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Sunday
Mar312019

Chili's

Chili's is the 4th largest casual player by domestic sales (behind Applebee's, Olive Garden & Buffalo Wild Wings) and its Southwest Tex-Mex theme helps distinguish it among the other national casual chains. Its refined brand positioning centers around getting friends & family together over improved burgers, ribs & sizzling fajitas and 2017 menu upgrades included: fajitas with 48% more meat and addition of rice & beans; Texas Size Ribs (+30% more meat) offered at the same price as original rib product; Bigger Big Mouth Burgers (half-pound, handcrafted patties which are smashed for greater flavor & faster cook times and served on a brioche bun); and use of all-natural chicken for its Chicken Crispers. Margin friendly 3 for $10 offer works well at lunch, dinner as well as for take-out (providing marketing efficiencies) and Chili’s other everyday value platforms include: $25 meal for 2 (share an app & dessert to go with 2 entrees); 8 lunches for $8; and $5 margarita of the month. 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. The brand's recent pivot to value has helped jump start sales & traffic and fiscal 2Q19 traffic growth (+2.9%) was best in 10 years. Going forward sales should benefit from: an ongoing commitment to keep operations simple (menu simplification helps get the food out hotter & faster) thus improving frequency; a compelling value platform; takeout business growth; its most effective & efficient marketing strategy ever (including a more aggressive approach to direct marketing); and remodeling progress. Having said all this, it is notable that its franchisee AUV remains significantly below the system's best year (2006) and well below the segment average, revealing: (1) the brand's sales challenges since the onset of the Great Recession; and (2) the tension between a need for greater value to drive traffic and the need for a higher check. Labor margins have been trending up and now represent a system worst as sales have failed to keep pace with wage rate inflation, and resultantly, its EBITDAR margin represents a system low in addition to significantly underperforming the segment average. Annual net unit counts have been running flat to slightly down over the last 10 years and development likely must wait for more evidence of a sustainable sales turn-around and a better sales-to-investment ratio. In conclusion, while the chain's food quality investments and emphasis on its everyday value platforms have helped reignite traffic after a long hiatus, more time is needed to determine the sustainability of this model particularly as it relates to driving higher checks & AUVs.

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