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.