• by Karlene Lukovitz  @KLmarketdaily, December 21, 2010

Casual dining chains are seeing an improvement in business, driven in particular by more affluent customers and business/travel entertaining, Darden Restaurants, Inc. executives confirmed during a Dec. 21 analyst conference call for the company's fiscal 2011 second-quarter results.  

But the executives also cautioned that the pace of economic recovery continues to be uncertain, and provided real-life evidence -- in the form of recent marketing miscalculations for Red Lobster -- that less affluent consumers are still very value-focused.

Darden -- also owner of Olive Garden, Longhorn Steakhouse and specialty chains such as The Capital Grille and Bahama Breeze -- reported a strong quarter, with diluted net earnings up 26%, to $0.54, and total sales (including those from new restaurants) up 5.2%, to $1.73 billion. The company affirmed its outlook of net EPS growth of 14% to 17% for the full fiscal year.

Darden's results included gains in returns and absolute operating profits for all three of the largest chains, and same-restaurant sales gains of 2% and 6.8%, respectively, at Olive Garden and Longhorn, or 1.4% combined growth. That exceeded the 1% same-store sales growth seen by the restaurant industry as a whole (excluding Darden) for the quarter, according to Knapp-Track industry benchmarking data.

However, Red Lobster sales for the full quarter dipped 1.6%, on top of a 1.7% same-store decline for the chain in the first quarter of the current fiscal.

While Darden drew praise from analysts for employing short-term, brand-distinctive promotions rather than deep discounting during the period when full-service restaurants were hardest-hit by the economy, its management confirmed that Darden is now looking to return promotional calendars and marketing emphases to being more in line with those typical prior to 2008-09.

Pulling back from promotions is proving to be more challenging with Red Lobster than with other chains, however. With Red Lobster, this will take "more time" and "a high level of skill," the executives acknowledged, in part because Red Lobster's customer base is somewhat lower-income than the other chains.

Darden has been repositioning the Red Lobster brand to have a more sophisticated image conveying greater value for the money -- including remodeling units with a Bar Harbor motif and shifting from an emphasis on fried fish to more fresh, grilled offerings. Simultaneously, it has been introducing more menu items at the $15 price point that is the "sweet spot" for its customers.

The strategy is aimed at countering declining performance created by cost-conscious consumers perceiving its prices as too high. (The average check size was $19.25 to $19.75 last year, according to media reports; Darden executives now report it is between $18 and $19, which is still somewhat higher than the average for casual restaurants.)

However, two recent Red Lobster promotions -- a summer Crabfest and the fall's Endless Shrimp deal -- fell short of expectations, partly due to an underestimation of the continuing level of Red Lobster's customers' sensitivity to pricing. Last quarter, the chain's sales decline was attributed in large part to what turned out to be an overly optimistic decision to up the Crabfest's well-received $12.99 test price to $14.99 in rollout.

In the latest quarter, the chain's sales decline reflected the full impact of the Endless Shrimp promotion's disappointing results -- which in addition to starting two weeks later than last year's, was reduced in duration by a week (back to pre-recession length), based on the context of the improving overall casual dining scenario, according to Darden.

During the Q2 results call, Darden executives also noted that during the Endless Shrimp promotion's first few weeks, the chain was offering the shrimp deal at $15.99 (same price as recent years) in some locations, but $16.99 in others. Furthermore, there was no television advertising support during the first week of this year's promotion, in contrast to heavy TV support during the same juncture in the previous year's promotion. Instead, the chain shifted spending to digital marketing.

Darden corrected the pricing issue quickly, moving to a uniform $15.99, and same-store sales, after declining 6.6% in September, were up 1.8% in both October and November. But the initial reliance on digital advertising -- sans TV -- is a media strategy that is not likely to be repeated, the executives said. For the Red Lobster customer base, television advertising clearly continues to be critical, and it seems premature to rely too heavily on digital marketing, they acknowledged.

Overall, Darden is learning that its success formula for Red Lobster must combine "crave-able new dishes" and messaging that provides "absolute price certainty" for consumers, along with strong advertising creative, the executives said. This does not necessarily mean offering exceptionally low price points for every promotional item, but making it clear what the price points are -- for instance, spelling out that there are three different combinations/price points available in the chain's current surf and turf promotion, "all under $20."

For the Longhorn Steakhouse chain, a media strategy shift of employing national cable television for a month to support a $29.99 dinner for two promotion, rather than the standard spot cable and spot network, succeeded and will continue to be used for select promotions, Darden said.

Red Lobster's remodeled units are resulting in sales lifts of 4% to 5%, while Longhorn's (less extensive and less expensive) remodelings are resulting in sales lifts of 3% to 4%, the company reported.