Brinker International CEO Kevin Hochman and his team have talked about what Chili’s would do if an economic downturn arrived in the U.S.
The answer is pretty simple—they’d do nothing different.
“It’s the same things that we’re going to do whether there’s a downturn or not, which is continue to improve the customer experience, improve the Core Four, and then get back on air with advertising with outstanding value,” Hochman said during the company’s Q1 earnings call. “And I still believe regardless of whether there’s the continued macro headwinds or not, that’s going to be the course of action for us if we want to continue to complete our resurgence as a brand.”
Chili’s is on its third wave of advertising since returning to TV in March. The commercials have worked so well that the brand decided to add an additional four weeks of advertising to its fiscal 2024 calendar, moving from 21 to 25 weeks.
The company’s initial round of advertising highlighted its $10.99 3 for Me value offer. It followed that up by showcasing Chicken Crispers, but without an alluring price point to go with it. The third iteration of advertising came back to the 3 for Me platform because Chili’s noticed softness in the industry around Labor Day. The strategy worked, as the brand saw the biggest lifts with its latest run of commercials compared to the previous two slots in March and July.
Despite advertising this value, 3 for Me mix is still lower versus the previous couple of quarters. Chili’s value-based menu items accounted for 28-30 percent of total check in Q3, while 3 for Me accounted for 16-17 percent. Hochman has noted on previous earnings calls that restaurants don’t do much to promote value in the dining room. If customers come in for the 3 for Me menu, that’s OK. That’s exactly what the advertisements are meant to do. But Chili’s isn’t going to twist customers’ arms to use it.
“I think a big part of that [lower 3 for Me mix] is how much we’ve driven the Crisper business,” Hochman explained. “Many of those Crisper 3 for Me bundles have moved to the full-price menu, which we feel really good about. And even when we put the advertising on most recently, we saw a couple of points of mix shift from the higher tiers of 3 for Me, down to the $10.99, but nothing that was really significant.”
Chili’s has honed in on Chicken Crispers as of late. Thanks to recipe simplification, larger piece counts, and pricing fueled by sauce and side innovation, average Crisper food cost lowered from 23 percent to 20 percent. The chain is also selling 40 percent more.
The improvements are part of Chili’s larger strategy to elevate its Core Four—burgers, margaritas, crispers, and fajitas. For example, the brand’s upgraded bar menu features new premium margaritas, in addition to former virtual brand It’s Just Wings. The brand has seen customers trade out of 3 for Me and move into these premium margaritas and full-priced wings, boosting sales and margins.
Next up will be burgers, followed by the relaunch of fajitas at the beginning of fiscal 2025, including updates in protein, tortillas, and sides. After that, the priority would be to innovate within these core products to remain relevant with customers.
“The first job is to make sure that each of those, number one, are as good as products as they can possibly be and that we’re really competitive in the marketplace,” Hochman said. “And two, that we have our barbell strategy covered within those four, right, which is good, better, best, making sure that we have the lower price tiers figured out, as well as allow guests to trade up and have premium. So we’re probably about 12 to 15 months away from really completing that. And then I think you’ll see more of the variety.”
The enhancements, paired with a cut to deep discounting, helped Chili’s gain wallet share with higher-income households that are not as sensitive to pricing.
“To have a more affluent customer base is always going to give you a little bit more insurance than one that’s not, and I think we’re seeing that a little bit now,” Hochman said. “We’re a year into removing a lot of the big needles out of the business, the discount needles, and some of those guests are leaving. … But what you end up having at the end of that is a stronger guest base that is a little bit less price elastic that can handle some of these things.”
In addition to advertising and revamping the Core Four, Chili’s is building traffic through its in-restaurant customer service. It lowered 12-month manager turnover to 24 percent, 14 points better than the industry, Hochman said. Hourly turnover shifted from 188 percent to 144 percent on an annual basis. The brand is also switching up its labor model. Chili’s found that too many duties are shared between workers, so it’s focused on creating more individualized roles. One example is adding back the buser position.
In Q3, labor expense was favorable by 10 basis points year-over-year. Wage rate inflation was elevated in the mid-single digit range, but has stabilized.
“We’re actually meeting with all of our regional vice presidents of operations in two weeks where basically most of that meeting is going to be about creating action plans against hourlies to continue the progress,” Hochman said. ‘Because while it’s been good, we need to get a whole lot better to get to where we want. And eventually if we get to the place where we have stabilized hourly turnover too, we’re going to continue to see those guest metrics improve. The net of it is good improvement. We’re still behind where we want to be and I think we’re going to have a really good action plan to share at the next earnings call, post these vice president meetings that I think is going to be very exciting.”
Each of those initiatives helped Chili’s deliver 6.1 percent same-store sales growth in the quarter, the chain’s fourth straight time outperforming the casual-dining industry, according to Brinker. The positive comps comprised 8.8 percent price and 3.1 percent mix, offset by negative 5.8 percent traffic. Chili’s decision to de-emphasize virtual brands contributed 4 percent of the overall traffic loss. The remaining traffic of less than 2 percent is from Chili’s basis business, which leadership views as a sign of progress. In fact, As the brand entered October, it accelerated traffic growth versus the industry and delivered positive visitation for the month.
Restaurant operating margin reached 10.4 percent for the quarter, up from 6 percent last year. Sales leverage from improved price mix positioning, a continuing shift of guest traffic into dining rooms, improved commodity markets, and manager labor cost improvements all contributed to the quarterly gain.
Maggiano’s reported 2.6 percent same-store sales growth, composed of 9.5 percent price partially offset by negative mix and traffic of 1.2 percent and 5.7 percent, respectively.
Chili’s had 1,599 restaurants worldwide as of September 27—1,226 in the U.S. and 323 internationally. Maggiano’s had 52 domestic stores.