Darden Restaurants CEO shares tips on surviving recession

Few companies escape recession, especially those selling something consumers can cut, such as dining out. Restaurant industry sales are down, but sales at Darden Restaurants' Olive Garden and Red Lobster have held firm. Darden CEO Clarence Otis, 53, spoke to USA TODAY corporate management reporter Del Jones about gaining market share as the pie shrinks. Following are excerpts, edited for clarity and space.

Q: How are you holding your own in a competitive industry susceptible to recession?

A: People are dining out less, so the occasion is more dear when they do. Someone who may have gone to four or five places a month may be going twice. There is a lower tolerance for service shortfalls, so make sure you operate better than you might normally.

Q: Every company should focus on service?

A: Yeah. A server or a manager, regardless of what's happening at home, must walk into a unit and put on a smile. It's more important now when people are experiencing more anxiety than they might normally.

Q: Have consumers been changed forever? Will they stay frugal when things improve?

A: Habits and behaviors change pretty slowly, so there won't be a radical change in behavior. A lot is temporary. There will be structural changes. Credit cards will be harder to get, the limits on credit cards will be lower. It will take a bigger down payment to buy a house. Absent those structural, institutionally driven changes, I'm not so sure there would be a lot of change, but credit will affect how people behave.

Q: What companies do you pay close attention to outside the restaurant industry?

A: Many. I think about Wal-Mart's support platform and supply chain. They are innovative and world class. Marriott has a number of brands that are positioned differently. They do a great job as a multibrand operator, and are focused on sharing much of the back end, such as their reservations technology, without it being obvious to the customer and muddying the brands.

Q: If cost cutting is done so customers don't notice, does that mean pressuring suppliers or cutting employee benefits such as health insurance?

A: We tend not to go to benefits because they are valued by our people. Our suppliers are long-term partners. We cut things like travel. We are automating key steps. We've centralized purchasing to take advantage of scale and qualify for better terms from suppliers, because they can count on us for volume. Companies in more distressed situations cut to the core, but we've made sure that we've got financial flexibility.

Q: At least it's easy to find good employees in times of high unemployment.

A: We're able to keep our good people, so turnover is lower. That's important, because these are people with basic training, and you can layer on advanced training and development.

Q: When competitors lose market share, they often turn to coupons and other forms of discounting. How do you avoid a race to the bottom?

A: Be prepared for cyclical downturns by offering a range from value to premium. When appropriate, emphasize the value offerings. The auto companies that have a range of models from entry-level to midtier have held up better. Those unprepared had to rely heavily on discounting.

Q: Do you lose business when you don't match a competitor's coupon for $2 off lunch?

A: It has no major impact. There is a lot of risk to putting your brand on heavy sales. It reinforces what it's worth, and it is challenging to get back normalized pricing after an extended period of time. You see it in consumer packaged goods that get supported by coupons. They lose their ability to command a premium.

Q: You must be operating each restaurant with one fewer employee?

A: No. That gets to the quality. When you reduce staffing, the customer experience gets eroded. You breach trust at a time when their restaurant visits are more dear than they've ever been.

Q: Surely Darden has made mistakes in this bad economy. What has failed or backfired?

A: We underestimated last summer the depth of the slowdown. Fuel prices were a big problem, and we didn't see that coming. We weren't as conservative as we needed to be.

Q: What is the smartest thing Darden has done?

A: Work as hard as we can to protect our people. A lot of companies saw the opportunity to take reductions. That breaks the bond with employees, and as things recover, you can pay.

Q: Did you get rid of weaker employees and replace them with good ones?

A: No. Our talent evaluation process is a good one. We didn't feel like we had many low performers, because we had been pretty disciplined.

Q: Based on your most recent data, what is happening with the economy now?

A: It's stabilized, but at a low level.

Q: What should companies do differently once the economy turns and consumers spend more?

A: Companies that will win are working right now to better position themselves to serve their customers, strengthen their offer, improve the business model. They will be able to move faster. They need to be investing in people, in the skill set. Look at the financial services. It's been under stress, but there are firms that have taken steps to get better, and you're seeing them perform better even before the economy turns.