a casual diner's $13.75.

Darden has restaurants that are working but, for some reason, would rather go down with Olive Garden. Instead of embracing its lucrative and successful fine-dining options, it's trying to cram its casual dining offerings into an unfamiliar fast casual mold. It's not working, and it's going to hurt a lot more than it helps.

If Darden is wise, it'll take the next year to plow under its Olive Garden and add some more seats at LongHorn, YardHouse and Bahama Breeze. If not, it's going to join giant SUVs, episodes of Blossom and its crumbling Italian restaurant chain as embarrassing relics of a past that its customers would rather forget.

-- Written by Jason Notte in Portland, Ore.

>To contact the writer of this article, click here: Jason Notte.

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Jason Notte is a reporter for TheStreet. His writing has appeared in The New York Times, The Huffington Post, Esquire.com, Time Out New York, the Boston Herald, the Boston Phoenix, the Metro newspaper and the Colorado Springs Independent. He previously served as the political and global affairs editor for Metro U.S., layout editor for Boston Now, assistant news editor for the Herald News of West Paterson, N.J., editor of Go Out! Magazine in Hoboken, N.J., and copy editor and lifestyle editor at the Jersey Journal in Jersey City, N.J.

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