Darden: Cheddar's Has an Awareness Problem
New insight could spark the family-dining chain's challenged sales.
When Darden first brought Cheddar’s Scratch Kitchen into the fold more than two years ago for $780 million, there were some open wounds.
The 165-unit brand’s turnover lagged Darden’s standards. Cheddar’s didn’t have a certified trainer program. The goal of having every hired employee go through a solid platform didn’t exist. Restaurants weren’t fully staffed. Darden had to methodically pick managing partners for units and work its way through the attrition that accompanies elevated expectations.
Cheddar’s got a new president last July—John Wilkerson, a 25-year Darden vet who previously headed up Bahama Breeze and started out as an hourly crew member at Red Lobster.
Darden also added reporting tools at Cheddar’s that included discount forecasting and food-waste management, and put best practices in place to ensure managers were present in the kitchen, lobby, and dining room during peak periods.
Perhaps most pressing, Cheddar’s 25 franchised units dragged progress as Darden worked in the brand’s two largest franchisees post deal. It had to pull resources from corporate stores to staff acquired restaurants and tackle a kitchen transformation project.
But one thing about an integration process is that some data takes longer to flow in. Darden CEO Gene Lee said during Thursday’s first-quarter review that the company now has enough transactional data “to look at some things in Cheddar’s we haven’t had the opportunity to do before.”
The big insight? Cheddar’s frequency is actually higher than any of its other brands (Olive Garden, LongHorn Steakhouse, Bahama Breeze, Yard House, Seasons 52, Eddie V’s, and the Capital Grille).
Married with some in-house research, Darden realized Cheddar’s awareness was extremely low.
“And our primary advertising had been more driven toward a frequency play,” Lee said.
The finding led Darden to pull back and instill testing intended to find a way to boost Cheddar’s standing in markets. This is a problem with guest within 10 miles of restaurants, Lee added.
There’s a sense of urgency, too. In Q1, the brand posted its worst same-store sales performance since Darden started sharing figures after the acquisition.
- Q1 2020: –5.4 percent
- Q4 2019: –3.2 percent
- Q3 2019: –2.7 percent
- Q2 2019: –4 percent
- Q1 2019: –4 percent
- Q4 2018: –4.7 percent
- Q3 2018: –2.2 percent
- Q2 2018: –2 percent
- Q1 2018: –1.4 percent
That builds a negative 9.4 percent two-year stack for Cheddar’s.
Lee said Darden course-corrected once the insight flashed. Its early goal is to use more traditional media to jumpstart awareness, with scale growing as learnings flood in. The realization was also one of the reasons Cheddar’s top-line struggles were so pronounced in Q1. Darden reduced marketing efforts once it identified the misstep. Lee credited “overall industry softness” for the lag as well (more on this later).
While sales trends are disappointing, Lee said, Cheddar’s continued progress against some of the earlier points remains promising. To start the fiscal year, the chain established three strategic priorities: create a people-focused, results-oriented culture; reduce friction in the guest experience; and build a brand people talk about, with the goal of furthering progress made last year “repairing fundament elements of the business,” Lee said.
“This is a high-volume, complex operation that has some operational challenges that aren't systemic,” Lee said. “Where we have strong leadership and great human resource metrics, we're running great businesses. We have to stabilize some of these other businesses. It starts with getting that right general manager in place, managing partner, and then building a great team.”
Cheddar's established three new strategic priorities to kick off the fiscal year.
He added that Cheddar’s turnover trends, at the team member and manager level, improved throughout Q1 and are now above industry levels, although still below Darden’s metrics.
For perspective, LongHorn’s team member turnover during the quarter was 68 percent compared to about 120 percent for casual dining. Management turnover was 13 percent versus 36 percent for the category.
Near the end of the quarter, Cheddar’s also introduced a new menu with more price diversity within categories, and launched Quick Pick Lunch Combos starting at $5.99. Lee said the latter led to higher value and intent to return ratings compared to last year.
The key to all this, however, is that Cheddar’s is still a work in progress from a foundation perspective. There’s runway ahead. Lee said operations and staffing improvements are setting the chain up to start increasing working media spend and, in turn, drive trial.
“They will be leveraging Darden resources and best practices to implement the media plan,” Lee said.
Because Darden is Darden and not a single-concept operator, and has the strength of its entire system, it can play the long game with Cheddar’s. The brand represents less than 8 percent of Darden’s overall business.
Lee said he’s “resolute in the fact that I want to fix this and fix it right for the long term.”
“I think this is still a huge opportunity,” he said. “And as much urgency as I’m putting behind it, I’m more concerned about doing it right.”
Guest satisfaction scores have grown across the board as employee staffing levels improved. “There’s still opportunity there,” Lee said. “I will say that the divergence—the differential between the better operating stores and the ones with challenges is still too great. We’ve got to close that gap down.”
Cheddar’s won’t grow in any significant way, either, until the human-resources conversation evolves further. The company is opening five or six a year right now, but doesn’t plan to accelerate until “the management depth continues to build,” Lee said.
“I’m focused on really, really getting great managing partners in these restaurants,” he said. “And I know when we do that, our likelihood of success increases dramatically.”
The state of the industry
Lee, as is often the case during quarterly calls, was asked about the state of restaurants. In particular casual dining. He said it’s surprising to see the field comping negative considering unemployment remains at all-time lows and there continues to be strong wage growth, which, historically, has been a positive for restaurants.
“I personally believe that there’s some uncertainty entering into the consumer, and it’s impacting their confidence,” Lee said. “How long? Now I’ve got to believe there, with all the media attention around what’s happening, how long does this continue, this environment continues? So there’s nothing structural that we see that’s changed out there other than there appears to be a little bit more uncertainty today than there was.”
What should restaurants do?
“We need to create compelling guest experience and come up with and reinforce our value propositions,” Lee said.
For Darden specifically, this means rethinking how it goes to market with brands not named Olive Garden and LongHorn, and how it advertises those smaller chains in different channels to compete more effectively in the trenches.
Lee said the industry is seeing added strength in limited service. “There’s no doubt about that,” he said.
“And you think about there is good income growth on the lower end of the curve, and those folks seem to be trading or dining out a little bit more frequently,” Lee added. “And I don’t know where people are trading out of in casual when you look at a 10-year period. That’s been a big question. I’m not sure we’ve had, as a industry, an answer.”
On the ever-present topic of discounting, Lee said, Darden will continue to use whatever levers it can to grow its business. When it looks at incentives, it doesn’t view at them as one piece; rather the overall advertising program.
“What is going on from a television standpoint? What’s going on from a digital and online [standpoint] What are we doing from an incentive standpoint?” he said.
“We have multiple ways to put incentives out there. And so we have a lot of leverage that we can pull over time depending on the environment, and we will use those appropriately to drive our business in a profitable way.”
One lever won’t be delivery. Lee said Darden’s thoughts “haven’t evolved at all” on the subject. While the cost burden appears to be shifting from the company to the consumer, Lee said, Darden still has ample concerns. How much of the overall experience are you willing to dedicate toward convenience? Darden isn’t comfortable with that equation just yet.
“Our job is to create a compelling off-premises experience right now that, with so much value, the consumer is willing to come and get it. That seems to be working for us, and we're going to continue to focus on that,” he said.
Olive Garden continues to churn along.
The overall picture
Olive Garden turned in another strong quarter, with same-store sales growth of 2.2 percent—its 20th consecutive period of gains. The brand’s sales gap to the industry, per Knapp-Track, was 340 basis points, which marked the biggest differential since Q1 2019. That lends some weight to Lee’s comment about overall industry softness.
On a two-year basis, Olive Garden has grown total sales by nearly 10 percent, topping the industry bar by a healthy 840 basis points. The 867-unit chain’s digital sales upped 30 percent in Q1 and mixed about 40 percent of to-go orders. Off-premises sales lifted 12 percent to 14 percent of total business in the period.
LongHorn’s comps hiked 2.6 percent to give the 514-unit steakhouse 26 consecutive quarters of growth. On a two-year basis, the brand’s total sales are up 11 percent—outperforming that same benchmark by 940 basis points. LongHorn grew its digital sales nearly 50 percent in Q1, and represented more than a third of total to-go sales. The chain also now has dedicated to-go areas in more than half of its restaurants. To-go sales as a whole upped nearly 12 percent in the quarter.
The Capital Grill’s same-store sales rose 1.5 percent. Eddie V’s 1.2 percent. Yard House (–1.9 percent), Seasons 52 (–4.2 percent), and Bahama Breeze (–4.2 percent) joined Cheddar’s in the red.
As a company, Darden’s total sales increased 3.5 percent to $2.13 billion.