Darden Restaurants, the world’s largest full-service restaurant company, recently announced a 37.6 percent drop in first-quarter earnings compared to last year and is going to have to make major cuts, including 85 corporate positions. The reason behind the short-fall in earnings is cited as a broad industry problem, the drop in casual dining, which is blamed on an unstable housing market.
Volatile mortgage rates and less consumer spending has led to what Matthew Di Frisco, director and senior restaurant analyst at Lizard Capital Markets says is a “discretionary sector.” Among the restaurants Darden owns is Olive Garden, Red Lobster and Longhorn Steakhouse. For more than a decade, Olive Garden has been the leader in casual dining, accounting for half of Darden’s sales. And although it led other restaurants in the casual-dining sector during the recession, it continues to struggle through the country’s long economic recovery. During the first-quarter, it fell below its competition, experiencing a 4 percent decline in sales in stores 16-months old or older. Yet, during the most recent month, it showed a small increase above the others. “It’s a broader industry problem,” stated Jeffrey Bernstein, senior restaurant analyst with Barclay’s.
According to Chris Muller, a restaurant professor at Boston University, “Olive Garden, probably more than any other company in the entire industry, is smack in the sweet middle-class mindset. It is middle class and the middle class right now is suffering.” With higher mortgage rates, home sales have slowed, and potential homebuyers are spending less. Also, the fewer homes that are built, the less jobs are created. It is estimated that three jobs that last for a year are created for each single-family home built. Fewer jobs mean fewer people who can afford to dine out. These are just a few of the factors that create the belief that the drop in casual dining has become another casualty to blame on an unstable housing market.
In general, America’s slow economic recovery has resulted in a decline across the board for casual dining restaurants. Instead, more and more consumers are choosing the limited-services establishments, where they do not have to tip. Such eateries as Duncan Donuts, Chipotle, and Starbucks are experiencing strong sales trends.
To increase sales in its casual-dining brands, Darden has initiated more fashionable items to its menus, such as tapas-style dishes at Olive Garden and has begun offering more discounts. New restaurant openings stimulated sales in the first quarter, showing revenue up by 6.1 percent from last year’s first quarter. Also during the first quarter, Its higher-end chain, Capitol Grille, which appeals to the corporate set, grew 3.2 percent.
An unstable housing market may not have to be blamed for the drop in casual dining for long. A recent survey showed that the confidence in the housing recovery by homebuilders was holding at an eight-year high. With housing permits up last month to the highest they have been since May 2008, homebuilders were optimistic about potential buyers and the expectations of seeing more construction activity.
By: Lisa Nance