Check averages dip, Darden adapts

It’s a huge check-booster when customers order appetizers at casual dining chains—providing they order an entrée, too. But when customers go the appetizer-only route, check averages shrink. No wonder Darden Restaurants chose to address this issue during its most recent conference call with security analysts.

Darden execs had plenty of good news for analysts, including a $111 million profit in the first quarter of its 2013 fiscal year. The company’s share price rose a full five percent on the news, a huge short-term gain for a mature company like Darden.

But even an organization of Darden’s size and stature is wary of consumer preference for reduced portion sizes and “everyday affordability” pricing, which could create revenue problems down the road. Darden president and c.o.o. Andrew Madsen sought to soft-pedal this issue in his opening remarks.

“With the recent introduction of some generously portioned new appetizers, there was an increase in the number of guests at Olive Garden ordering appetizers instead of an entrée for their meal,” he told analysts.

“Now what we’ve seen at Olive Garden is consistent with guest behavior at some of our other brands as well as across the industry. We believe it reflects a combination of factors, including the growing guest need for greater affordability, guest interest in safe experimentation and guests’ increasing interest in smaller portions, which some brands, including Bahama Breeze, are responding to with small plates or individual-sized versus shareable-sized appetizers.

“Now we see the increased guest interest in both of these options, generous appetizers that can substitute for entrees and small plates, as opportunities for Olive Garden that we will address with upcoming menu enhancements over the next several quarters.”

A menu revamp at Darden’s other megachain, Red Lobster, will address similar customer concerns. It’s the biggest menu upgrade this chain has made in 10 years “We talk about items under $15 addressing the need for more everyday affordability, and so the Red Lobster menu is going to go from having about 40 percent of the entrées being under $15 to about 60 percent of the entrées being under $15,” Madsen said.

It’s all well and good, except that, as JP Morgan Chase & Co. analyst John Ivankoe noted, “You’re giving consumers an opportunity to spend less.” He wanted to know “if there is that negative mix, are the new items designed to be gross profit dollar neutral to the higher-priced items? And if it is gross profit dollar negative, how much traffic do you need, from a profit perspective, to offset the potential for negative mix…?”

Ivankoe hit the nail on the head. No matter whether you run a single independent restaurant or are a 2,000-store multi-brand giant like Darden, the small plates/appetizer era we’re in now tends to drive check averages down. What can a restaurant owner do about it?

Darden executive chairman/c.e.o. Clarence Otis responded to Ivankoe’s question this way:

“Those are the dynamics we are looking at very carefully as we were testing this new menu at Red Lobster,” he said. “What we’ve seen is a pretty modest check decline that is partly offset by an increase in appetizers, because there’s a broader range of appetizers on this new menu and we’ve talked earlier about some guests ordering appetizers instead of an entrée.

“Then the rest of the check impact is offset by guest count growth and some labor optimization that we’ve put in place. So what we would expect to see isn’t a big decline in check, probably a slower growing check, improving guest count growth that’s driving growth in total sales and total earnings. That’s kind of the dynamic overall that we’re seeing in the test.”

Put simply, if customers want less-expensive entrees or wish to economize by just ordering an appetizer, Darden—or any other restaurant—has to give them what they want. Darden will address the lower check averages that result by boosting volume and finding operational efficiencies along the way. If your restaurant is facing a similar situation, be ready.