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

Now under new CEO Kevin Hochman, the casual chain is making it a point to cut deep discounting, reduce costs in the back of house, and rightsize its approach to virtual brands and technological initiatives.

August 25, 2022 Ben Coley

Kevin Hochman, named CEO of Brinker International in May, knew he entered a strong foundation, with brands that’ve stood the test of time.

Fourth quarter results explain his high praise. Chili’s experienced a 0.3 percent same-store sales bump (8.6 percent on a two-year basis). Average weekly sales per unit were $59,500 ($3.1 million annualized AUV), compared to $56,900 in Q4 2019. Maggiano’s saw a 30.1 percent comps lift (10.3 percent on a two-year basis), and average weekly sales of $163,600 ($8.5 million annualized AUV), versus $152,400.

But Hochman didn’t join the team for status quo. The CEO spent his first few months in the field learning from restaurant teams about immediate challenges.

“We’re working quickly to identify the things we can do to grow the business sustainably, improve the guest experience, reduce cost and complexity, and implement more strategic pricing, which will in turn expand restaurant margins and grow profits,” Hochman said during the company’s Q4 earnings call.

There is clearly room to get better. Traffic was negative at Chili’s in Q4 as guests reacted to the inflationary environment. The brand experienced a 1 percent negative sales impact from understaffed locations not fully opening dining rooms at peak times and throttling back online orders. Traffic has shown sequential increases into August, although it’s still in the mid-single-digit negative range. Off-premises held at 34 percent, as dining rooms saw positive sales and traffic.

Restaurant operating margin in Q4 was 10.3 percent, but Hochman thinks mid-teens is achievable. He doesn’t have a timeline of when that may happen, but there is a path in place. The CEO created two teams of senior executives, one dedicated to identifying sales opportunities, and the other focused on simplifying operations.

Chili's

Chili's wants to showcase its value, like the $10.99 3 for Me Deal that comes with a drink, appetizer and entrée.

Growing comps starts with reimagining the menu. Chili’s will lean into a barbell strategy that provides everyday value to low-income customers and uses food and beverage innovation to mitigate trade-down from higher-paying guests. Hochman is looking to drive traffic, but without deep discounting and giving away as much free food through the rewards program. The CEO said 37 percent of items are moving at a discount, which he referred to as “simply too high.”

Hochman believes the chain has competitive value, like its 3 for Me deal featuring an appetizer, entrée, and a drink starting at $10.99, and a $9 lunch combo. But he added that Chili’s must do better at promoting these offerings. The brand is in the process of reinvesting marketing dollars from My Chili’s Rewards comped meals into advertising everyday value.

“I think there are some things I can bring from my [quick-service restaurant] days that I think can help the business,” said Hochman, who previously led KFC and Pizza Hut. “I think more strategic pricing. I think [quick-service] does an exceptional job of understanding how do we make sure that the great value that we offer is advertised and drives traffic? … One of the lessons in [quick-service]—if you’re going to have great value, you have to make sure you talk about it. Quite frankly, it’s been a little bit invisible in our business the last few years, and we need to get back on air once we’re ready to do that.”

To simplify operations and reduce costs, Brinker is looking to cut low-mixing items, redundant pantry SKUs, unnecessary dishware, and unneeded processes that don’t help the customer. Less complexity should help with poor retention, which is leading to higher-than-normal training expenses and use of overtime. When Hochman spoke with operators, he learned that it’s become more difficult to work inside a Chili’s. He used the example of portioning proteins, like counting shrimp or measuring brisket. One hour of prep per restaurant equates to the company paying 46 years’ worth of labor annually.

Hochman recalled a team member suggesting that instead of counting all shrimp prior to opening, employees simply grab the necessary number when the dish is ordered.

“That seems pretty logical and something that we could immediately do," the executive said. "And probably there was a time where we put in proteins and we were really worried about the waste on them. And labor rates weren’t where they were, and so they might have been good decisions 15 years ago. But today, in a world where wage rates are where they are and turnover rates are where they are, that’s not the most fun task to do. Why don’t we get rid of that and save millions of dollars in terms of labor that can either be redeployed back into the restaurant or potentially to the bottom line?”

Chili's

Chili's is suspending its robotics testing.

Change is also coming for virtual brands It’s Just Wings and Maggiano’s Italian Classics. The two mix 6 percent, and Hochman wants to make sure attention toward these concepts matches up with the level of sales they’re bringing in. For instance, Maggiano’s Italian Classics has 26 unique SKUs to service 2 percent of business. Hochman said the brand could delete more than half of those SKUs and still retain most of the sales mix. For It’s Just Wings, it’s not as much about simplification since the brand was designed to fit well within the kitchen. It’s more about removing items with low sales volume and working to build capacity during the dinner daypart.

Additionally, Brinker will take more pricing on virtual brands since most of the sales go out for delivery—a customer base that values convenience and not as impacted by price increases. To grow the concepts, the company will bring It’s Just Wings flavors and curly fries to the core Chili’s menu and place the casual chain’s chicken crispers onto the It’s Just Wings menu for more variety.

When it comes to technological initiatives, the leadership team made decisions on whether to accelerate projects or stop them, based on ability to impact sales and probability of success. As a result, Chili’s suspended its test of “Rita the Robot”—a self-functioning machine that could play host, waiter, and busser. However, the company will accelerate what it calls “Kitchen of the Future 3,” or equipment that improves speed of service and table turns. Chili’s is also testing technology that would enable guests to seat, order, and pay on their own, and it's working to enhance its mobile site interface for off-premises customers.

“We're going to stop some of those projects that we just didn't have a line of sight to a return on the business, but we're going to double down and accelerate the ones that we think will have a more meaningful impact on restaurant margins and a quicker impact on our business,” Hochman said.

Brinker’s food and beverage costs were unfavorable by 310 basis points compared to last year, driven by close to 15 percent commodity inflation. Every category was negatively impacted, with poultry seeing the biggest year-over-year increase. That especially hurts the company, since chicken mixes 52 percent across menus. But the chain is starting to see cost reductions.

Labor was unfavorable by 70 basis points year-over-year, fueled by a 6-7 percent rise in wage rates.

Chili’s expects to exit Q1 at 8 percent pricing, and that should remain the same throughout fiscal 2023. Maggiano’s will carry pricing of mid-5 percent, and that’s projected to reach closer to 7 percent for the entire year.

Chili’s ended its 2022 fiscal year with 1,596 restaurants systemwide, including 1,232 domestically and 364 internationally. Maggiano’s completed the year with 54 locations, 52 of which are in the U.S.

In fiscal 2023, Brinker is anticipating revenue of $3.9-$4 billion, capital expenditures of $155-$165 million, and the opening of 19 locations.