Chain restaurants are supposed to be more affordable and accessible dining options for everyone. Think Olive Garden's endless soups, salads, and breadsticks, and Longhorn Steakhouse's irresistible rolls.
But the CEO of Darden Restaurants, which owns those two brands, sees total sales in the third quarter rising 6.8% to $3 billion. Despite this, low-income households are said to be less likely to eat out at restaurants.
“We're clearly seeing a shift in consumer behavior,” Darden CEO Rick Cardenas said on Thursday's third-quarter earnings call. “Transactions with incomes under $75,000 were significantly lower than last year. And across all brands, transactions with incomes below $50,000 decreased.”
Meanwhile, high-income earners made more transactions than last year, and households earning at least $150,000 more were eating out more, according to the financial report. This is a “continuing change” in Darden's revenue mix, Chief Financial Officer Raj Venum said. It's also a vivid example of a dual-track economy, with lower-income consumers exiting and higher-income households cashing in.
Inflation meets dining
Although Mr. Cárdenas did not mention politics during the earnings call, his remarks were an important sign of the state of the all-powerful American consumer in the lead-up to a pivotal 2024 election that will hinge on economic realities and perceptions. It may serve as evidence.
Americans are famously dire about the post-COVID-19 economy, as consumer sentiment consistently underperforms strong economic indicators, a phenomenon coined the “vibe session.” . And economists are puzzled as to why. While it may have something to do with the housing market, where mortgage rates and home prices are high, Darden's earnings comments suggest a two-track economy: a strong upper middle class; , households that hide the real struggles of low-income families.
It's not just Darden.
Darden owns a brand that is not strictly fast food but is considered to belong to fast-casual or “casual” fine-dining restaurants, but as lower-income households look to more cost-friendly options. It's not surprising that it is. Even giant fast food chains like McDonald's are raising prices to match inflation and rising labor costs. This is also a phenomenon that some people refer to as “McFlation.”
In fact, McDonald's CEO Chris Kempczinski said during an earnings call that “the battleground is definitely the low-income consumer, who is considered to be making less than $45,000 a year.'' Kempczinski also acknowledged that for many of these low-income people, it's cheaper to just cook at home.
“As we head into 2024, I think there will probably be a focus on what could be described as affordability,” Kempczinski said.
But Venum argues that despite affordability challenges for low-income households, many Darden brands haven't even reached their price peak yet.
“If you look back over the last four years, our prices were significantly lower,” Venum said, arguing that Darden's price increases during that time were “considerably” lower than the industry average and the Consumer Price Index.
“It gives us room to continue to set prices as needed,” Venum said. “But our plan is still long-term to keep below inflation.” He also added that Olive Garden is famous for significantly increasing its entrees that it offers to customers, such as buy-one-get-one-take-home. We accomplish this through discounts and promotions.
Return to status quo?
Low-income households did not eat out as much as they did in the third quarter, but several Darden restaurants posted record sales. Eddie V's (a seafood restaurant brand) set an all-time record for weekly gross sales in February, and Olive Garden set a new sales record for Valentine's Day.
Despite lower income households spending less on Darden chain restaurants, the mix of income groups eating out is actually something of a return to the status quo.
“If you think about where we were before coronavirus, across all of our segments, across all of our brands, what percentage of our guests were under $50,000, what percentage of guests were under $75,000, etc. So it's pretty much the same as it was pre-coronavirus,” Cárdenas said. “So at least that makes us feel like we know how to act in this environment.
