Why Olive Garden doesn’t want to give discounts

By CNN Newsource

Published June 20, 2024 12:07 PM

By Danielle Wiener-Bronner, CNN

New York (CNN) — Restaurant chains from Applebee’s to McDonald’s have in recent months clocked a troubling trend: Customers watching their budgets are spending less, and dining out less often. So they’ve come up with a solution — offer meal deals and discounts to bring people back.

But Olive Garden is holding out.

“We’re not doing that,” said Rick Cardenas, CEO of Olive Garden’s parent company Darden Restaurants, during an analyst call Thursday. “Even at a time that our competitors have ramped up discounting.”

There’s a reason that so many restaurants are turning to discounts now, after years of avoiding the practice. Since the start of the pandemic, chains have been hiking prices dramatically — partially because of increasing costs, and partially because customers didn’t seem to mind spending more. But recently, diners have started to push back. So restaurants started offering temporary discounts on those higher menu prices.

The Italian casual dining chain has bucked the trend, making relatively moderate pricing increases and avoiding deep discounts.

The approach has yielded mixed results. In the past, Olive Garden used to outperform the industry during times of economic uncertainty. The chain has lost that edge, at least in terms of sales.

In the quarter ending on May 26, sales at Olive Garden restaurants open at least 16 months dropped 1.5%.

Still, Cardenas is confident in the strategy. “We think that everyday low value … is more sustainable than deep discounting to try to drive people in,” he said Thursday. “This is a long game for us.”

Raising prices, but not by much

Customers have recently started to fume over higher prices, particularly at fast food restaurants. On TikTok, complaints of $3 McDonald’s hash browns and $16 meals have gone viral. The grumblings reached such a fever pitch that chains like Applebee’s and Chili’s have made a bid for those customers, offering deals that they say put their prices on par with those at popular fast food chains.

Olive Garden has tried to avoid such pushback by keeping its price increases low.

In the most recent quarter, Olive Garden raised prices by 1%. That change hurt dollar sales, but kept restaurant traffic strong, Darden CFO Raj Vennam argued during the call Thursday.

“While Olive Garden same restaurant sales were below the industry, same-restaurant guest counts outperformed the industry,” Vennam said. “This dynamic was due to our decision to minimize pricing.”

Over the course of the fiscal year, Olive Garden hiked prices up about 3.5%, compared to roughly 4% across Darden’s brands, which include LongHorn Steakhouse, Eddie V’s and Cheddar’s Scratch Kitchen, among other chains. Next year, executives expect Olive Garden to once again raise prices below Darden’s brands overall.

“We’re not talking about huge pricing actions,” said Vennam.

The increases put Olive Garden more or less on par with most sit-down restaurants in the US. According to inflation data from the Bureau of Labor Statistics, menu prices at full-service, or sit-down, restaurants rose 3.5% in the twelve months through May. They jumped 4.5% at limited-service restaurants, which include fast food and fast casual locations.

The problem with discounting

Offering deals is a short-term fix to declining sales, but it’s a risky business.

A race to the bottom is “always the danger,” when it comes to cutting prices, David Henkes, a senior principal at the food industry research and consulting firm Technomic, previously told CNN. “Margin and profitability is going to be the challenge for 2024,” he said. “These value meals in the short term are only going to exacerbate that.”

Cardenas sees the practice as setting a dangerous precedent.

“If you do deep discount …. you have to do even more the next year,” he said. “The way we do it is more sustainable.”

Rather than vie for customers with steep discounts, Olive Garden is planning to bring people in by highlighting its regular offerings. One example? Refills for soup or salad and breadsticks. “That refill is a pretty big part of what we do and a big part of the value equation.”

The chain is also hoping to get some buzz the old-fashioned way, through word of mouth.

“Our best way to drive sales is our focus on a back-to-basics operating philosophy and our guests telling others what a great value they have when they come to our restaurants.”