Chili's Enjoys Best Traffic in Over a Decade
Chili’s second quarter, which wrapped December 26, marked the one-year anniversary of its “traffic-focus strategy.” The early results? The Brinker flagship, over the past two periods, just turned in its best back-to-back traffic trends in 12 years.
Chili’s reported same-store sales and traffic gains of 2.9 percent, year-over-year, in Q2. That after increases of 2 and 4 percent, respectively, to start fiscal 2019. Brinker, which also operates Maggiano’s, reported total revenues of $791 million, a lift of 2.5 percent.
For 1,248-unit (domestic locations) Chili’s, Q2 marked the fifth consecutive quarter of sequential sales improvement, with the last three in positive territory and climbing: 0.6 percent in Q4 2018 followed by the 2 and 2.9 percent results to kick off the fresh fiscal year. See the chart below for more:
Brinker chief executive Wyman Roberts unpacked several reasons why Chili’s is pushing its best figures in more than decade. Specifically, value takeout and improved operational execution. Let’s focus on the value play first.
“A relevant and compelling offer.”
Roberts was asked during the call if Chili’s expected its performance to plateau or decline as we push further into 2019. The reason being, it simply won’t have weak traffic and sales trends to level against once it starts lapping those results. Roberts doesn’t believe so. Here’s why:
Chili’s has worked—successfully—to build a value platform with staying power. It’s not an LTO or promotional message that pulses and fades away. “They actually build over time as people become more familiar with them,” he said.
Chili’s 3 for $10 deal, which offers an appetizer, entrée, and drink at the price point, has proven to be “highly motivating from a consumer’s perspective,” Roberts said.
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). It includes an appetizer, two entrees, and a shareable desert.
Joe Taylor, Brinker’s CFO, said the launch resulted in sequential improvement and positive comp sales in each month that quarter. Roberts added that it’s been effective due to its customer, occasion, and daypart flexibility.
“It's at the right level of preference and its driving traffic because it meets the needs of our lunch, our dinner, as well as our takeout guests,” he said. “The offerings are full portion and high-quality products and the platform is flexible enough to keep it fresh so guest satisfaction and intent to return are very strong.”
Chili’s goal was to embed value its base menu—one that works across all dayparts. This erases the need, from a marketing perspective, to be out there with multiple messages. Chili’s can talk about the offer in a to-go environment, for instance, without adding additional media weight. In fact, Chili’s cut that weight “fairly significantly” in Q2 and still drove results. “The beauty of a compelling message that works across lunch, dinner, and to-go is that we can now add other specifics to the message, if you will, without having to create a new campaign, without having to buy a separate media strategy for it. And that's something we're excited about and that the marketing is already leaning heavily into,” Roberts said.
And Chili’s protected its margins by making some changes to other platforms. One example: the lunch combos that used to start at $6 are now $8. “We've been able to mitigate much of the pressure to the cost of sales through those kinds of change in the other buyer platforms.”
The favorable guest response to Chili’s value offerings still impacted cost to sales margin, Taylor said. The brand took a 40 basis-point hit in that component of its offer. But given the traffic uptick, Roberts called it a “very manageable” trade-off. Cost of sales is a category Chili’s often fronts in casual dining since it has very attractive food margins versus competitors. Chili’s restaurant operating margin in Q2 was 12.4 percent, a 250 basis-point reduction versus the prior-year period. Taylor said value offerings “tend to play out within restaurant operating margins on that cost to sales and the mix dynamic of that cost to sales.”
“We're more than comfortable that the margin give up we're investing in, if you will, with this value proposition is manageable to do both,” Roberts added.
BTIG analyst Peter Saleh expressed some concern over the 3 for $10 promotion’s ability to drive profitability as well as transaction growth. “The sales results suggest Chili’s is resonating with consumers following several years of lagging the industry. However, the persistent margin contraction and lack of earnings flowthrough on a considerable same-store sales beat keeps us on the sidelines,” he wrote in a Wednesday morning note.
Chili’s 2.9 percent comps beat Saleh’s 1.5 percent estimate. The restaurant-level margin decline of 250 basis points to 12.4 percent was credited to revenue recognition change (70 basis points), sale leaseback (110 basis points), promotions and discounts (negative 40 basis points), and higher labor.
Chili’s sales growth was driven by the traffic growth and flat average check, as 90 basis points of net pricing was offset by a 90 basis point menu-mix decline. “We believe this margin decline … will likely prove to be permanent given the changes mentioned above and on-going wage inflation. While we applaud management’s ability to regain traffic momentum, we remain concerned that same-store sales trends buoyed by deep discounts are fragile and may reverse course when lapped in Q4.”
Taylor said part of the value proposition of Chili’s 3 for $10 offering, one that customers are still discovering, is that it focuses on abundance in addition to price. “When we first started that message there were a lot of consumers that assumed that to put on offer out there like that was going to require us to either reduce portions or reduce quality of the product and the exact opposite is actually true,” he said.
Taylor added that Chili’s has seen strong intent to return from heavier users, showing that it’s a deal worthy of loyal guests. With lighter diners, those who are having their perceptions changed—in regards to assuming the low price point means less food—are helping sustain the traffic lift. “And we think that will continue to grow,” Taylor said.
Additionally, Chili’s is not trading the bulk of its guests into the offer. It’s still leaning on add-ons through suggestions, like its Margaritas and other higher-priced and higher-margin items. But the key is, while that plays out, to still feature a flexible and consistent daypart that’s always there for value-seeking consumers.
“That's the beauty of the Chili's menu,” Roberts said. “The selection gives you value in multiple different ways.”
How does this measure up against the industry?
Baking in everyday value is something casual brands are adopting, Roberts said. It’s helping lessen the burden on LTOs and promotional incentives to drive immediate traffic. Roberts said cost of sales is the barometer for how much they’re giving and what are they getting. Then Chili’s will find absolute price points to determine the compelling nature in terms of breadth and target. “And that’s what we’re doing and will continue to look at pricing in a way that continues to keep our margin structure intact. But also, we’re focused on driving traffic.”
That last note is where things differ between Chili’s and some of its competitors, he added. “You’re hearing people talk about comp sales growth with negative traffic growth,” he said. “… And I think they are rationalizing that. But I think that’s a slippery slope.” Roberts admitted Chili’s has tumbled down it before. “This isn’t one we don’t talk about without some experience,” he said. “How long can you continue to drive sales growth with traffic declines? That’s a very interesting question.”
The digital side of the growth story
Chili’s to-go sales upped 20 percent in Q2, driven by a rise in ecommerce as well as more marketing support, improvements in packaging, and better execution, Roberts said. He highlighted curbside as the key channel. To-go currently represents 12 percent of Chili’s business and presents “plenty of upside,” Roberts said.
On the subject of delivery, Roberts said Chili’s has been cautious on two fronts. One is the business model implications related to fees third-party partners charge. Next is the impact on operations given “that their integration into our systems isn’t great.” From a technology standpoint, Roberts added, Chili’s is challenging aggregators to integrate better so the operations impact is minimized. Lastly, Roberts said Chili’s is closely guarding the customer experience.
“We're engaged with all the big partners. We continue to look at it. We know that convenience is not something that's going to go away as a consumer need,” he said. “That's obviously very high on the list right now. But we're also very cautious about making sure that delivery works within the Chili's organization and is handled in the appropriate way from all aspects of the business.”
“We understand the implications of delivery and both the positive and the negative,” Roberts continued. “And so we are just looking to make sure that we're confident before we get too far out of our skis, if you will, on these partners.”