The company is removing 'unprofitable traffic' from the system, and reinvesting saved dollars in other drivers, such as TV advertisements, service levels, and better food. 

Chili’s is waging a battle against discounting, and it’s winning thus far.

In October, the casual chain launched a new menu in which the “3 for Me” value platform’s price points switched to $10.99, $13.99, and $15.99. The latter two pricing tiers have more variety, pushing customers to buy upward.

More importantly for Chili’s, a gaping pricing loophole was closed. Previously, there were bundles on the 3 for Me section—beverage, appetizer, and entrée—that were cheaper than the a la carte menu—entrée and side. That’s no longer the case. Also, certain items were removed from the 3 for Me section, encouraging customers to go for a la carte options.

Here are the early results of that shift: 24 percent fewer Three for Me meals are being purchased per day, but the per check average is up $1.38. More than two-thirds of orders are coming from the $13.99 and $15.99 price point. Additionally, menu mix in the second quarter increased by 5.6 percent because those switching to a la carte are buying higher-priced items, but also appetizers and more soft drinks since they are not included.

Same-store sales increased 8 percent in the second quarter year-over-year, on top of 12.1 percent growth. However, cutting discounting did come with a cost. Chili’s traffic dropped 7.6 percent year-over-year in the second quarter. CEO Kevin Hochman called it “unprofitable traffic,” and something the company knew would happen with the menu changes and removal of deep discounting coupons given through email. Even though Chili’s dragged behind the industry on traffic, the concept believes it’s gaining dollars in the market.

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Hochman is aware of the big question marks—what’s going to happen to the economy and customers’ wallets? And how will Chili’s manage this while pushing away discounting?

Firstly, pricing grew 10 percent in Q2 compared to the previous year, but Hochman said there’s still a “pretty big” delta between Chili’s and its competitors. Also, the brand protected its $10.99 entry point on the Three for Me menu, and it wants everyone to know. Chili’s plans to use dollars saved from less discounting on television advertisements, which hasn’t happened in three years. In the commercials, the Three for Me platform will be positioned as an “industry-leading abundant and complete meal at a sharp price point” with “more variety than many other bundles in the marketplace.”

The CEO said these factors will help Chili’s remain within one to two points on traffic versus the industry.

“I will say we are adamant about protecting an opening price point for the guests that would otherwise not be able to afford Chili’s or casual dining,” Hochman said during Chili’s Q2 earnings call. “This is why we’ve protected $10.99 and that’s why we’re going to be advertising that later this quarter and really shout the abundant value as well as the quality of the food that you get.”

“And you think about the $10.99 price point for a complete meal with an unlimited chips and salsa, a full-size entrée, and a bottomless drink and compare that to even fast food or [quick-service], that’s pretty unbeatable,” he added. “So I think as long as we make sure that we are honest about protecting the price points for that guest that really needs it in order to come in, I think we’re generally going to be okay.”

Hochman said that if Chili’s is marching in the right direction in terms of sales and profitability, it will move forward with decreased discounting. But if that starts to not be the case anymore, the company isn’t going to wait to intervene. There could be a situation in which the macroeconomic environment heads in the wrong direction. In that case, Chili’s may return to “a little bit more” discounting or protecting some pricing. With that said, Hochman hasn’t seen anything in forecasts that would lead the company to make such a move.

“And as long as we run, a couple of points away from the industry on traffic, the equation looks really good for our business and then allows us to plow back investments that we hope will then grow traffic over time, whether it’s advertising, improved service levels, or better food,” Hochman said. “So that’s our belief. We’ll continue to monitor it.”

CFO Joe Taylor pointed out that value isn’t just price point—it’s also about quality, consistency, and service levels. That’s where Chili’s new labor model comes into play. At the end of December, the company began rolling out changes: servers were given more time on fewer tables; runner/busser positions were added to keep tables cleaner; a second bartender was added in restaurants with higher bar traffic; and an expeditor position was added to monitor the back-of-house so managers can focus on leadership and coaching instead of hourly tasks.

Manager turnover is below pre-pandemic comparisons, and huge strides have been made in hourly turnover. Chili’s has also found that improved conditions mean better team member engagement, and that leads to better service and food quality. Thus, more value is provided to the consumer.

“So net what we’re seeing is the customers that continue to come are accepting the price increases,” Hochman said. “And the good news is our value scores this quarter actually ticked up, which would be surprising given the price increases. And we think that’s because the service levels have improved … and so we’re seeing all those things trend in the right direction. I don’t want to say that victory is accomplished and there’s not a lot more work to do. But as I said in previous calls, as long as we continue to make progress every quarter, we know that we’re making the right moves. We’re heading in the right direction.”

Maggiano’s comps increased 21.2 percent in Q2, thanks to strong holiday sales—across the dining room, banquet, and off-premises—that surpassed pre-pandemic levels. Price rose 7.7 percent, mix-shift 5.1 percent, and traffic 8.4 percent.

Companywide sales were $1 billion, a growth from $916 million in the previous year. Adjusted EBITDA was $91 million, an improvement from $87.8 million in Q2 2022.

Chain Restaurants, Feature, Finance, Chili's