Chili's restaurant exterior.

Chili's same-store sales grew 3.8 percent year-over-year, including 7.4 percent pricing, 3.4 percent mix-shift, and negative 6.6 percent traffic. 

Chili's Eyes Increased Profits with New Menu

The casual-dining chain revamped its '3 for Me' value platform to encourage more trade-up and higher average checks. 

Brinker International CEO Kevin Hochman, with just a few months under his belt, identified excessive deep discounting as one of Chili's most concerning issues. 

In the chain's fiscal fourth quarter, discounted items mixed 37 percent, and that was simply too high for his blood. In response, the chain reconfigured its "3 for Me" value platform, which has only been around since June. The menu—which bundles a beverage, appetizer, and entrée—had four pricing tiers, with $10.99 being the entry. The newer version cuts the number of offers available on the 3 for Me platform from 12 to nine and reduces the number of pricing tiers from four to three. Chili's kept the $10.99 level, and added more premium price points of $13.99 and $15.99. 

The goal is retain the value-conscious consumer, but also drive trade-up within the Three for Me platform and make the a la carte menu more competitive. Previously, customers were pushed toward the 3 for Me because the bundles (beverage, appetizer, and entrée)  were cheaper than the a la carte menu (entrée and side). That was corrected with the latest menu update; all bundled items on the Three for Me menu are now higher priced. 

Discounting now mixes in the low 30s, and Chili's has seen significant increases in average check for those buying off the Three for Me menu. Additionally, more customers are opting to order off the a la carte menu to find items that were removed from the 3 for Me platform—the Cajun Chicken Pasta, Chicken Fajitas, and Margarita Grilled Chicken. 

The menu launched October 25, so the brand is early into the change, but the company expects lower costs, higher sales, and increased profitability. Chili's is implementing the same actions to its rewards program by rightsizing the number of promotional offers. CFO Joe Taylor said that doesn't necessarily mean removing a deal entirely; it may just be offering something for $1 or $2 instead of a freebie. 

Chili's same-store sales grew 3.8 percent year-over-year, including 7.4 percent pricing. Mix-shift was 3.4 percent, but traffic slipped to negative 6.6 percent after the initial reduction of discounts. 

"In the move we're making, we'll probably see some traffic losses as it relates to the discounting side of the equation," Hochman explained during the brand's Q1 earnings call. "But again, we're trying to create a stronger, profitable model from an ongoing basis. We think that's worth the trade-off right now. We're seeing a nice net positive benefit as we move through the first four months really of continuing on through October. ... Through some of the moves we've made on the discounting side of the equation, while you typically will see an initial traffic reaction, we saw that gap narrow as we move farther through, in particular in October, when I look at traffic gap to the industry."

READ MORE: Chili's Has an Aggressive, Multi-Layered Plan to Build Margins

The company believes these strategies will allow it to reinvest in marketing, starting in its fiscal Q3 (or essentially the new year). With increasing concerns over inflation and an impending recession, Hochman said customers will be on the lookout for value deals, making it the perfect time for Chili's to build its awareness. Right now, the brand allocates 1 percent to marketing. Prior to COVID, Chili's dedicated 4 percent; the CEO doesn't want to return to that level, but there will be an increase in spend. The company will incrementally add back marketing dollars and monitor the return on investment. 

If the advertising works, Chili's will keep building on it. If not, the concept will retool. Details haven't been fleshed out quite yet. During COVID, the company has directed its limited spend toward digital channels, but Hochman hopes the restaurant can make a return to TV. 

"We've done some pretty good things on the business that we think we could advertise," Hochman said. "So we've got like these margaritas of the month that are incredibly attractive. We've obviously got this unbeatable value in the industry at Three for Me on the menu, but we've not invested dollars to make customers aware of those amazing offers. And so, any of the incremental spend that we put into the business next in the back half will be funded from removing some of this deep discounting and removing the menu mix that we talked about on Three for Me. And we'll be putting dollars into really focusing on the value components of our business just because we think that's going to be thing that resonates with a cash-strapped customer coming out of the holidays, looking for not just low prices, but high quality and abundant value."

In conjunction with these shifts, Chili's is working toward stabilizing turnover and reducing complexity in restaurants. A recent example is bringing back busers in all restaurants so servers can focus on greeting and fulfilling guests' needs. Looking further ahead, the chain is looking at back-of-house equipment to automate processes. The company has experienced improvements in manager and hourly turnover, but Hochman said they're still not at pre-pandemic levels. To quicken this process, Chili's brought "critical people functions" closer to operations, which involved former Chili's co-COO Aaron White—a 21-year veteran of the brand—moving to chief people officer of Brinker.  Wage rate increases have moderated, but they were still in the mid-single digits in the first quarter. 

Brinker saw commodity inflation of 24 percent in Q1 year-over-year, driven by chicken and beef. However, CFO Joe Taylor noted that most of the company's commodity markets are moving to lower cost levels. 

Maggiano's comps rose 18.2 percent year-over-year, including 5.8 percent pricing, 3.1 percent mix-shift, and 9.3 percent traffic. Brinker overall reported sales of $946.1 million in the first quarter as compared to $865.6 million last year. There was an operating loss of $19.8 million, versus operating income of $25.6 million in the year-ago period. The primary driver of the operating loss was the significant increase in food and beverage costs. Restaurant operating margin was 6 percent versus 11 percent last year, fueled by high commodity inflation. 

Chili's finished Q1 with 1,592 stores globally, including 1,228 in the U.S. and 364 internationally. Maggiano's had 53 units domestically.