Make no mistake, Chili’s new delivery-only concept It’s Just Wings is not a sign it’s dipping toes into the waters of virtual brands.
The action is more comparable to the swimming portion of a triathlon.
Brinker International CEO Wyman Roberts said It’s Just Wings is not a disposable vehicle; the chain is committed to the brand for the long haul. With the concept on pace to reach its $150 million annual projection—along with high consumer satisfaction scores—the chain is now considering other potential pathways.
Roberts said the company has the scale, asset ownership, available capacity in well-equipped kitchens, correct technology, and operating talent to continue the delivery-only concept’s growth.
“It’s Just Wings started as a virtual brand, but as we wire in execution and accelerate growth, it may take different trajectories,” Roberts said Wednesday during the company’s Q1 earnings call. “We’re evaluating internal and external opportunities to increase awareness levels and expand access to consumers. This is just phase one for It’s Just Wings.”
Not only is It’s Just Wings continuing to thrive, but Roberts once again indicated that Chili’s is testing multiple other virtual brands to better understand consumer demand and ensure it can execute at a high level.
Roberts said it’s not so much about how many virtual brands the company can support; it’s more about volume. He added that the main constraint is kitchen capacity because of certain limitations that come with current set-ups that would need to be modified. But he noted that Brinker’s virtual brand portfolio would be a low single-digit affair. Whether it’s one, two, or even three depends on how tests play out and how the company executes.
The CEO also said that points of distribution—a strength of Chili’s—play a major role in a virtual brand’s development.
“As penetrated as we are in a lot of markets, you don’t have to necessarily put every brand in every distribution point,” Roberts said. “Not every kitchen has to carry every [brand] to still give you coverage of those guests that are looking for a delivery option. It’s a relatively small number. It’s all about sales growth. We have $5 million Chili’s that do that kind of volume even though our average is $3 million. So we know we have a lot of capacity to put more food out of that kitchen than our average, and so we’re optimistic that we have plenty of room to grow the virtual brand business because of that.”
Roberts said there’s still a large group of consumers not dining out, which he estimates to be 30 percent. With that said, restaurants seeing volumes reaching pre-pandemic levels have retained an off-premises mix of 30 to 35 percent.
“We feel very optimistic or very comfortable that the convenience experience by the broad market now isn’t going to revert back to where it was pre-pandemic,” Roberts said. “We’re going to see significantly higher takeout/delivery, and that’s without virtual brands. So obviously as we throw virtual brands into the mix that adds to that mix.”
Although Roberts remained tight-lipped on the virtual brand’s specific impact on sales in Q1, it likely had an incremental effect on Chili’s ending September with same-store sales dropping 1.4 percent. During that same month, traffic increased 2.2 percent.
For the entire quarter, comps at U.S. Chili’s units decreased 7 percent while company-owned locations dropped 7.2 percent and domestic franchises slipped 5.6 percent. Traffic at corporate stores lowered 3.2 percent while mix-shift dipped 4.2 percent and price increased 0.2 percent. Chili’s Q1 revenue dropped 9.1 percent from $695.6 million last year to $686.5 million this year.
“Obviously the big upside comes when COVID moves away,” Brinker CEO Wyman Roberts said. “Again, given that 30 percent is saying they’re not going to restaurants until there is a vaccine, that tells you there’s some pent-up demand out there.
Excluding markets not fully open for indoor dining in Q1, which is about 14 percent of the system, Chili’s was down 1.3 percent for Q3 and grew 3.6 percent in September.
The main challenge has been Maggiano’s, which saw company-run comps slide 38.6 percent in Q1. It ended September down 32.5 percent. The chain earned $53.6 million in Q1 revenue, a decrease from $90.4 million last year, or a 36.8 percent difference. Traffic in the quarter declined nearly 29 percent.
“Polished casual is obviously a more challenged segment that’s facing greater headwinds,” Roberts said. “But Maggiano’s team is doing a great job managing their cost structure and flow through. We feel good about where Maggiano’s is from a relative perspective, and we’re excited about the bold strategies Steve Provost and the team are putting in place to build the business.”
CFO Joe Taylor said that in a typical second quarter, Maggiano’s has historically performed strongly because of celebratory events around the holiday. That’s expected to change this year because of COVID restrictions.
He said the company anticipates Q2 operating margins to be relatively similar compared to the prior year, which consists of an improving Chili’s offset by a dragging Maggiano’s.
“This is a very outsized earnings quarter for that Maggiano’s piece of the equation,” Taylor explained. “Again, that’s specific to the second quarter, so as we move further into the year that tends to mitigate itself.”
Chili’s ended Q1 with 1,607 units—1,064 company-owned and 543 franchises. Maggiano’s had 53 units, one of them being a U.S. franchise. Chili’s is expected to open four domestic stores and three international locations in Q1.
Roberts said projecting whether Chili’s sales trends will continually improve is a complicated question given tight restrictions in major markets such as California.
The CEO said if restrictions lessen and everyone can open dining rooms at a limited capacity, there’s growth potential for Chili’s in a COVID world.
“And then obviously the big upside comes when COVID moves away,” Roberts said. “Again, given that 30 percent is saying they’re not going to restaurants until there is a vaccine, that tells you there’s some pent-up demand out there. Now they’re using takeout and delivery, but that tells you our dining rooms have a lot of potential to get very busy once there is a vaccine.”
