Olive Garden and Red Lobster customers will have to pay a bit more for their favorite dishes in the months ahead as the restaurant chains struggle to keep revenue and profit growing in a depressed economy.
On a conference call with analysts Wednesday, the parent company of both brands — Darden Restaurants Inc. — said its prices in the 2009 fiscal year that began this summer will be higher than in years past.
The company said its menu prices at Olive Garden and Red Lobster have typically gone up between 2 percent and 3 percent each year, with price increases usually falling in the middle of that range. But for 2009, Darden said it will have to raise prices by a percentage closer to the high end of that range.
"It's not a dramatic increase," said Chief Operating Officer Drew Madsen. "But it's a little more pricing than we have taken in the past."
Darden said the economy — specifically higher costs for food, energy and labor — is to blame. Most restaurants have been pressed by significantly higher costs in the past year with prices for grain and meat rising to record levels and state and federal governments boosting the minimum wage for workers.
During the company's first quarter, which ended in August, the higher costs were a factor in a big drop in profit.
After the market closed Tuesday, Darden said its profit dropped 23 percent, with food and beverage labor costs both rising in the double digits.
Besides the higher costs, the company was hurt by slower sales, particularly at Red Lobster and LongHorn Steakhouse. Overall, sales at restaurants open at least a year — a metric known as same-store sales — dropped 1 percent.
Gas prices were one of the main culprits for the sales decline, the company said, noting that prices spiked in July. Both Olive Garden and Red Lobster recorded falling traffic and sales during the month.
"There's no question that this has been a difficult quarter," said Chief Executive Clarence Otis on the call Wednesday, adding "it looks like it's going to be a difficult year."
Darden expects its earnings per share from continuing operations to grow between 5 percent and 10 percent in 2009, including one-time costs. The company expects costs — including for food, energy and labor — to rise about 2.5 percent.
To meet its profit expectations given the higher costs, the company will have to report same-store sales growth of up to 1 percent for the year.
Whether the company can increase its sales in a difficult economy will be at least partly dependent on whether consumers see dining out at one of Darden's brands a good value. Consumers have increasingly been opting against casual dining chains in favor of cheaper fast food or eating at home in order to save money.
Darden said it recognized that some customers may need more of an incentive to eat out. The company said it will offer more coupons at its LongHorn Steakhouse chain, which is pricier than some of its other brands, and will lower the prices of a few lobster-based promotional dishes at Red Lobster since lobster prices have now declined.
Darden also said it is looking for ways to offer more value to "more price sensitive" Red Lobster customers, and may have something ready by the second half of the fiscal year.
Morningstar analyst John Owens said offering some deals to those consumers could be a good idea as long as it doesn't affect the company's profits.
"You definitely want to keep that customer traffic coming," he said. "But you want to make sure that customer traffic is profitable."