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Darden analysis: Fast casual restaurants are much more affordable

Xun Yao Chen

Strategic analysis: Should Darden spin off its brands? (Part 10 of 25)

(Continued from Part 9)

Olive Garden and Red Lobster: Just too expensive

Darden’s core brands like Olive Garden and Red Lobster are losing customers for one reason: they’re just too expensive for the value-conscious average American citizen these days. With an average check of $16 for Olive Garden and $20 for Red Lobster, the two brands are by no means cheap compared to alternatives like the Cheesecake Factory (CAKE), with an average guest check of $19 at a more upscale dining atmosphere, or Chili’s—held under Brinker International Inc. (EAT)—and AppleBee’s, where customers can enjoy a meal for less than $14.00.

Even upscale Italian brands are performing poorly

Excluding alcohol sales, the average check for food and non-alcoholic beverages amounts to $15.26 for Olive Garden and $18.67 for Red Lobster. Customers at Italian brands like Brio Tuscan Grille and Bravo Cucina—held under Bravo Brio Restaurant Group Inc. (BBRG)—pay slightly more for a meal. But these brands are described as “upscale casual.” If these upscale casual brands are performing poorly, then Olive Garden and Red Lobster, which are casual full-service dining, must bring their prices down.

Consumers flocking to fast casual concepts

As with any restaurant, competition lies beyond its immediate peers and competitors. The fast-casual restaurant concepts have been making waves since 2009, outperforming other segments of the restaurant industry, including fast-food and fine dining. These include companies like Chipotle Mexican Grill Inc. (CMG) and Panera Bread Co. (PNRA). The average guest check for this group of restaurants typically ranges between $8 and $15, according to Franchise Direct. With an $8.50 chicken burrito bowl, consumers can get carbohydrates as well as protein from soybeans and chicken and greens. For a little bit more cash, consumers can go to Panera for a nice warm sandwich, potato chips, a pickle spear, and a cookie.

Other up-and-coming publicly traded names that compete against Darden for customers’ pockets include Potbelly (PBPB), another sandwich shop priced slightly lower than Panera’s but higher than Subway (a private company), and Noodles & Company (NDLS), which specializes in noodles. For those who know, Panda Express is considered a fast-casual concept restaurant. Although consumers still rely on word of mouth and friends’ recommendations for picking places to eat out, the use of social networks like Yelp to pick restaurants is likely on the rise, further driving competition in the restaurant industry. This makes it even more important for brand managers to get price and value mixes right.

Continue to Part 11

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