Summary
Darden Restaurants CEO Clarence Otis shares his views in an interview with USA Today concerning the strategy of not participating in the aggressive discounting and value offerings being featured by some of the top players in Casual Dining. His belief that the consumer will return to normal consumption and spending patterns seems to be a bit over confident.
Analysis
While cost cutting has enabled Darden to fare pretty well during the economic downturn, I find the current strategy outlined by CEO Clarence Otis very interesting. His strategy of just being better operationally, assume you have no low performers (based on recent experiences there are plenty out there), and by all means don't offer the consumer any extra form of value that might diminish your brand, may be just a little to simple and somewhat dangerous. I don't think the consumer thinks all that deeply about brand loyalty, in general they are looking for the best deal in spending their reduced disposable income. It just may be the companies offering some additionally relief to a strapped consumer during these difficult economic times (Brinker, Outback Steakhouse, Applebees, Ruby Tuesday's, Friday's, etc) might just be the ones who will win some increased consumer loyalty. The promotion menu at Red Lobster the last few months has been dominated by twenty dollar plus entrees. With traffic at this brand down eight quarters in a row, you would think a little value offering would be in order. As Red Lobster nears a twenty dollar check average,one can't help to think how 600 plus Red Lobsters will survive as a special occasion restaurant for the middle class. I don't believe a piece of wood under the old gas grill along with higher prices will do the trick in developing a younger, more upscale consumer base.
Assuming the consumer will return to normal spending behaviors is pretty interesting. Over the past decade, annual casual dining growth of six to eight percent was driven by five factors. Negative savings rates, massive gains in real estate values, willingness to run up large sums of credit card debt , full employment and increasing value of retirement and investment accounts. Who knows how long it will take for any or all five of these to return to pre recession levels, maybe never. Discounting may be here to stay in the casual dining business.
With an increased debt load from the top dollar paid for Longhorn/Capital Grille and the new corporate office facility about to be completed, I would think driving beaten up consumers into the restaurants would be high on the priority list. But, maybe not?
John Ducey consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
