5 Things You Didn't Know About Olive Garden
"When you're here, you're family," reads a recent marketing tag line for Darden Restaurants' Olive Garden, so let's go ahead and spill the beans on some family secrets. Given the casual-dining chain's recent struggles, some of these meatball-sized nuggets may either delight or concern you.
1. Sometimes a bargain isn't enough
Like so many restaurant operators these days, Olive Garden finds itself having to offer up deals from time to time to get patrons through the door. The promotional activity is based on the market's climate and what the competition is doing, but simply offering better values isn't always enough.
Outgoing COO Drew Madsen -- outgoing not in the sense of his cheery personality but in that he's retiring this year -- told analysts last week that the chain's recent deal offering two Italian dinners for $25 didn't meet Olive Garden's guest-count estimates.
One can argue that it was the price point. Brinker's Chili's and DineEquity's Applebee's have often been tethered to a somewhat similar "2 for $20" promotion, in which two guests can order two entrees and share an appetizer. Olive Garden could position the deal as a three-course meal because it also includes its unlimited salad and breadsticks, but maybe $25 is too high for couples and other duos who have been spoiled by $20 deals elsewhere.
However, Madsen also revealed that its "three-course Italian dinner for $12.95" promotion in June went well, even if the math adds up to a higher price per person.
2. Olive Garden's weakness is being blamed on your shiny Chevy and brand-new refrigerator
Olive Garden's same-store sales slipped 4% during the quarter, and sister chain Red Lobster fell even harder. Olive Garden's parent company has a theory.
"There's been a lot of speculation that consumers have deferred some big-ticket expenditures on autos, on appliances, some other things," CEO Clarence Otis argues, saying that folks who have held back on replacing their cars or major appliances over the past six or seven years are doing so now.
"With relatively flat budgets, they've got to do some more disciplined budgeting, and dining out is one of the things that may be paying a price for that," he said. "We suspect there's some truth to that."
That would be a great theory if folks were, in fact, spending less money across all chains, but that's not the case. Fast-casual concepts that offer quicker service and better value than casual dining are growing just fine these days. There are fine-dining institutions -- including some of Darden's own smaller concepts -- that are growing nicely.
Let's not turn your washing machine into a scapegoat.
3. The stock's juicy 4.8% yield isn't a sure thing
Perhaps the only silver lining behind having a stock close in on another 52-week low earlier this week is that new investors will be buying into a healthy yield of 4.8%.
This is an unusually high dividend for a restaurant operator, essentially double Brinker's 2.4% yield. DineEquity sports a nice 4.4% rate, but Darden is still magnetic to income investors as the top rate among the three leading casual-dining operators.
Darden thinks the distributions are secure, but it didn't generate enough free cash flow in its latest quarter to cover the period's payout. Darden is also cutting costs, announcing the elimination of 85 jobs at the organizational level and other promotional and supply-chain initiatives that will eliminate annual overhead by at least $50 million. These may be the actions of a company that wants to preserve its high dividend, but we can't assume that a leaner and less active promoter will somehow perform any better in the future.
Olive Garden fans who are thinking that they can use dividend checks to cover their tabs may want to reassess that strategy.
4. The Culinary Institute of Tuscany wasn't entirely real
Olive Garden has gone through several marketing campaigns over the years, but one that stood out a few years ago was the showcasing of a lively cooking school in Italy.
The ads showed the chain's chefs and managers training at the Culinary Institute of Tuscany in the throwback hamlet of Riserva di Fizzano in Chianti, Tuscany.
Well, it wasn't entirely real. Olive Garden's marketing came undone when a manager was tapped to make the weeklong trek to Tuscany reported that there wasn't a lot of training going on. It was mostly a sightseeing trip. The only time a chef was spotted was for a brief demonstration before taking media snapshots with those in attendance to distribute to local media.
Timeexplored the story, and the claim held up. The Culinary Institute of Tuscany wasn't really a cooking school. It was a hotel that would allow Olive Garden to host the chain's managers and chefs during the offseason.
5. Yes, a 2-year-old was once served sangria
Two years ago, an Olive Garden patron in Lakeland, Fla., took her 2-year-old son to the hospital after he was served sangria instead of orange juice.
The kid was fine. The mother moved to hire an attorney and sue the chain.
Accidents happen, but the fact that Olive Garden took nearly two weeks to make a public statement after the incident, allowing the media to jump all over the story before the company could get in front of it, wasn't its finest moment. I'm guessing the mother wouldn't settle for a lifetime of unlimited breadsticks in this case.
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The article 5 Things You Didn't Know About Olive Garden originally appeared on Fool.com.Longtime Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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