Chili’s is going to stop giving away so much free food.
That’s one of the changes coming to the 1,600-unit casual-dining chain under new CEO Kevin Hochman, who unveiled on Wednesday a series of “interventions” at Chili’s that are intended to help improve flagging sales and profits.
Same-store sales in the chain’s fiscal fourth quarter rose just 0.3%, and traffic declined as some guests recoiled from rising inflation, executives of parent company Brinker International said. Restaurant operating margins for both Chili’s and sister concept Maggiano’s, meanwhile, fell nearly 7 points, to 10.3%, as Brinker absorbed commodity price inflation of 15%—its highest for the year.
But Hochman has a plan. On his first earnings call since replacing outgoing CEO Wyman Roberts in June, the former Yum Brands executive detailed a variety of strategies intended to help Chili’s boost its margins.
More value, fewer discounts
The first order of business, he said, is to increase sales. One way to do that is by cutting back on discounts. Hochman said 37% of Chili’s checks include some sort of discount.
“We give away a lot of free food in our My Chili's Rewards [loyalty program],” he said. “There's probably a better way to do that and still maintain the traffic that that drives without constantly giving away free food every week.”
He wants the chain to instead pursue more of a “barbell” strategy, promoting value for lower-income customers while encouraging trade-up among guests who can afford it. The idea has become prevalent among sit-down chains, including Red Robin and Denny’s, as they look to appeal to price-conscious guests.
At Chili’s, it will include more emphasis on its 3 for Me value offer, which features a drink, appetizer and entree for $10.99. The brand will shift marketing dollars away from its loyalty program and virtual brands to focus more on the meal deal in order to drive traffic—a technique Hochman is familiar with from his quick-service days.
“One of the lessons in QSR is, if you're going to have a great value, you’ve got to make sure that you talk about it,” he said. “And quite frankly, we've 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.”
It will also update its My Chili’s Rewards program to focus more on “compressing the time between visits” rather than free giveaways, Hochman said.
An 8% price hike planned for the current quarter should likewise give sales a boost. Chili’s will maintain the 8% rate throughout the year, which could involve additional incremental hikes, CFO Joe Taylor said.
At the same time, Chili’s plans to ramp up menu innovation, particularly at the bar, which will get a revamped food and drink lineup that Hochman believes will drive more transactions.
In other menu tweaks, Chili’s next week will start offering items served by its delivery-only chicken wing brand, It’s Just Wings, on the core Chili’s menu. Applebee’s recently did the same thing with its virtual brand, Cosmic Wings.
“The core Chili's does about 24x the sales of It's Just Wings,” Hochman said. “So why not take these amazing flavors and these amazing curly fries and put them into the Chili's business as a premium at the bar?”
By the same token, Chili’s chicken tenders will join the It’s Just Wings lineup to offer guests more selection without adding new SKUs.
Speaking of SKUs, Chili’s plans to cut back there, too. One place that will happen is It’s Just Wings, which will drop the less popular smoked wing option from its menu. Maggiano’s virtual brand, Maggiano’s Italian Classics, is also due for a pruning, Hochman said: It currently accounts for 26 unique SKUs but only 2% of the Italian chain’s business.
“We’ve got to make sure that we cut that number probably by more than half,” he said.
Chili’s will also eliminate other low-selling or redundant menu items as well as unneeded dishware, he said.
The right-sizing will extend to operations, too. “There's just a lot of tasks that we do in the back of the restaurant that don't necessarily help the guest experience and can be frustrating for team members,” Hochman said.
One example: A process called portioning, which involves counting out individual servings of proteins before a shift, bagging them and storing them in a cooler for later. While touring the chain’s restaurants recently, Hochman said an employee questioned why they were spending so much time counting shrimp.
“I said, ‘Well, how would you do it?’” he recounted. “And they said, ‘When the customer orders a shrimp dish, I would count eight shrimp and not do it before service,’ right?”
He said the practice, developed years ago to reduce waste, doesn’t make as much sense now that many restaurants are short-staffed. Eliminating those kinds of processes could save the company years’ worth of labor costs annually, he said.
Plus, he said, the streamlining efforts could have the added effect of making employees’ jobs more fun, which could help address another problem: turnover.
Hourly staff turnover at Chili’s is still “much higher” than it was pre-COVID, Taylor said. Weeding out rote tasks could help make workers’ jobs easier and more enjoyable, enticing them to stay longer and, in turn, ensuring that restaurants have enough staff to meet demand. The chain recorded a 1% negative impact on sales in the quarter from capacity constraints caused by staffing shortages, Taylor said.
Despite the wide-ranging strategy changes, things are likely to get worse for Brinker before they get better. Food and beverage expenses are expected to rise more than $50 million in the current quarter, which is typically its lowest revenue period for the year. The higher costs and lower sales will combine to generate restaurant operation margins of just 4.5% to 5.5%, Taylor said.
But he said the anticipated “disappointing start” to the new fiscal year will give way to improvements later on.
“We maintain a clear line of sight to meaningfully improved operating performance throughout the year as incremental pricing, lower food and beverage costs and sales-driving initiatives all kick in during subsequent quarters,” he said.
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