A restaurant price war nobody's winning

Red Lobster and Olive Garden lose profits as competitors' 2-for-$20 meal deals present an industrywide problem.

By Jason Notte Dec 20, 2012 2:01PM

Customers walk into a Red Lobster restaurant in Hialeah, Fla. on Sept. 6, 2012 (Alan Diaz/AP Photo)Red Lobster and Olive Garden parent company Darden Restaurants (DRI) just watched the casual dining price wars eat more than a third of its profits.


Earlier this month, Darden issued a warning about second-quarter profits after acknowledging that Superstorm Sandy, comments the company made about Obamacare and, most importantly, bad meal promotions were sinking sales.


On Thursday, Darden revealed that sales at its U.S. restaurants open at least a year fell 2.7% for its three biggest chains last quarter. That included a 3.2% drop at Olive Garden, a 2.7% decline at Red Lobster and a 0.8% slump at LongHorn Steakhouse.


Overall net income fell 37% last quarter as a result and served as a warning to other restaurants lowering the bar on price. Olive Garden misjudged consumer appetites by offering a 2-for-$25 three-course meal deal last quarter when competitors including DineEquity's (DINE) Applebee's, Brinker Restaurants' (EAT) Chili's and Bloomin' Brands' (BLMN) Outback Steakhouse offered 2-for-$20 meal deals or $10 entrees.


All of those restaurants could end up paying for Darden's mistake, however, as industry analyst Howard Penney tweeted Thursday:


Memo to Casual Dining investors: $DRI declared a price war - "nobody wins in a nuclear war"


Darden went through a whole lot of effort to lose that much money. It just overhauled menus and restaurants at Red Lobster and Olive Garden and attempted to change the low-cost culture of each establishment. Red Lobster, known for its all-you-can-eat seafood specials, increased chicken and beef items from 8% of the menu to nearly a quarter of its offerings. Olive Garden, meanwhile, shifted the focus away from unlimited breadsticks and pasta to "lighter" fare with fewer than 600 calories.


While Darden's relatively robust performance during the recession gave it room to make such moves, its competitors' recovery made their price drops possible. Even with recent gains, the casual dining industry still isn't study enough to keep the bar that low. According to the Census Bureau, spending at food service and drinking establishments is up 7.2% so far this year. At casual dining establishment, however, spending fell 2% last quarter and has dropped between 1% and 4% each quarter since spring of 2010.


When such restaurants aren't offering $10 meal promotions, the paying public doesn't find them all that cheap. The cost of dining out rose 2.7% over the last year, according to the Consumer Price Index, which puts it ahead of the 2.2% overall rate of inflation. Under those circumstances, a customer paying $10 for a promotional deal will pay 20% to 40% more when the price rises to $12 or $14 a few months from now. Even if those prices remain in place, they don't guarantee customers will stay.


"What happens is that after [value promotions] have been in place for a while, consumers no longer perceive them to be a deal," said Bonnie Riggs, restaurant-industry analyst at NPD Group, told AdAge when Darden issued its warning earlier this month.


While Darden's competitors haven't suffered the same losses, their gains from low-price promotions haven't been great. Sales at Brinker are up 2.7%. DineEquity has seen Applebee's same-restaurant sales rise 1.3% this year, only to be balanced by a 1.3% decline at its breakfast-focused chain IHOP. It's been a somewhat better story for Bloomin' Brands, with sales at Outback, Carraba's Italian, Bonefish Grill and Flemings Steakhouse 3.6% last quarter.


Casual dining's biggest success story, however, had nothing to do with promotions or tweaks to a chain's family friendliness. Buffalo Wild Wings (BWLD) rode a combination of football, beer, big TVs, and chicken smothered in spicy sauce to an average 6% sales increase last quarter.


Darden says it will revise its promotions calendar to get profits flowing again, but even the menu may not be off limits as the company backtracks on some of its decisions. Earlier this month, Darden said it won't bump any workers from full-time to part-time to deal with rising costs as Obamacare is implemented. Starting in 2014, large companies must offer health insurance to full-time workers, and as a result Darden was testing the use of more part-time employees. The company was criticized for the move, and said that employee and customer satisfaction declined at restaurants where the tests took place, the Associated Press reported.


That's fine, but Darden and its competitors need to make customers see the value in the service and product they're offering. Without that, casual dining becomes a collage of different strip-mall logos for the same faceless fare.

VIDEO ON MSN MONEY

17Comments
Dec 20, 2012 3:58PM
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Price wars are not a good way to get people in the door.  Give great food, great service and a great atmosphere and you will do better than just lowering your prices.  Darden has the reputation of treating it's employees very badly and when your employees are unhappy in the restaurant business then they give poor service and your customers don't come back.
Dec 20, 2012 2:50PM
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The food sucks.

At least peel back the cellophane before nuking it.

Don't forget to fluff it before serving.
Dec 20, 2012 4:16PM
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I don't like seafood, so my comments on the stink of the few Red Lobsters I've been dragged into don't really count for much. Olive Garden, on the other hand, serves the worst Italian food I've ever been near, and charges way too much for it. These restaurants aren't going under because of the recession, they're going under because nobody's willing to waste their money on awful food anymore.
Dec 20, 2012 5:41PM
Dec 20, 2012 4:18PM
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I know our Red Lobster is a nightmare to go to. The line is around the block! Doesn't matter when or what time you go. If it goes out of business it's bad management plain and simple. 
Dec 20, 2012 10:19PM
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Everyone on hear is bitching about these restaurants, and some others.  As fat as Americans are they got to be eating somewhere.  The facts don't support everyone griping about the food.  
Dec 20, 2012 6:25PM
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Yeah, there's a definite preparation problem at nearly all of the restaurants mentioned in this article.  The menu seems fine, and the food seems conceptually OK for what it is, but what comes out of the kitchen is really really poor.  I find Applebees and Chilis to be the worst offenders there. 
Dec 20, 2012 11:31PM
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Maybe 3 courses for $10 bucks...May garner more business??

 

But the food and service has to be excellent also...Otherwise we can eat at home.

 

We are serving a 10 pound,"choice" Prime Rib, for Christmas, we do it every year..

So why the hell would we go to a restaurant to get inferior meat at a higher price.??

Dec 20, 2012 5:18PM
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They need to get some people in the kitchen that know how to cook. Microwave doesn't solve all the problems.  The last time I was there the shrimps were raw, egg plant like leather.  I have been in the food business for 30 years, and they didn't want to know what was wrong. Go broke you bastards.
Dec 23, 2012 12:47PM
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If the product isn't good, lowering prices won't get people in the door.  There are too many restaurants out there chasing the same dollars.  We have a Five Guys and a Jersey Mike's near my home.  Anytime I go in to either place they seem to have business.  Neither place is what one would call cheap, fast food.  They produce excellent products, are clean, and the staffs are attentive and friendly. 
Dec 26, 2012 2:45PM
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Red lobster lures you with all you can eat shrimps. But when you want seconds you have to wait and wait and wait for the servers. this pisses you off so you do not want to wait anymore or come back anymore. No wonder they are bellying up
Dec 21, 2012 4:09PM
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It is a fine line between quality and profits in a restuarant business and always has been. The local guy opens up, because he is a great chef, but doesnt understand portion control or per ticket average like the big out of town corps, and falls on his face with a bk and a nice try. All the inspections and health department regs work for the big corporations with big coffers but the small guy is forced to buy the same equipment and cant afford the education of the aboved mentioned

Dec 25, 2012 3:10AM
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The promotions that were being run of 2 for $20 didn't appeal to me as a single woman. I am usually eating out alone (widowed) and I don't want or need two entrees. I want a good meal at a cheap price, as I live on a reduced income, and I find that I cannot get that at Chili's, Applebee's, Olive Garden or Red Lobster. Their prices have just gone through the ceiling! Furthermore, they need to hire cooks who know what they're doing! The last time I had buffalo wings at Chili's, they were inedible due to the high salt content. I complained and they offered to bring me something else. But I had time constraints and had to leave. I paid for the meal even though I didn't eat it; they did discount me a bit for the wings. So I paid in full for my coffee and chips and most of the price for the wings. I felt that they should have just written off my whole bill. Oh well, live and learn. No more eating wings at Chili's!
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