While the majority of restaurants have resorted to delivery options to boost their profits, there are still some holdouts.
Darden (NYSE: DRI), the parent company of banners like Olive Garden and Longhorn Steakhouse, is one of them. The full-service restaurant magnate told investors in its first-quarter 2023 earnings call this week that its decision not to offer delivery protected it from a negative impact on margins.
“Since the margins are basically the same for us off-site and on-site because we don’t have that delivery fee, we’re fine anywhere [the on-premise/off-premise mix] is,” said Rick Cardenas, President and CEO of Darden.
Cardenas acknowledged that some of the company’s brands are still seeing fewer on-site visitors than they did before COVID-19. But he said the reduction will be offset by a surge in to-go sales. For the quarter, off-premises sales — primarily takeout and catering — accounted for just under a quarter (24%) of total sales at the Olive Garden and 14% at the Longhorn Steakhouse.
“For two consecutive quarters, we have seen consistent levels of off-premises,” said Rajesh Vennam, Darden’s senior vice president, chief financial officer and treasurer.
Because Darden brands do not offer any form of delivery, they are not susceptible to fluctuations in supply demand that can affect margins. These swings can be more volatile than demand for takeout, which is typically a cheaper option and more insulated from factors like inflation that slow consumer spending.
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But compare the Darden brands’ sales mix to that of other well-known restaurant brands, and you’ll see that the parent company of Olive Garden and Longhorn Steakhouse stands in stark contrast to the industry as a whole.
A 2020 National Restaurant Association report found that 71% of operators saw an increase in off-premises sales as part of overall sales following the COVID-19 outbreak. A 2022 report echoed these findings – 80% of operators said they expected off-premises sales volume to remain the same or increase in 2022.
Consumer data supports this sentiment. The same report found that more than half (54%) of the adults surveyed believe buying takeout or delivery is “essential to their lifestyle”. And research from Pymnts found that 43% of over 2,600 US respondents order groceries each month from same-day delivery apps like Uber Eats or DoorDash. More than half of them order once a week.
Meanwhile, a 2022 survey by Technomic found that 64% of groceries ordered at U.S. restaurants in 2021 were for either takeout (43%) or delivery (21%). This means that only 36% of orders are made locally. By not delivering, Darden taps into the smaller of the two markets – on-site orders account for around 80% of total orders for some brands.
Why, then, has Darden refused to add delivery to its off-premise sales mix? Comments from company executives indicate the company is concerned about the unit economics of small shipments.
“Right now, we have no interest in shipping a $10 meal to an individual household,” Gene Lee, Darden’s former CEO, said on a earnings call for 2018. “It’s just not a business, of which we believe we want to do now.”
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The attitude of the company has not changed with the new leadership. A year ago, when asked if the company was reconsidering its opposition to delivery offers, a Darden executive replied with a simple “no.”
In 2020 it was reported that Darden had been experimenting with a delivery option but the economics were still a concern.
“We tested our own delivery [but] found it really inefficient,” Lee said. “We really haven’t seen third-party delivery grow faster than our own to-go business. We do not anticipate bringing a third-party delivery model to market.”
This to-go business works a little differently than most third-party grocery delivery apps. Olive Garden has a minimum basket size requirement of $75, which was reduced to $50 during the pandemic.
Cardenas believes these orders are more reliable than those from third-party sellers, who charge a shipping surcharge, which he believes will put some customers off.
“If consumers are feeling more tense, will they be willing to pay the prices they have to pay for food delivery?” he asked in June. “Or do they just decide to pick it up?”
Soon we’ll see if Cardenas is right to be skeptical. With inflation rising, third-party delivery volumes could be impacted, so it’s worth keeping an eye on upcoming earnings reports from the likes of Uber, DoorDash, and Grubhub.
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