Why Olive Garden, Longhorn Steakhouse refuses to deliver
While the majority of restaurants have turned to delivery options to boost their profits, there are still a few holdouts.
Darden (NYSE: DRI), the parent company of banners like Olive Garden and Longhorn Steakhouse, is one of them. The full-service restaurant mogul told investors this week on its first-quarter 2023 earnings call that its decision not to offer delivery has shielded it from a negative impact on margins.
“With the margins being basically the same for us off-site versus on-site, because we don’t have those delivery costs, we’re OK everywhere [the on-premise/off-premise mix] is,” said Rick Cardenas, President and CEO of Darden.
Cardenas conceded that some of the company’s brands are still seeing less on-site traffic than before COVID-19. But he said that reduction was offset by an increase in take-out sales. For the quarter, takeout sales — primarily takeout and dine-in orders — accounted for just under a quarter (24%) of total sales at Olive Garden and 14% at Longhorn Steakhouse.
“Two quarters in a row now, we’re seeing consistent offsite levels,” said Rajesh Vennam, senior vice president, chief financial officer and treasurer of Darden.
Since Darden brands do not offer any form of delivery, they are not susceptible to fluctuations in delivery demand which can hurt margins. These fluctuations can be more volatile than demand for takeout, which is generally a cheaper option and is better protected from factors such as inflation that dampen consumer spending.
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But compare the sales mix of Darden brands to those of other big-name restaurant brands, and you’ll see parent company Olive Garden and Longhorn Steakhouse stand in stark contrast to the industry as a whole.
A 2020 report from the National Restaurant Association found that 71% of operators saw an increase in offsite sales as a share of total sales following the COVID-19 outbreak. A 2022 report echoed those findings – 80% of operators said they expected offsite sales volume to stay the same or increase in 2022.
Consumer data confirms this sentiment. The same report found that more than half (54%) of adults surveyed consider buying takeout or delivery “essential to their lifestyle.” And research from Pymnts found that 43% of the more than 2,600 U.S. respondents order food from same-day delivery apps like Uber Eats or DoorDash each month. More than half of them order once a week.
Meanwhile, a 2022 survey from Technomic found that 64% of food ordered from American restaurants in 2021 was either takeout (43%) or delivery (21%). This means that only 36% of orders are made on site. By foregoing delivery, Darden taps into the smaller of the two markets – on-site orders account for around 80% of total orders for some brands.
Why, then, has Darden refused to expand its offsite sales mix through delivery? Comments from company executives suggest the company is concerned about the unit economics of small deliveries.
“At this time, we have no interest in delivering a $10 meal…to an individual household,” Gene Lee, the former CEO of Darden, said in a 2018 earnings call. It’s just not a business we think we want to get involved in right now.”
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The company’s position has not changed with the new management. A year ago, when asked if the company was reconsidering its resistance to delivery offers, a Darden executive answered with a simple “no.”
It was reported in 2020 that Darden had experimented with a delivery option, but he still found the economics worrying.
“We tested by doing our own delivery [but] found it really ineffective,” Lee said. “We really haven’t seen third-party delivery grow faster than our own takeout business. We do not plan to launch a third-party delivery model. »
This takeaway business works a little differently than most third-party food delivery apps. For Olive Garden, this calls for a minimum basket size of $75, which was reduced to $50 during the pandemic.
Cardenas thinks these orders are more reliable than third-party deliverers, who add a delivery surcharge that he says will scare off some customers.
“If the consumer starts to feel more cash-strapped, will they be willing to pay the kind of prices they have to pay to have food delivered?” he asked in June. “Or will they just decide to go get it?”
Soon we’ll see if Cardenas is right to be skeptical. With rising inflation, third-party delivery volumes could take a hit, so upcoming earnings reports from companies like Uber, DoorDash and Grubhub will be worth watching.
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