Chili’s is the 4th largest casual player by domestic sales (behind Olive Garden, Applebee’s & Buffalo Wild Wings) and is positioned as a great place to hang-out with family & friends by offering good value, bold food innovation, and a great bar atmosphere to go with a convenient off-premise digital order platform. This overlays Chili’s historical core brand equity as a sit-down Southwest (Tex-Mex) chain that specializes in burgers, ribs, sizzling fajitas & margaritas. Strong everyday value is driving higher frequency among its core customers and is expected to increase the frequency among its lighter users. Its margin friendly 3 for $10 offer (high-teens mix) works well at lunch, dinner as well as for take-out and other everyday value platforms include: $25 meal for 2 (share an app & dessert to go with 2 entrees); $8 lunch combos; and $5 margarita of the month (easy way to drive new news). Food items are rotated onto these value platforms to keep things fresh and helps the brand avoid dependence on operationally complex LTOs every 6-8 weeks. A significant shift in marketing spend from traditional to digital reflects: a focus on reaching a younger demo; a better tie-in to its digital order platform & loyalty program; and an effort to leverage a more cost-effective marketing channel. Notably, Chili’s is now spending (on a national basis) more on digital than tradition TV. Success in leveraging its 6MM+ loyalty and 2.6MM email databases facilitates 1-to-1 marketing and it is notable that its My Chili’s Reward members drive 20% of total guest checks. Fiscal 2Q20 off-premise growth of +31% y/y increased the mix of this channel to 17% and its digital ordering platforms drive 2/3s of off-premise sales, benefitting operations & marketing. Having said all this, it is notable that its AUV significantly under-performs the segment average, revealing the brand’s sales challenges since the onset of the Great Recession as Chili’s struggled to balance the tension between a need for greater value to drive traffic and the need for a higher check (which under-performs by double-digits). Resultantly, its labor margins have been trending-up and now represents a system worst as sales have failed to keep pace with wage rate inflation & higher manager bonuses. A system low EBITDAR margin challenges franchisee willingness to make very necessary capex investments to modernize facilities and explains corporate’s move to further increase its ownership of system stores (76% at the end of FY19). In conclusion, while Chili’s re-positioning has started the ball rolling, it will take a longer track record of comp out-performance for its store-level unit economics to catch-up to the segment average.
