Chili's 'Extremely Powerful' Value Proposition Keeps Growing
If you really want to dissect the heart of Chili’s comeback over the past year and a half, looks to the message. In fiscal 2019, which ended June 26, the 1,612-unit chain didn’t run an LTO, promotional deal, or new initiative. That’s a stark change in a relatively short window of time.
Chili’s first noted it would nix LTOs in April 2017, electing instead to focus on menu and service, consistency, and how it could drive visits into a casual-dining category historically tied to low-frequency trends. The first major swoop was to slice 40 percent of its menu—down from 125 or so selections to 75 in a “less is more” initiative. Zero in on core items, like fajitas, and let some of the bulk slip away, not just form guests but from back-of-the-house complexity as well.
While that was effective quickly, cutting down service times and lifting customer satisfaction, it was really just the crawl before the run for Chili’s. It improved the brand’s baseline business but was it a traffic driver?
That’s where value came into play. In early October, Chili’s reconstituted its on-menu value offerings around the 3 for $10 deal, lunch combos, and a $25 three-course meal for two that replaced a 2 for $22 offerings. The hero here, though, was the 3 for $10, which has now been in place for a full year.
A LOOK BACK AT 2019:
Brinker CEO Wyman Roberts called the offer’s proposition, which features an appetizer, entrée, and drink at the price point, “extremely powerful.” That part is taken care of. But what’s next up for Chili’s is a twofold chance. One, increase awareness given the fact Chili’s really didn’t promote heavy through initiatives in fiscal 2019. “What we’ve got now is the opportunity to tackle that value message and build on that awareness level,” Roberts said. “Even though we’ve been out there for a year with it, there’s still a lot of people that don’t know about it.”
The second part is adding innovation into the construct. Roberts said there are “some things” in test today that could make the “platform work even harder for us and continue to build off of the strength of that idea.”
A question asked often during Tuesday’s conference call to discuss Q4 results, however, was whether or not Chili’s would sag from its own success in 2020. In other terms, would its upcoming same-store sales and traffic lag off its own strong comps?
Chili’s closed the fiscal calendar with domestic same-store gains of 1.3 percent, year-over-year (1.5 percent at corporate units and 0.9 percent at U.S. franchises). Traffic declined 0.5 percent. For the full year, comps rose 2.2 percent compared to negative 1.3 percent in fiscal 2018 and traffic climbed 2.3 percent versus a drop of 3.6 percent in the prior-year period.
Q4 revenue totaled $804.8 million, up from $791.4 million in 2018. Net income was $46.8 million, or $1.22 per share, higher than last year’s $43.8 million, or $1.01 per share. Adjusted earnings were $1.36 per share.
Chili’s quarterly comp performance included a price impact of 3.9 percent, which was a reflection of its year-over-year decrease in promotional, direct marketing activity.
Improving its base business allowed Chili’s to reduce promotional activity and the related comp expense. Chili’s accounts for year-over-year changes in comp expense as an adjustment in price. So, in this case, the lower number in Q4 resulted in an increase in net price. The actual menu price uptick was 3.3 percent. That’s higher than Chili’s annual range of 1.5–2 percent. The chain expects to maintain that lower breakout moving forward.
Here’s a look at domestic same-store sales trends for Chili’s (1,242 stores are in the U.S.):
- Q4 2019: 1.3 percent
- Q3 2019: 2.7 percent
- Q2 2019: 3 percent
- Q1 2019: 1.9 percent
- Q4 2018: 0.4 percent
- Q3 2018: –1.1 percent
- Q2 2018: –1.6 percent
- Q1 2018: –3 percent
- Q4 2017: –1.7 percent
- Q3 2017: –1.7 percent
- Q2 2017: –3.2 percent
- Q1 2017: –1.3 percent
And traffic (at company stores)
- Q4 2019: –0.5 percent
- Q3 2019: 3 percent
- Q2 2019: 2.9 percent
- Q1 2019: 4 percent
- Q4 2018: 0.8 percent
- Q3 2018: –2.1 percent
- Q2 2018: –4.4 percent
- Q1 2018: –8.7 percent
- Q4 2017: –6.5 percent
- Q3 2017: –6.2 percent
- Q2 2017: –6.5 percent
- Q1 2017: –4.1 percent
When Chili’s first laid out its turnaround strategy, it took aim at three targets—strengthen its value proposition, improve operational execution, and leverage digital technology to increase convenience.
For years, Chili’s led with 2 for $20. Roberts said it needed a more flexible platform that could work across both dayparts. And thus, the 3 for $10 was born.
Roberts said it plays well at lunch and dinner and works within Chili’s margin structure. It’s mixing in the mid-teens currently and continues to hold cost of sales. Moving forward, Chili’s can work to build check off the base, Roberts said.
Returning to the lapping concern, Robert said Chili’s still has room to grow in and around the architecture of the 3 for $10.
Brinker CFO Joe Taylor said one of the mistakes people make when looking at the deal is viewing it as a promotional lap. It’s a core value platform, he said, and “we have well over 10 years experience on how to manage that and bring that forward.”
Unlike a pulsed offer that drives guests through barrage marketing, Taylor said the 3 for $10 will offer incrementality out of a platform that sticks to everyday value. “It's a solid base business that we can grow as we move forward,” he said. A reason it’s been so successful, and has long-term legs, is because it’s consistent, and something customers can count on whether they show up in January or April, Monday at 2 p.m. or Saturday at 7 p.m.
“With the strength of our value proposition, now we can layer-in innovation and marketing support, targeting the value-oriented segment of our guests, which will encourage them to return more often and with stronger operational execution, our guests are having better experiences and fewer problems, which help us drive frequency as we challenge ourselves to take our guest metrics to new heights,” Roberts added.
The 3 for $10 also opens doors to ladder-up opportunities for Chili’s. It can market to value-oriented consumers to get them through the lobby. Then put message, offers, and appeal behind the other end of the menu from a quality perspective. Bigger portions, abundance. “We’re looking at the various guest segments and going to put offerings out there that are, we think, appropriate and compelling for each of those and that drives the business.”
And, Roberts said, Chili’s has not gone “pedal to the metal” on loyalty yet, which it could save for a future date if it needs it.
Delivery, where the 3 for $10 doesn’t figure
In June, Chili’s announced an exclusive deal with DoorDash to expand delivery to 1,000-plus restaurants nationwide. The deal came after two years of testing with multiple vendors. The agreement with DoorDash is one Roberts said Chili’s was comfortable with from a cost structure standpoint.
Roberts said the brand has already seen “significant incremental off-premises growth that’s accretive to margins.” He pegged the incrementality in excess of 80 percent, which mirrors what Chili’s saw in pilots. He said the system basically turned on all units overnight and integrated the DoorDash platform. “It was seamless,” he said. The next step is investing to grow scale.
Chili’s is still in phase one of delivery. “It is performing as we expected it to perform. It is delivering the incrementality at very high levels, right in line with what our test shares, it is delivering a better check and it's delivering a better PPA,” Taylor said.
Roberts added that most of the delivery business is coming through DoorDash’s marketing channels, meaning there’s little crossover with regular guests. Down the road, however, Chili’s plans to push some initiatives that have more direct contact with customers it knows are core users. “And we may see some trade-offs there, but we think the trade-offs are going to be well worth it. And we’ll monitor that as we go forward,” Roberts said.
To guard profitability, Chili’s decided not to offer the 3 for $10 deal on DoorDash. But could that change? “That's a vehicle that we could play with, but we’ve got levers to pull as it relates to how do we continue to build on that value proposition. And I think value is going to be important as we look to the future,” Roberts said.
For now, though, those customers don’t cannibalize each other too much. Taylor said the to-go guest tends to have a higher preference for value, as does the dine-in one. Delivery plays less to value seekers. “And I think there's a lot of responsiveness to the ability to get that from a delivery and less sensitivity to maybe some of those charges that go with it,” he said. “But it is a very profitable guest driven by a number of different attributes now. Now, you watch that over time, then incrementality and shifts in the business will be a piece of the equation that you watch closely.
Also, Chili’s, as noted, is running delivery through just one marketing channel right now (DoorDash).
“We’ll see what happens as we open up additional channels,” Roberts said, “and we really start to market and partner more aggressively with them.”