Alison
By Allison Linn Senior writer
msnbc.com
updated 2/25/2010 10:01:01 AM ET 2010-02-25T15:01:01

At the height of the worst recession in decades, when many casual dining chains began offering deep discounts to lure tightfisted diners, Clarence Otis Jr. resisted.

As some rival restaurant chains halted expansion plans or began closing locations, Otis, head of the company that includes Olive Garden and Red Lobster, continued to expand, albeit at a slower pace.

And when companies across all industries began plotting major job cuts, Otis opted against such layoffs, although he didn’t necessarily replace every worker who left.

As chairman and chief executive of Darden Restaurants, Otis was well aware his company needed to respond to the recession and deep downturn in consumer spending. But he didn’t want to do so in a way that would hurt the brand more than it would help the bottom line.

“We’re a very strong brand, and we wanted to make sure that, even as we responded tactically, we didn’t reduce those brands to the point where price was the primary attribute that we reinforced in people’s minds,” Otis said in a recent interview with msnbc.com.

Now, many of the bets Otis made during the recession appear to be paying off, and Darden is poised to benefit in what many expect will be a slow and difficult economic recovery.

“I think he’s doing an excellent job,” said R.J. Hottovy, equity analyst at Morningstar.

Image: Clarence Otis Jr.
Darden Restaurants
As chief executive of Darden Restaurants, Clarence Otis aimed to navigate the recession without diluting his brands.
Otis, 53, whose company owns and operates some 1,800 restaurants across North America, was chosen this month as one of The Grio’s 100, a look at the next generation of African-American leaders and history makers.

Short-term benefits, long-term risks
Some restaurant chains may have seen a short-term boost in customer traffic from deep discounts but could face a long-term struggle in trying to convince those diners to pay full price again, Hottovy said.

A similar risk could hamper companies who cut staff sharply during the recession and then saw customer service erode, alienating customers.

As such a big player in the casual dining segment, Darden had an advantage going into the recession in that it could afford to offer some everyday deals on items like pasta and shrimp, Hottovy said. That allowed the company to entice skittish diners without hurting the brand with bargain-basement discounts.

Hottovy expects the company's market clout to help in the recovery phase as well.

Darden, whose holdings also include Bahama Breeze, LongHorn Steakhouse, The Capital Grille and Seasons 52, had $7.2 billion in sales in its latest fiscal year, making it the largest full-service restaurant operator by sales.

Major competitors include Brinker International, which owns, operates or franchises about  1,700 restaurants, most of them under the Chili's brand name, and had sales of $3.6 billion in its latest year. DineEquity, which owns or franchises around 3,400 Applebee's and IHOP restaurants, had revenue of $1.6 billion in its latest year.

To Otis, who worked as a lawyer and on Wall Street before rising in the ranks of the restaurant industry, proof that the strategy worked is in company’s recent financial results.

“We do think that the outperformance that we’ve had on same-store sales and on earnings really is probably the best evidence that the strategy was appropriate,” Otis said.

Sales fell, but not as sharply
Darden saw so-called same-store sales fall during the recession, but generally not as steeply as its competitors. Same-store sales, measuring sales growth at restaurants or stores open at least a year, is considered one of the best measures of strength in the retail industry.

In the company’s fiscal second quarter ended Nov. 29, blended same-restaurant sales for Olive Garden, Red Lobster and LongHorn Steakhouse fell 3.9 percent, excluding the impact of a Thanksgiving week shift. That compared to a 5.9 percent drop in an industry benchmark of  same-restaurant sales, excluding Darden.

Last week, Darden said it is seeing signs of improvement in customer traffic and sales. For the quarter that ends Sunday, Darden now expects same-restaurant sales at its main brands to be between minus 0.5 percent and 0.5 percent as compared to a year earlier.

“The company has done a very good job of navigating the recession,” said Tom Forte, restaurant analyst with Telsey Group.

Full plate
Things could have gone the other way for Darden, which was already facing a plate full of responsibilities when the financial crisis hit.

In mid-2007, Darden made an aggressive move to expand its restaurant base when it bought the LongHorn Steakhouse and upscale Capital Grille restaurants in a $1.4 billion deal.

Otis, who had become chief executive in late 2004, said the company was already forecasting sales at those restaurants to fall following the acquisition, as it had started to see signs the economy was slowing. Still, no one was prepared for how big a toll the recession would take.

Otis said he does not regret the decision to buy the chains. Although the price might have fallen later, Otis said the risk would have been that valuations were so low the boards of directors wouldn’t have approved the deal.

Still, the move meant that the company faced a big job of retooling and remodeling the LongHorn locations in a deep recession. Meanwhile, it had to deal with at a steep drop in sales at the upscale Capital Grille restaurants, which were hit especially hard as consumers cut back on discretionary spending.

As it incorporates those new brands, Darden also has been working to improve sales at Red Lobster by adding more modern, healthy offerings and remodeling the restaurants. The effort is expected to continue for several more years.

Analysts say such moves, if done correctly, could help the company boost sales in coming years. Some also have high hopes for the company’s still-tiny Seasons 52 chain, which is focused on low-calorie, seasonal fare.

“I do think that they’re on to something with Seasons 52,” Forte said.

Markets growing saturated
Even as economic conditions improve, Darden and its competitors will have their share of challenges. Darden is forecasting industry sales growth to slow in coming years as the market for full-service chain restaurants grows saturated.

Still, the company continues to see some room for its brands to expand. Darden expects to open 50 to 55 new restaurants this fiscal year and plans more expansion in years to come.

By continuing to add restaurants even in a difficult economic environment, Otis said the company has benefited to some extent from a drop in the commercial real estate market, which allowed it to pick up some properties it couldn’t have otherwise afforded.

But it also has seen some store openings stymied as developers have held or canceled projects because of financial worries. Otis said the company would have liked to have opened around 40 Olive Garden restaurants this fiscal year, but had to settle for 30 to 35.

The company also expects to face challenges in growing its customer base.

In the coming years, Darden expect sales growth fueled by baby boomers to taper off, leaving the company to look for other demographic groups.

Otis said Darden is working on ways to appeal to 15- to 30-year-olds, who may want to eat at non-traditional times or be looking for a different mix of menu items. The company also is hoping to find more ways to attract and retain the growing group of middle-class Hispanic and African-American diners, he said.

Otis, the son of a janitor who grew up in the Los Angeles neighborhood of Watts before attending Williams College and Stanford Law School, said he thinks his own background has helped him better serve the broad array of Darden customers.

“I’ve had the opportunity, given my personal history, to sort of live and witness firsthand … the whole socioeconomic spectrum in this country, from people who don’t have a lot to people who probably have more than they need,” Otis said. “I do feel like I probably have a sense of what each of those groups are like, what the things are that differentiate them.”

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