When you think of free breadsticks,
unlimited salad, and pounds of pasta, one name comes to mind Olive Garden. For generations, diners have been flocking
to the Tuscan style theme restaurant for its signature Fettuccine Alfredo
and classic tour of Italy entrees. You can't afford
not to eat there. It's actually, it competes with a
supermarket meal because you can bring enough food home to feed yourself a
second time or your family a second. That's value. But the Italian eatery known
for its five dollar take home meal has fallen on hard times
as the coronavirus pandemic has wreaked havoc on the restaurant industry. According to the National Restaurant
Association, as of December 2020, more than 110,000 bars and
restaurants in the U.S. have closed permanently or long term due
to covid-19 and lost sales this year are expected to
reach $240 billion. Your restaurants are not going to last
at these kind of numbers, OK? Anybody who has a restaurant in
New York that's full service, casual dining, at 25% is going
to go out of business. Olive Garden's Times
Square location alone. The chain's best performing restaurant saw
sales plummet by 94% as of September 2020. In response, the casual dining chain,
pivoted to takeout, trimmed its menu, and cut costs. But are those changes enough for Olive
Garden to survive the pandemic and offset the overall decline of
the dining restaurant experience? Olive Garden, the nation's first Italian
restaurant chain, got its start in the early 1980s in Orlando, Florida. In 1982, General Mills, home of Lucky
Charms and Cocoa Puffs, decided to expand its restaurant portfolio beyond
its Red Lobster business by launching the Italian eatery. There was a trend in the
60s and 70s for large food companies, General Mills, Purina, they
all decided that they could virtually integrate by
owning restaurants. If you think about General Mills being
in the cereal and grain business, that's where the mills are, that
Olive Garden being a pasta driven restaurant using lots of grains
makes complete sense, vertically integrate. In 1988, Olive
Garden went national. At the time, reckless lending led to
a meltdown in the savings and loan industry, bankrupting hundreds of financial
institutions, according to one analyst sensing an opportunity. General Mills uses economic muscle to
purchase prime real estate for its restaurants across the Sunbelt for 25
to 30 cents on the dollar. One of the reasons they did this
was both aggressive and defensive in its strategy. Aggressive, go out and find
new units defensive, knowing that the market was going to
come back at some point. No competitors could then
have new sites. They would they would lock up a
generation of restaurant sites for 10 or 20 years. And in
fact, that's what happened. By 1994, Olive Garden had 450
restaurants with dinner entree prices ranging from $6.95 to $13.95. Americans were flocking to the eatery after
facing a slowdown in the brand name cereal and food business. General Mills decided in 1995 to
sell off its restaurants, moving Olive Garden, and Red Lobster into a
new company called Darden Restaurants. By the early 2000s, the Italian
casual dining market in the U.S. was a $4.4 billion business, with Olive
Garden taking a 34% share and with business booming. In 2008, Olive
Garden posted its 55th consecutive quarter of U.S. same store sales growth. But by the early 2010s following
the Great Recession, Darden's was starting to struggle like other full
service restaurants the chain was facing increased competition from fast
casual restaurants like Chipotle and Panera Bread that offered a similar
experience but at a fraction of the cost. And with sales declining in
May 2014, Darden announced it was selling off its Red Lobster restaurants to
a private equity firm for $2.1 billion. Olive Garden was
facing headwinds too. In October 2014, Darden's entire board
was ousted by activist investor starboard value after complaints that the
chain's pasta was mushy and the breadsticks were like hot dog buns. Fixing Olive Garden was really the key
to fixing Darden overall and to maximizing that value
for shareholders. So they went in, they did
a lot with the menu. In response, Olive Garden announced
plans to remodel restaurants, upgrade its logo, and retool the website. And according to analysts, the restaurant
had another big advantage over its competitors: technology. Darden has always been
a technology company. They have their own internal technology
folks that write software, that do customer profiling, that actually do time
and motion study so they know more about what happens in the restaurant
than any other company and they own it. It's all proprietary. By the end of fiscal year 2019, Olive
Garden had sales of $4.3 billion, up 5% from a year earlier. As of May 2020, the chain at
868 company owned restaurants in North America and three dozen franchises
at home and abroad. The casual dining industry
in the U.S. is a $185 billion business
and includes restaurants like Applebee's, Chili's, Outback Steakhouse, The Cheesecake
Factory, and of course, the Olive Garden. Prior to covid-19,
casual dining restaurants faced an onslaught of competition from quick
service restaurants like Chipotle and Shake Shack. Casual dining has been a
slow growth, somewhat mature part of the business and the excitement and the
growth has really been in fast, casual covid-19 has only
accelerated those problems. The pandemic has absolutely devastated
the casual dining segment. Chili's parent company, Brinker International,
announced in October 2020 that first quarter 2021 revenue was
down 6% from the year prior. Same store sales during that same
period at Chili's fell 7%. With fewer dine in customers, casual dine
in chains like Chili's have been forced to pivot from dine in
customers to take out delivery. Prior to the pandemic, only about 20%
of Brinker sales came from its off premise business. To get meals out the
door quicker in the summer of 2020 the company launched It's Just Wings,
a delivery only brand in partnership with DoorDash. One of the things that's
been able to help us as we've built a very strong carry out
and delivery business during this time. I mean, our delivery and carry out
system delivery sales have peaked three times what they were
before all this started. And our goal is to keep a large
share of that as dine in restaurants open. It's a similar story for Bloomin'
Brands, the owner of Outback Steakhouse. In October 2020, the company reported a
drop in 3rd quarter 2020 revenue by 20%. During the same period,
same store sales at U.S. company owned outback
restaurants decreased 10%. With more consumers stuck at home, in
May 2020 pick up orders at Bloomin' Brands tripled. None of these restaurants
were really built to be fast food restaurants to focus on takeout
or to focus on delivery, right. And so I think that's been the challenge
for a lot of these guys is they just need to figure out how to do it. But Olive Garden might have taken
the hardest hit from covid-19. In December 2020, Darden reported second
quarter 2021 revenue at Olive Garden fell 19%. But the brand is seeing
some relief from earlier investments. In the years leading up to 2020,
Olive Garden launched a TOGO service allowing customers to pick up meals
at restaurants, a catering delivery business for orders of $125 or more,
and began testing with third party delivery companies. In a Q1 2021 earnings call, Darden
Restaurants CEO Eugene Lee said Olive Garden saw off premise sales increase 123%
in the first quarter making up 45% of total sales. CNBC reached out to Olive Garden but
they denied our request for an interview. As of December 22nd 2020, Darden's stock price had climbed to
close at $119, 357% higher than its March lows, the company have
reinstated a quarterly dividend and in August 2010, repaid a
$270 million loan. With fewer people eating out, and
some states limiting indoor dining room capacity, independent mom and pop restaurants,
as well as some larger chains are struggling to
make ends meet. So how was Olive Garden able
to weather the coronavirus storm? According to analysts, besides its
early investment in takeout and delivery. The brand began cutting costs
like reducing its marketing spend, trimming executive pay, furloughing staff,
and streamlining its menu. Garden has been really smart about
cutting costs well during the pandemic, and that only helps
to serve Olive Garden. And Olive Garden has also been smart
about trimming down its menu and all the typical things that
we've seen from restaurants. So they're taking this as a chance
to also look at the restaurant company as a whole and say, OK,
what can we improve on? How do we keep
improving on this takeout? This kind of experience that we want
to keep these kinds of digital sales and takeout sales past the pandemic. And because of its economic
strength, well capitalized restaurant companies like Darden also have significant negotiating
power with their food and beverage suppliers and distributors. What this pandemic has shown is that
companies that are in a strong financial position are probably well
positioned to take advantage of certain things like those A locations
that you've probably been covering for 5 or 10 years. That suddenly are available because the
restaurants that were in them have gone out of business. There's one
estimate where we call the restaurant apocalypse that possibly as much as
50% to 75% of independent restaurants will not make it. We saw the first
wave of closures back in the spring, in March, and we saw another wave
of closings in early September and still happening. We're going to see
that third wave after Christmas. People in small restaurants and many chains
are just not going to be able to survive. And once the pandemic
ends, analysts say there will most likely be pent up demand for consumers
who are ready to dine out again. And that could be welcome
news for Olive Garden. Fast forward 12 to 18 months
post pandemic, the restaurant industry and especially casual dining looks
a lot different. We'll have lost a fair number
of the independent, boutique, smaller mom and pop restaurants, many
of which are Italian. And we're going to have much
more of a chain dominated landscape.
