The Italian Industry’s Big 3 Hold Their Own
Three of the largest Italian casual-dining chains in the U.S.—Olive Garden, Carrabba’s Italian Grill, and Maggiano’s Little Italy—are holding their own amid an increasingly competitive environment. While same-store sales growth has been modest, they are gaining, not losing revenue. And in this tough restaurant environment that’s a positive.
The competition curtailing traffic for casual Italian eateries stems from a variety of directions, says R.J. Hottovy, the Chicago, Illinois-based senior restaurant analyst at Morgingstar, who follows the stock of Olive Garden parent Darden. The segment has been threatened by a “class of fast-casual chains that permeate the market, such as Chipotle and Panera, and smaller chains that offer slightly cheaper prices,” he says. Since many families and consumers are cash-strapped and time-sensitive, they’ve gravitated to the lower-cost, more convenient alternatives.
Stepped-up competition from fast-casual eateries also ratcheted up price pressure on these Italian eateries, Hottovy says. “You can’t charge as much as you’d like or you’ll lose the value proposition,” he says.
Moreover, many families are facing macroeconomic issues, highlighted by higher rents, rising health care and child care costs, and therefore are dining out less. In addition, supermarkets such as Trader Joe’s, Whole Foods Market, and Kroger have captured customers by offering reasonably priced prepared meals.
Hottovy says Olive Garden made strategic moves to keep their top-line sales rising and stem the pressure. In 2018, its sales rose 3.7 percent to $4.1 billion, driven by comps growth of 2.4 percent—healthy increases in a competitive arena.
Olive Garden has thrived on promotions and deals. For example, it offers, “$10 entrees or more attractive price points that level the playing field with fast casual,” Hottovy says. It compensates for lowering prices with add-ons, but the discounted deals enabled it to maintain traffic. Olive Garden’s average dinner check was $18.50 in 2018.
In addition, Olive Garden “streamlined operations and improved how restaurants are operating, with better labor schedules, better blocking and tackling, and set themselves up for carry-out business,” Hottovy says. The chain made it easier to order food on mobile apps and set aside parking spots for curbside pick-up so it doesn’t interfere with dine-in execution.
Darden’s annual report this past year attributed Olive Garden’s growth to the following factors: Improving the guest experience; creating “craveable” Italian food; marketing that reaches the right target, at the right time; and improving off-premises sales. The latter category accounted for roughly 16 percent of total sales, quarter-to-quarter, throughout fiscal 2019, despite the fact Darden remains resistant to third-party delivery.
In addition, its TV marketing and social media campaigns made inroads with millennials, the company said, in an effort to overcome the perception that grandpa dines as Olive Garden, not his grandkids, Hottovy says.
One area that Olive Garden could still ignite is its beverage-related sales, which amounted to 6.7 percent of revenue in 2018, Hottovy says.
But overall, Darden CEO Gene Lee has done an effective job positioning Olive Garden for sustained success. “He understands what needs to be done and doesn’t need to be done. They’ve stuck to the vision and executed it,” Hottovy says.
These iconic brands have, like many casual chains, faced heightened resistance from millennials who prefer meals that are “wholesome, unique and customizable, where they get what they want quickly and for good value,” says Brian Warrener, associate professor at the College of Hospitality Management at Johnson & Wales, located in Providence, Rhode Island. He says millennials carry the perception, rightly or wrongly, that the meals aren’t prepared from scratch and are “cooked in a commissary, and are shipped and wrapped.”
Nonetheless, the three chains, Olive Garden in particular, have appealed to millennials and other generations through targeted promotions and deals. Olive Garden’s dinner of unlimited pasta bowls, unlimited salad, and free breadsticks for under $15 resonates with younger consumers and other value-seekers on a budget. Because pasta isn’t that expensive, the chain can keep its food costs down and still turn a healthy profit.
Curbside dining also spiked revenue. “It’s a home-meal replacement operation, especially for families. It’s quick, inexpensive and appeals to young folks who don’t want to be tied to a restaurant for a couple of hours,” Warrener says.
At the April 26, 2019 earnings call for first-quarter results, Brinker International’s CEO Wyman Roberts, which owns Maggiano’s and Chili’s, painted a rosy picture of strong same-store sales that spiked 2.6 percent for the company. But much of that revenue growth sprang from Chili’s, which rose 2.9 percent. Maggiano’s climbed a more modest 0.4 percent.
Roberts said Maggiano’s “continues to grow sales through traffic and gain share from our competitors.” He also portrayed an optimistic view of the economic scene in America affecting restaurants. Due to “low unemployment and income growth in the middle class, more people are choosing to dine out, strengthening the entire industry,” he said.
During the call, Roberts highlighted delivery as a key growth area for Maggiano’s. The brand’s business grew “double-digits year-to-date primarily through our third-party partnerships,” he said. The chain has offered delivery for about a decade, making it a veteran in the space. Yet this was kept to in-house delivery on minimum orders of $125. The third-party push is a relatively new initiative and helps Maggiano’s grab share in that smaller-order space.
The brand’s goal, Roberts said, was to devise an approach with third-party vendors that “integrates with our system and delivers the high-quality experience to our guests” comparable to dining in at the restaurant.
In its first-quarter review, Bloomin’ Brands’ comps lifted 2.4 percent, with Outback doing much of the heavy lifting at 3.5 percent. Carrabba’s growth stemmed mostly from off-premises sales and delivery, which now constitute 14 percent of its overall sales.
“In my opinion, delivery and large-party catering is probably one of the biggest growth opportunities for my brand,” says Carrabba’s president Michael Kappitt. “Italian travels so well and it can suit so many occasions and in a world where the casual-dining category really hasn’t grown traffic in a very long time.”
“When you find areas like this,” he adds, “where there’s just a gravitational pull from the consumer, we’ve got to figure out how to leverage that. And I think we’re in a pretty great position to do that.”
Part of what has been made life difficult for these Italian restaurant giants is that many American consumers crave the next great thing. What’s new and different. These legacy brands have been around for a while and local food at mom-and-pops is readily accessible, says Clark Wolf, who runs his own eponymous consulting company, based in New York and California. But many of these independent eateries have folded due to increased competition, he adds.
Olive Garden, Maggiano’s, and Carrabba’s “have held their own due to the overpopulation of restaurants,” Wolf says. Fast casual is also retracting. The tax bill hurt middle-class families. And immigrant restrictions have made it difficult for many restaurants to replenish staff, he adds.
Wolf praised Olive Garden for its effective menu strategy. Devising a value-oriented campaign of offering pasta plus free salad and breadsticks appeals to the masses while still maintaining margins. People know what Olive Garden is, what to expect, and the chain has a strong, unambiguous brand identify, he says.
But Carrabba’s identity with consumers is less defined, Wolf says, suggesting there’s room to grow still. “Its DNA isn’t clear enough across the board as that of Olive Garden,” he says.
Though off premises may constitute 10–15 percent of sales mix, it’s growing double-digits and these brands are ideally situated to take advantage. Italian food travels well, or at least better than burgers and fires, and Olive Garden, Carrabba’s, and Maggiano’s have the backing of large companies with deep pockets for investments. A ton of money has been spent on delivery and most consumers respond to these promotions, Wolf says.