While the majority of restaurants have turned to delivery options to boost profits, there are still a few holdouts.
Darden (NYSE: DRI), the parent company of banners like Olive Garden and Longhorn Steakhouse, is one of them. The full-service restaurant magnate this week told investors on its first-quarter 2023 earnings call that its decision to not offer delivery has shielded it from a negative impact on margins.
“With margins being basically the same for us on off-premise versus on-premise, because we don’t have that delivery charge, we’re OK wherever [the on-premise/off-premise mix] is,” said Rick Cardenas, president and CEO of Darden.
Cardenas conceded that some of the company’s brands are still seeing less on-site traffic than they did before COVID-19. But he said that reduction is being offset by an uptick in to-go sales. For the quarter, off-premise sales — mainly takeout and catering orders — accounted for just under a quarter (24%) of Olive Garden’s total sales and 14% of Longhorn Steakhouse’s.
“Two quarters in a row now, we are seeing consistent off-premise levels,” said Rajesh Vennam, senior vice president, chief financial officer and treasurer of Darden.
Since Darden brands don’t offer any form of delivery, they aren’t susceptible to swings in delivery demand that can hamper margins. Those swings can be more volatile than the demand for takeout, which is typically a cheaper option and is more insulated from factors like inflation that curb consumer spending.
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But compare the sales mix of Darden brands to those of other marquee restaurant brands, and you’ll see that the Olive Garden and Longhorn Steakhouse parent stands in stark contrast to the industry at large.
A 2020 report from the National Restaurant Association found that 71% of operators saw an increase in off-premise sales as a portion of total sales after the COVID-19 outbreak. A 2022 report echoed those findings — 80% of operators said they expected off-premise sales volume to stay the same or increase in 2022.
The consumer data backs up that sentiment. The same report found that over half (54%) of adults surveyed consider purchasing takeout or delivery “essential to the way they live.” And research from Pymnts discovered that 43% of over 2,600 U.S. respondents order food from same-day delivery apps like Uber Eats or DoorDash every month. More than half of them order once a week.
Meanwhile, a 2022 survey from Technomic found that 64% of food ordered from U.S. restaurants in 2021 was either for takeout (43%) or delivery (21%). That means just 36% of orders are on-premise. By forgoing delivery, Darden is tapping into the smaller of the two markets — on-premise orders make up around 80% of total orders for some brands.
Why, then, has Darden refused to grow its off-premise sales mix through delivery? Comments from company executives suggest the company is worried about the unit economics of small deliveries.
“Right now, we have no interest in delivering a $10 meal … to an individual household,” said Gene Lee, the former CEO of Darden, on a 2018 earnings call. “That’s just not a business that we think we want to be involved in right now.”
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The company’s stance hasn’t changed with new leadership. A year ago, when asked if the company is reconsidering its resistance to delivery offerings, a Darden executive replied with a simple “no.”
It was reported in 2020 that Darden had been experimenting with a delivery option, but it still found the economics worrisome.
“We did test doing our own delivery [but] found it really inefficient,” said Lee. “We really didn’t see that the third-party delivery grew faster than our own to-go business. We are not anticipating launching a third-party delivery model.”
That to-go business operates a bit differently than most third-party food delivery apps. For Olive Garden, it calls for a minimum basket size of $75, which was slashed to $50 during the pandemic.
Cardenas believes those orders are more reliable than those from third-party deliverers, which tack on a delivery surcharge that he thinks will scare off some customers.
“If the consumer starts feeling more strapped, will they be willing to pay the kind of rates they have to get food delivered?” he asked in June. “Or will they just decide to go pick it up?”
Soon, we’ll see if Cardenas is right to be skeptical. With inflation on the rise, third-party delivery volumes could take a hit, so the upcoming earnings reports of companies like Uber, DoorDash and Grubhub will be worth keeping an eye on.
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