Key Consumer Challenges and Restaurant Trends for 2011

Key Consumer Challenges and Restaurant Trends for 2011

February 2, 2011February 2, 2011

SM

William B. DardenWilliam B. Darden

Started selling fish sandwiches in the train yards of south Georgiafor 5¢

Opened his first restaurant in 1938 called “The Green Frog”

Not sure what the “Swamp Boy Breakfast” was?

Started selling fish sandwiches in the train yards of south Georgiafor 5¢

Opened his first restaurant in 1938 called “The Green Frog”

Not sure what the “Swamp Boy Breakfast” was?

“THE FOUNDER”“THE FOUNDER”

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The First Red Lobster Was CreatedThe First Red Lobster Was CreatedRESTAURANT OPENED in 1968 in Lakeland, FloridaRESTAURANT OPENED in 1968 in Lakeland, Florida

Lakeland, FL

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WHICH GREW INTO DARDEN TODAY

Darden Today – A Fortune 400 CompanyDarden Today – A Fortune 400 Company

Fiscal 2009 sales of $7.2 billion

Own and operate 1,800 restaurants in U.S., Canada & Puerto Rico

Employ over 170,000 people who serve more than 400 million mealsannually (the largest casual dining company in the U.S.)

The 26th largest employer in Fortune 500

Brands – Red Lobster, Olive Garden, LongHorn Steak House, The Capital Grille, Seasons 52 & Bahama Breeze

Fiscal 2009 sales of $7.2 billion

Own and operate 1,800 restaurants in U.S., Canada & Puerto Rico

Employ over 170,000 people who serve more than 400 million mealsannually (the largest casual dining company in the U.S.)

The 26th largest employer in Fortune 500

Brands – Red Lobster, Olive Garden, LongHorn Steak House, The Capital Grille, Seasons 52 & Bahama Breeze

Just voted one of the 100 best places to work in the US by FortuJust voted one of the 100 best places to work in the US by Fortune Magazine ne Magazine

Our Supply ChainOur Supply Chain

$3 billion in purchases including energy and equipment– 3300 SKUs– 35 million cases moved annually– 60% of products sourced internationally

10 distribution centers in US delivering twice a week to 1800 restaurants

Five seafood warehouses with $150 million of inventory

Darden-owned and operated smallwares distribution warehouse with $50 million in sales

$3 billion in purchases including energy and equipment– 3300 SKUs– 35 million cases moved annually– 60% of products sourced internationally

10 distribution centers in US delivering twice a week to 1800 restaurants

Five seafood warehouses with $150 million of inventory

Darden-owned and operated smallwares distribution warehouse with $50 million in sales

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Darden’s Global Supplier NetworkDarden’s Global Supplier Network

• 1500 Suppliers in 35 Countries• 1500 Suppliers in 35 Countries

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Darden’s Annual Beef PurchasesDarden’s Annual Beef Purchases

Darden uses a wide array of beef products

The majority of the Darden’s beef volume originates from the loin & the rib with some specialty cuts and grinds

Annually, Darden’s raw beef demand is near 50 million pounds – Made up of: Sirloins, Tenderloins, Short Loins, Strips, Export Ribs,

Boneless Ribs, Teres Major (about 25% of US harvested), Short Ribs, Ground Beef and Meatballs

The Darden concepts that focus on providing high quality, freshsteaks are LongHorn Steak House and The Capital Grille

Darden uses a wide array of beef products

The majority of the Darden’s beef volume originates from the loin & the rib with some specialty cuts and grinds

Annually, Darden’s raw beef demand is near 50 million pounds – Made up of: Sirloins, Tenderloins, Short Loins, Strips, Export Ribs,

Boneless Ribs, Teres Major (about 25% of US harvested), Short Ribs, Ground Beef and Meatballs

The Darden concepts that focus on providing high quality, freshsteaks are LongHorn Steak House and The Capital Grille

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Unwind and Savor a Great Steakhouse MealServed with Genuine Western Hospitality

Unwind and Savor a Great Steakhouse MealServed with Genuine Western Hospitality

350 restaurants in the U.S.

Near $1 billion in annual sales

350 restaurants in the U.S.

Near $1 billion in annual sales

Build Exceptional Guest Relationships through Personalized Service in an Exclusive Club Atmosphere

Build Exceptional Guest Relationships through Personalized Service in an Exclusive Club Atmosphere

44 restaurants

$250 million in annual sales– Only prime & choice fresh beef sold

44 restaurants

$250 million in annual sales– Only prime & choice fresh beef sold

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Consumer Attitudes, Challenges and Restaurant Trends

Consumer Attitudes, Challenges and Restaurant Trends

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The 2010 U.S. Restaurant Industry$386 Billion in Sales

The 2010 U.S. Restaurant Industry$386 Billion in Sales

Quick ServiceQuick Service$231B$231B

MidscaleMidscale$57B$57B

Casual DiningCasual Dining$83B$83B

Fine DiningFine Dining$15B$15B

5%5%22%22%

57%57%16%16%

Source: CRESTSource: CREST

Darden is the largest casual dining company in the U.S.

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Percent of Total Restaurant Visitors

20%Steakhouse

Users

Steakhouse User Definition:Over past year was a steakhouse visitor

Prefer beef most often for dinnerIn past year was a visitor to Outback,

LongHorn or independent casual dining steakhouses

1 in 5 Consumers is a Steakhouse UserGreat Opportunity To Turn More Consumers Into Steak Lovers

1 in 5 Consumers is a Steakhouse UserGreat Opportunity To Turn More Consumers Into Steak Lovers

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Consumer Attitudes and Drivers in the Current Economic Environment

Consumer Attitudes and Drivers in the Current Economic Environment

The shrinking pocket book caused by the recession has forced restaurants to shift focus to adapt to the guests’ changing needs

– Today, consumers have more limited food budgets, especially for eating out occasions, as lost jobs, debt payments, foreclosures and food/fuel inflation erode disposable income

Guests are splitting or not ordering appetizersSome evidence of more entrée sharing

Reduced beverage consumption, especially higher-priced alcohol, ordering water only (Lost beverage sales = lost high margins)Foregoing desserts or sharingMore use of couponsDownsizing to less costly entreesLess frequent visits (Down 1% in 12 months ending August, 2010)

More at home meals due to household financial stressWant more healthy / lower calorie options (local & fresh are drivers)More variety that is attractive to the social group or family

The shrinking pocket book caused by the recession has forced restaurants to shift focus to adapt to the guests’ changing needs

– Today, consumers have more limited food budgets, especially for eating out occasions, as lost jobs, debt payments, foreclosures and food/fuel inflation erode disposable income

Guests are splitting or not ordering appetizersSome evidence of more entrée sharing

Reduced beverage consumption, especially higher-priced alcohol, ordering water only (Lost beverage sales = lost high margins)Foregoing desserts or sharingMore use of couponsDownsizing to less costly entreesLess frequent visits (Down 1% in 12 months ending August, 2010)

More at home meals due to household financial stressWant more healthy / lower calorie options (local & fresh are drivers)More variety that is attractive to the social group or family

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Consumer Attitudes and Drivers in the Current Economic Environment

Consumer Attitudes and Drivers in the Current Economic Environment

It’s not just about the food today – it’s the total experience!

Consumers’ eating out choices are more selective

Guests consider the value of the total eating experience when choosing a restaurant

– Women influence the majority of restaurant visits for the family– Guests have many choices.

The Restaurant Industry is overbuilt probably by about 10% at 579,000 units (units declined about 1% last year)Exterior and internal décor, speed / friendliness of service, food quality / affordability, crave factor and warm, respectful treatment of our guest Street appeal has become even more important just to attract guests to come through the door

It’s not just about the food today – it’s the total experience!

Consumers’ eating out choices are more selective

Guests consider the value of the total eating experience when choosing a restaurant

– Women influence the majority of restaurant visits for the family– Guests have many choices.

The Restaurant Industry is overbuilt probably by about 10% at 579,000 units (units declined about 1% last year)Exterior and internal décor, speed / friendliness of service, food quality / affordability, crave factor and warm, respectful treatment of our guest Street appeal has become even more important just to attract guests to come through the door

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LongHorn Brand Evolution The Original LongHorn Steak House: Atlanta - 1981

LongHorn Brand Evolution The Original LongHorn Steak House: Atlanta - 1981

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Roadhouse to SteakhouseRoadhouse to Steakhouse

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Roadhouse BarRoadhouse Bar

Ranch House LoungeRanch House Lounge

Ranch House Dining aligned with Western Hospitality and the Spirit of the West

Ranch House Dining aligned with Western Hospitality and the Spirit of the West

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LongHorn Brand Promise – Genuine Western HospitalityLongHorn Brand Promise – Genuine Western Hospitality

I can trust LongHornto help me

unwind and savora great steakhouse meal

served withGenuine Western

Hospitality

I can trust LongHornto help me

unwind and savora great steakhouse meal

served withGenuine Western

Hospitality

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The Spirit of the West

What Do Guests Value in a Steak? What Do Guests Value in a Steak? Guests want a thick, juicy and tender steak that is cooked properly and is always the same high quality on every occasion

Top 6 words that consumers associate with high quality steaksPrime – 63%Tender – 61%Fresh – 61%Juicy – 58%USDA Beef – 54%Angus – 53%

But they are not confident understanding USDA Grades

● The classic cuts still enjoy the highest awareness – Ribeye, Sirloin, Filet, Prime Rib, New York Strip & T-Bone

♦ They don’t really know what a flat iron, sierra or ranch cut is yet

– But what they buy most is also influenced by affordability as follows:

♦ Sirloin (23%), Ribeye (16%), Filet (16%), NY Strip (12%) & T-Bone (8%)

Guests want a thick, juicy and tender steak that is cooked properly and is always the same high quality on every occasion

Top 6 words that consumers associate with high quality steaksPrime – 63%Tender – 61%Fresh – 61%Juicy – 58%USDA Beef – 54%Angus – 53%

But they are not confident understanding USDA Grades

● The classic cuts still enjoy the highest awareness – Ribeye, Sirloin, Filet, Prime Rib, New York Strip & T-Bone

♦ They don’t really know what a flat iron, sierra or ranch cut is yet

– But what they buy most is also influenced by affordability as follows:

♦ Sirloin (23%), Ribeye (16%), Filet (16%), NY Strip (12%) & T-Bone (8%)

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Key Steakhouse Visit Drivers & ExpectationsFocus on the Overall Experience for the Guest

Key Steakhouse Visit Drivers & ExpectationsFocus on the Overall Experience for the Guest

•Visit Drivers •Visit Expectations

Consistently good experience

Steaks cooked correctly

Good selection of quality steaks

Perfectly seasoned and expertly grilled steaks

Fresh, never frozen steaks

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Steaks cooked correctly

Food prepared as ordered

Meal appropriately paced

Attentive to my needs

Feel like a valued guest

Key Beef Challenges Facing Restaurant IndustryKey Beef Challenges Facing Restaurant Industry

How to drive brand recognition, differentiate offerings, create food crave appeal and yet deliver value?

– With limited unit growth, it’s a very tough market share battle today– How to create a compelling competitive advantage with so many

restaurant choices and great super market deli options to steal guests?

A Key Challenge: Raw and Cooked Steak Consistency– Economics have forced cattle to be grown larger, making it more difficult

to deliver consistently high quality expectations to our guestsSteaks are sold by weight in foodservice. Larger cattle cause steak served to be thinner, increasing the risk of overcooking and poor plate presentation

– A choice steak does not always eat the same, due to variation across cattle and breeds

To be able to deliver a consistent, outstanding eating experience on every occasion would be a competitive advantage for a steak house?Animal genetics and care through the life cycle, calf selection and the feeding regimen all influence final eating quality

Darden has been testing in this area

How to drive brand recognition, differentiate offerings, create food crave appeal and yet deliver value?

– With limited unit growth, it’s a very tough market share battle today– How to create a compelling competitive advantage with so many

restaurant choices and great super market deli options to steal guests?

A Key Challenge: Raw and Cooked Steak Consistency– Economics have forced cattle to be grown larger, making it more difficult

to deliver consistently high quality expectations to our guestsSteaks are sold by weight in foodservice. Larger cattle cause steak served to be thinner, increasing the risk of overcooking and poor plate presentation

– A choice steak does not always eat the same, due to variation across cattle and breeds

To be able to deliver a consistent, outstanding eating experience on every occasion would be a competitive advantage for a steak house?Animal genetics and care through the life cycle, calf selection and the feeding regimen all influence final eating quality

Darden has been testing in this area

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Key Beef Challenges Facing Restaurant IndustryKey Beef Challenges Facing Restaurant IndustryGuest Visit Frequency

– Increased competition in an industry with too many restaurants– Beef menu items tend to have a higher menu price point– Health and Animal Welfare concerns have taken their toll on beef– Food Safety: E-Coli recall media hype has negatively impacted beef use – Today, barriers to increased visits from high unemployment, debt /

foreclosures, higher savings rates and reduced wealth from the recession have made consumers more cautious and more frugal

Affordability – Beef loin / Rib cuts are expensive versus poultry & pork– Now, protein and commodity cost inflation is squeezing restaurant

margins that can not be fully recovered through price increases– Herd declines and growing US exports will push beef costs higher over

the next 2-3 years, as domestic availability declinesHigher demand from income and population growth in emerging nations and ethanol are the major drivers of higher commodity costs – it’s a global market today

Guest Visit Frequency – Increased competition in an industry with too many restaurants– Beef menu items tend to have a higher menu price point– Health and Animal Welfare concerns have taken their toll on beef– Food Safety: E-Coli recall media hype has negatively impacted beef use – Today, barriers to increased visits from high unemployment, debt /

foreclosures, higher savings rates and reduced wealth from the recession have made consumers more cautious and more frugal

Affordability – Beef loin / Rib cuts are expensive versus poultry & pork– Now, protein and commodity cost inflation is squeezing restaurant

margins that can not be fully recovered through price increases– Herd declines and growing US exports will push beef costs higher over

the next 2-3 years, as domestic availability declinesHigher demand from income and population growth in emerging nations and ethanol are the major drivers of higher commodity costs – it’s a global market today

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Key Beef Challenges Facing Restaurant IndustryKey Beef Challenges Facing Restaurant Industry

Discounting and Guest Perception of Cost / Value– To attract more guests, some chains are offering 2 for one and other

lower entrée price points to drive traffic– This may work for a period of time, but the risk is that your customers

only visit when you are couponing and offering deals. This establishes a new value proposition at the lower prices, asregular menu items are perceived as now too expensive.

– Differentiate through the value of the total experience, while offering some additional value options on the menu to increase traffic

The value shift to more lower cost steak cuts on the menu has now made some of those cuts more expensive historically

– At the beginning of 2011, top butts had increased the most over prior year (up 23%) versus the other major steak cuts

– End cuts and grinds are also higher – Most of the loin and rib cuts have not risen as fast and have value

historically

Discounting and Guest Perception of Cost / Value– To attract more guests, some chains are offering 2 for one and other

lower entrée price points to drive traffic– This may work for a period of time, but the risk is that your customers

only visit when you are couponing and offering deals. This establishes a new value proposition at the lower prices, asregular menu items are perceived as now too expensive.

– Differentiate through the value of the total experience, while offering some additional value options on the menu to increase traffic

The value shift to more lower cost steak cuts on the menu has now made some of those cuts more expensive historically

– At the beginning of 2011, top butts had increased the most over prior year (up 23%) versus the other major steak cuts

– End cuts and grinds are also higher – Most of the loin and rib cuts have not risen as fast and have value

historically

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How Are Restaurant Companies Responding?How Are Restaurant Companies Responding?Along with more value-priced options, some consumers are accepting smaller but healthier portions.

– Darden’s Seasons 52 entrées do not exceed 475 calories, plus seasonal, local, and healthy options are also change quarterly

Desserts are smaller “mini-desserts” with 10-12 different flavor profiles

More frequent menu changes, promos and ads build brand news

Combining concepts on one site to reduce initial capital costs

New builds will slow, as returns are stressed. Focus will be ondriving traffic for market share

– Curb appeal and meeting guest expectations will be important

Focus on operational efficiencies, economies of scale in supply chain / other support systems and commodity risk management

Product specifications: Does the guest reward us for all the food quality we deliver?

– Is the specification over-engineered? May offer opportunity to take costs out of the system

Along with more value-priced options, some consumers are accepting smaller but healthier portions.

– Darden’s Seasons 52 entrées do not exceed 475 calories, plus seasonal, local, and healthy options are also change quarterly

Desserts are smaller “mini-desserts” with 10-12 different flavor profiles

More frequent menu changes, promos and ads build brand news

Combining concepts on one site to reduce initial capital costs

New builds will slow, as returns are stressed. Focus will be ondriving traffic for market share

– Curb appeal and meeting guest expectations will be important

Focus on operational efficiencies, economies of scale in supply chain / other support systems and commodity risk management

Product specifications: Does the guest reward us for all the food quality we deliver?

– Is the specification over-engineered? May offer opportunity to take costs out of the system

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How Are Restaurant Companies Responding?How Are Restaurant Companies Responding?

● Renewed emphasis on delivering over the top hospitality to ensure guests receive the great food experience they expect and come back often

Cattle/Beef – Continue supporting research to improve steak quality and consistency

through genetic markers, calf selection and a disciplined feeding regimen– Closer alignment with specific suppliers may be important, especially as

the declining cattle herd becomes a more critical supply factor– Identify alternate muscle cuts that can be prepared to eat similar to the

premium middle meats and the packers are willing to harvest– Continue reviewing guest acceptance of lower cost beef cuts in menu

applications, in light of value driving more consumer decisions – As domestic costs escalate, restaurant companies will be forced to

source globally to compete

● Renewed emphasis on delivering over the top hospitality to ensure guests receive the great food experience they expect and come back often

Cattle/Beef – Continue supporting research to improve steak quality and consistency

through genetic markers, calf selection and a disciplined feeding regimen– Closer alignment with specific suppliers may be important, especially as

the declining cattle herd becomes a more critical supply factor– Identify alternate muscle cuts that can be prepared to eat similar to the

premium middle meats and the packers are willing to harvest– Continue reviewing guest acceptance of lower cost beef cuts in menu

applications, in light of value driving more consumer decisions – As domestic costs escalate, restaurant companies will be forced to

source globally to compete

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