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Why 'Deep Discounting' Is Not Always the Winning Recipe

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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.
 

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