Why ‘Deep Discounting’ Is Not Always the Winning Recipe

Nowadays the deepest threat to the restaurant industry isn’t food companies advertising the value of their brands, but competitors who promote “deep discounting,” said Drew Madsen, president and chief operating officer of Darden Restaurants, which owns such dining concepts as Red Lobster, Olive Garden and LongHorn Steakhouse. The company saw first-quarter sales dip 2.3 percent to $1.73 billion, but Madsen remains optimistic that the economy will turn around and that consumers will go back to dining out more. He said the “deep discounting” tactic erodes the value of a brand over time, which is exactly why Darden Restaurants, for the most part, has stayed away from heavy promotions. Instead, the company chose to focus on “value” for family-friendly brands like Olive Garden, and “broadening the appeal” of less value-oriented restaurants like Red Lobster and The Capital Grille. Madsen chatted with Brandweek about these and other changes, as well as the company’s hopeful outlook, even despite heavy consumer cutback. Some excerpts are below.

Brandweek: How’s the economy affected Darden and the restaurants it operates?
Drew Madsen: It’s a difficult environment and consumers certainly are more cautious about how they spend their money in this [recession]. In a discretionary business like restaurants, we, [as an industry], have seen an impact on our same store sales line. Darden is similar to that, but what’s different about us is we’ve been able to maintain a meaningful level of outperformance to the industry on [the strength of] our same restaurant sales [according to the Knapp-Track industry benchmark].

BW: What kinds of consumer changes are you noticing among patrons who eat at each of these brands? Are they skipping dessert more, forgoing appetizers, taking advantage of limited-time promotions or keeping the check under a certain amount?
DM: We are seeing a little more pressure on the dinner than the lunch occasion. We’re also seeing a [bit] more pressure on our higher price, higher check [restaurant dining] concepts, so brands like The Capital Grille—a fine dining steakhouse that’s priced at $90 or so a person—have seen a bigger impact than Olive Garden, which is [around] $15 a person, and we’re seeing a little bit of a decline in the overall check. Part of that is consumers are probably being more careful with the types of [menu items], like entrees, appetizers and desserts that they buy, and whether or not they have the same number of add-ons like they did in the past. But a big part of the check erosion is due to all of the deep discounting that’s going on with competitors trying to get more people [eating at restaurants]. That discounting is essentially sacrificed per person per check. That’s not the case at Darden.

BW: During the earnings call last week, you discussed at great length the need for Darden—and the restaurant industry—to stay away from “deep discounting.” Why so?
DM: It’s obviously a very value-sensitive experience [in this environment], and we think it’s very important to define what success looks like for your organization, and to make sure that you’re clear on what it takes to deliver on that success. Success for us is profitable market share growth that allows us to maintain the integrity of our brands and the strength of our business model long-term. Our belief is that deep discounts that artificially drive traffic and [sales] strength in the short term typically have a very significant long-term cost. It trains your best guests to expect that your experience rests on what the discount is—say $9 or $10—and it also makes it very difficult for you to maintain your restaurant and overall business model over time, especially in more normalized environments.

BW: So how are you balancing the need for short-term growth, especially in a recession, without cheapening or tarnishing the brand’s image, as you say?
DM: In a variety-seeking category like restaurants, when consumers decide to cut back on the number of restaurant occasions they will have, there are two important considerations: One is trust. With restaurants, if you’re not going out as often, what is the restaurant or brand where you have the most trust and that will give you a great experience?…That’s not to say we don’t need to give people new reasons to visit our restaurants in the form of limited time offers and or to do something innovative to respond to an elevated desire for affordability—because we are doing both of these things. [For instance,] each year we have six to eight promotional windows where we tend to feature new dishes. But what we try to do with all of our advertising and promotions is to try to increase near-term visits to our restaurants, No. 1, but secondly, to build lasting, long-term brand equity that helps differentiate us from competitors and contribute to stronger loyalty over time. We’ll continue to do that at all of our restaurants, but we’ve complemented that with some shorter or healthier, near-term [tactics], such as a “Quick Catch” menu at Red Lobster they’ve introduced to increase affordability at lunch. There are eight items on that menu, four or five of which are priced at $6.99, and that is a very appropriate price point for lunch. It gives people a reason to come to Red Lobster, and it helps develop a daypart that they’ve got opportunity to grow in.  
BW: Olive Garden has been around for 27 years, and as you pointed out, is clearly Darden Restaurants’ most value-oriented brand. How are you keeping the brand contemporary and fresh over time?
DM: The brand has been defined in a way that really taps into the emotional center of casual dining and full service dining. They’ve got a brand promise that is very broadly appealing…What they promise is to delight guests with an idealized Italian family meal, and it’s a promise that physically says, “We’re going to give you a fresh, simple, delicious Italian food in abundant portions at a good value.” Emotionally, it says, “We will welcome you and make you feel like family.” We think that every brand has to do both of those things. They have to offer a physical promise that’s more about what you get and they have to offer an emotional promise that’s about how we make you feel and the way Olive Garden is able to do that is through its very broad appeal and very timeless appeal as well.

They’ve been able to keep that relevant over time through innovations like opening a restaurant in the Culinary Institute [of Tuscany in Italy], by redesigning their menu to showcase the number of items that were inspired by that restaurant in Italy, and they’ve also been able to keep employee engagement very high. The difference we think between a good restaurant brand and a great restaurant brand is quite often the engagement and discretionary effort of the front line employees. If they feel like they are part of something special, they’ll go beyond the formal job requirements and work on developing an experience that makes guests feel appreciated and want to come back. This connection with Italy and the restaurant and the Culinary Institute in Italy—where we send our restaurant managers to every year to train for eight days, and we’ve been doing this for the past decade—results in a very cohesive and engaged group of employees who deliver the brand’s promise in our restaurants every day at a very high level. That’s the strength of Olive Garden that we’ve been able to capture in our latest ad campaign which captures moments in people’s lives, how they live their lives and how Olive Garden is a part of their lives.

BW: You’ve taken strides to position Red Lobster as a “fresh seafood restaurant with culinary experience,” in response to consumers’ perceptions of the chain as a frozen-seafood-only experience. How have consumers been responding thus far?
DM: Red Lobster is still a very vibrant brand with very strong average unit volumes and a solid business model. It’s a big cash generator for Darden. We think there is an opportunity to broaden the appeal and take it and make it stronger…For guests who used to come to Red Lobster but don’t come anymore or who don’t come as often, it’s because they didn’t view the menu as being relevant to them, because it lacks culinary expertise. They think it’s all frozen food, which isn’t true, but that was the perception…The marketing program the team at Red Lobster has been pursuing for the last couple of years is really about refreshing the brand and the experience has centered on [improving] those two barriers. They introduced a “today’s fresh fish sheet,” a menu that highlights, in a very visible manner, the different fresh species of fish offered in each restaurant. It’s five to seven fresh fish species in every restaurant, and the menu is printed twice a day in every [Red Lobster] to make sure we’re…really only serving the freshest seafood possible. The second big initiative that started last January or so was the introduction of wood fire grill, which, [research found], was the preferred cooking platform for seafood, and that’s the platform that conveys the highest level of culinary expertise. We installed wood fire grills in roughly all 685 restaurants. Red Lobster redesigned its menu to highlight a wood fire grill section. They’ve also developed 10 or 15 wood fire grill menu items and added a new position in the kitchen, a Certified Grill Master,…and, on the building side, we’ve been working on a different environment for that experience, if you will, so remodeling the restaurants in a way that provides a relaxed setting, like the new building prototype we introduced [at the Northtown Plaza location in  Spokane, Wash.] that was inspired by Bar Harbor [a popular lobster-fishing village in Maine].

BW: Do you think consumers will be just as likely to eat out after the recession is over or is it a case of “old habits die hard?” (i.e. Consumers will still be in a penny-pinching mode after the economy improves.)
DM: The big question on everyone’s mind is, “When will the economy get stronger and better” and everyone knows it will get better at some point. Our outlook reflects the fact that we think [the economy] will be changing over a longer time frame.

Habits take a long time to change. We think that eating out in a restaurant in a more normalized environment is a very affordable way to make your life more enjoyable. It’s deeply ingrained in the way people live their lives. While it takes some time to get from “here” to “there,” if you will—and maybe we’ll never get things to be 100 percent back to the way they were prior to this downturn—our belief is the consumer will want to go to full-service restaurants. It makes their lives more rewarding and enjoyable and helps connect consumers with those people close to them. It helps them create moments during special occasions, and that’s one of the things [our research] for all four restaurants shows. One of the top things consumers say they will do more of when the economy gets better is to go out to restaurants more often because it’s a pretty affordable thing to do to rejuvenate their emotions—not just to avoid cooking, but to live a more fulfilling lifestyle.
BW: Which do you perceive to be the bigger threat: Food companies advertising the value, comfort and affordability of their brands, or competitors’ heavy discounting?

DM: In the short term, with the very value sensitive consumers, both are probably near term challenges to profitable same restaurant sales growth. Candidly, I think the bigger challenge is companies that overreact to the near term challenges and fail to evolve their brands in an appropriate way over time. So I absolutely believe everything I just told you about the way consumers want to live their lives, but that doesn’t mean we don’t need to evolve our experience, our menu offerings and our advertising to make sure we’re keeping pace with changing consumers’ lifestyles. I just think those changing needs and lifestyles are always going to include restaurants, but the bigger risk is people who overreact with very short-term lenses as single differentiator of success [i.e. heavy discounting].

BW: How’s the recession affected your advertising strategy? Are you spending more or less marketing Darden’s brands?
DM: We’ve maintained our media impact, so, the number of weeks we advertise, the weight levels, and the quality of our advertising in terms of 30- versus 15-second spots. We’ve maintained all of that advertising, and we’ve reinvested some of the savings [though little] in this year’s buy to support near term actions…like the “Quick Catch” lunch program. The No. 1 reason [we’re continuing our ad spend] is we have strong evidence that suggests that even in this environment, we’re getting a very strong ROI in advertising on our brands.

BW: What’s your No. 1 for helping marketers in the restaurant industry weather the recession?
DM: Strategy is important, but culture is what allows the strategy to come to life. Culture is what allows the strategy to be executed consistently, and, at a high level, culture is about what you value and reward, what’s important to you. And culture is ultimately tested and defined and periods of stress. It’s not build in prosperity. Everyone can talk about having value and do what’s right or wrong when times are growing, but when things are tough, that’s when your values are put to the test.