Chili’s Keeps Rolling with ‘Traffic-Focus Strategy’
Brinker International chief executive Wyman Roberts sees a consumer landscape Chili’s can thrive in. With record low unemployment and income growth expanding throughout the middle class, more people are choosing to dine out, which is strengthening the entire restaurant industry. But it’s especially kind to concepts with scale, those who have the leverage and resources to combat industry headwinds.
For Chili’s in particular, Brinker recognized two slices of opportunity. That first consumer dynamic is one. The second is the notion diners are willing to spend more, a fact reflected by TDn2K’s latest Black Box data. The insights platform said growth in average check was 3 percent, year-over-year, during March. The pace at which guest checks are growing has accelerated, year-over-year. On average, they hiked 3 percent since the fourth quarter of 2018. To compare, the average was 2.4 percent for the first three quarters of last year.
It speaks to accelerating wage growth, as Roberts alluded to, and a consumer that is relatively more confident and willing to spend on food.
Yet while this environment allows some pricing power to manage costs, Chili’s has decided to maintain a tight pricing strategy, Roberts said. The chain has stayed in a targeted range of 1.5–2 percent, which it took late this past quarter.
“We believe this discipline further strengthens our value position for the long run versus taking a more aggressive approach to pricing,” he said.
Chili’s is coming from a position of strength right now. The chain reported same-store sales growth of 2.9 percent at corporate units in the third quarter of fiscal 2019, year-over-year, announced Tuesday. Comps rose 2 percent at franchised units (940 of 1,248 domestic stores are company run). Traffic climbed 3 percent. Q3 revenues of $839 million were up 3.3 percent from 2018. The corporate same-store sales broke down as 1.6 percent benefit from pricing, 3 percent in traffic, and offset by negative 1.7 percent mix shift.
Q3’s results marked the fifth consecutive quarter of category outperformance in regards to traffic, Roberts said, and the third with a positive sales gap. Chili’s has driven positive same-store sales four straight periods and beat the sector by nearly 5 percent in traffic in Q3.
The value proposition is where Chili’s has really separated itself from competitors, Roberts said. And it’s not as simple as winning at price points smaller brands couldn’t counter.
Ever since Chili’s announced a “traffic-focus strategy” more than a year ago, the brand worked on a flexible platform built around guest experience and food quality, as well as better operations and a simpler, better executed menu. Chili’s hasn’t reduced its portions or compromised quality, Roberts said. “Instead, we’ve maintained and even improved our products, and we offer it at a price point that’s compelling to our guests and works for our business model.”
He used the company’s $5 margarita program as an example. In perhaps a veiled shot at competitor Applebee’s and the Dollarita, he said, “we didn’t go to the lowest possible price point.”
Rather, Chili’s created a program that features premium liquors that change every month. The recent iteration featured brands like Hennessy, St-Germain, Jameson Whiskey and Grand Marnier. “The program generates significant social media buzz, drives traffic and strengthens the brand,” Roberts said.
He added the same notion rings true of Chili’s 3 for $10 deal, which offers an appetizer, entrée, and drink at the price point. In early October, Chili’s reconstituted its on-menu value offerings around the 3 for $10 deal, lunch combos, and its new $25 three-course meal for two (which replaced a 2 for $22 offering).
“I know there's been a lot of concern about the sustainability of this offering,” Roberts said of the 3 for $10. “Could we really deliver quality products at that price point and sustain the volume that it’s helping drive?”
A year later, Roberts said the answer is yes. The business model held up and cost of sales are in line.
“The value strategy is compelling. It’s profitable. And it’s a differentiator for us,” he said.
Chili’s gained room, especially from independents and smaller chains, by leaning into its marketing and ability to promote the value construct in ways regional or single-unit concepts couldn’t. Roberts said the chain moved away from traditional marketing—bringing new news to consumers—to a more guest-centric model that focuses on embedded traits that don’t change by the promotional calendar.
“What matters most to us is that we create a better guest experience every day, that we strengthen the connection with our guests,” Roberts said. “We inspire them to visit more often with relevant, targeted communications, and we delivery better food and service every time they come in.”
He said marketing to those strengths has provided more long-term punch. Guest metrics, compared to last year before the model was put into place, are up “significantly and climbing.”
“We’re increasing trust with our guests,” he said, “which supports our business in the short term and increases the long-term sustainability of our strategy.”
That plays into the 3 for $10 deal, too. Since it’s not a fleeting promotion, it grows as awareness does—a far different challenge than offering a fixed-rate deal that requires Chili’s to drive guests into the restaurant before it leaves the menu.
Roberts also spoke on pricing, even to 1–2 percent and whether that gives quick-serves a competitive edge.
“The way we always think about it is there's always somebody who's just—no matter how much they love you—they're just kind of on the edge of their budget,” he said. “And every time you price, you probably push a couple of people off. And so we're just very cautious about doing that because we really believe in the power of traffic and keeping as many people in the restaurants as possible.”
He said the relationship between casual dining and fast food “has always been an interesting one,” but there isn’t as much correlation as people think.
When quick-serves ignited the value wars, Roberts added, it created some pressure, especially around lunch. “But overall, I think the two roads are fairly separate,” he said. “Most of the data that we have says that creating options really comes from other casual diners, maybe on the fast casual side a little more.”
In other terms, casual-dining guests tend to be casual-dining loyal at this price point and menu structure. That’s why everyday value, top-notch execution, and service define the segment leaders, not race-to-the bottom LTOs.
A delivery partner?
Both Chili's and Maggiano’s enjoyed off-premises boosts north of 17 percent in the quarter versus the year-ago period. More than half of the orders are coming through digital platforms, which integrate into Brinker’s system to avoid operational headaches.
The integration piece is a huge part of it. Chili’s has skirted delivery to date because it wasn’t willing to give up the data or take on muddy economics. Not to mention what it would do to Chili’s back of the house if operators were ill equipped to handle added orders. Basically, Roberts said, Chili’s wanted to avoid the scenario where a third-party delivery provider tossed a tablet into a restaurant and said, good luck.
“This doesn’t work for us,” Roberts said. “On our weekends and when we’re busy, we have to have a better system running.”
“We’ve invested a lot of time, money, and resources to making sure we set our operators up for success, and to just throw a wrench in the middle of their business, especially during volume, just wasn’t going to happen,” he added.
Roberts said Chili’s found some big players that are willing to work with them and figure out how to better support adoption. Now the question becomes, how can Chili’s make money off it?
Roberts said the company never doubted the potential of delivery, it was just about overcoming hurdles so they could hit the ground running instead of face-plant into the pavement.
“We've seen a lot of players skin their knees on the bleeding edge of this burgeoning business, and frankly, for us, it's been too high a risk as we worked hard the past year to build trust with our guests,” he said.
But now that the foundation of Chili’s off-premises business is strong, the brand is committed to creating a delivery program that delivers a high-quality experience. And that starts with integration.
“We're close to finding a partner capable of managing our scale, one who is just as committed to our guests as well as profits for our shareholders,” Roberts said.
On the data note, CFO Joseph Taylor said it was “clearly front and center.”
“We’ve for a long time now talked about and have been focused on the importance of data and how we utilize data to help drive our business, and that's not going to change as it relates to the delivery options,” he said.
Taylor added there’s significant opportunity to deliver through Chili’s app. “The ability to have one of our guests choose delivery through our app probably powered by a third party potentially is a nice piece of the equation when we look at the delivery horizon,” he said.
“I think we're also going to see scale matter, so brands that are big that can partner with third-party aggregators and give them something in the equation more than just a big percentage of their sales off the top,” Roberts added. “They're going to be able to negotiate better deals and partnerships, and that's what we're looking for.”