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.