How Chili's Is Fighting Back Against Chipotle and Shake Shack

NEW YORK (TheStreet) -- The reinvention of sit-down dining is on full display at Brinker International (EAT), which operates almost 1,600 Chili's restaurants around the world. 

Out are the five-pound gooey nacho cheese dishes; in are tabletop tablets that allow customers to order their lower-calorie dinner and trendy alcoholic drinks.

Sit-down chains such as Chili's,  DineEquity's (DIN) Applebee's, and TGI Friday's are under major pressure to retool as fast-casual rivals such as Chipotle (CMG) and Shake Shack  (SHAK) steal diners away. 

Chili's is currently halfway through a three-year reinvention of its menu, removing scores of less popular dishes and focusing on food that falls under categories the company calls "Fresh Mex" and "Fresh Tex." Both menu categories, which began to arrive in restaurants in January 2014, have a history etched in the very DNA of the Chili's brand, explained Brinker International president and CEO Wyman Roberts in an interview.

"We are on a journey to get Chili's more relevant," said Roberts.

The latest edition of the Southwestern cuisine-focused Chili's menu are best epitomized by its "top-shelf tacos," inspired by the rustic street tacos often found on local food trucks.

Chili's top shelf carnitas tacos feature slow-cooked pork over jack cheese, chimichuri sauce and house made pico de gallo. Elsewhere, the Chili's homepage is now showing off Dr. Pepper-flavored ribs and chili-rubbed salmon.

Brinker International, with a long history in the burger category, also revamped Chili's entire burger lineup in the fall. The revamp has introduced a "craft burger" section to customers that includes a guacamole burger and a sweet and smoky burger infused with mango BBQ sauce.



"We think our burgers will play a role in our Fresh Tex platform; we will lean into it with bolder, richer flavors," noted Roberts. A clearer point of differentiation for Chili's in the form of Southwest cuisine could give the brand's burger business a shot at gaining favor among the crowd in love at the moment with better burger joints Shake Shack and Five Guys.

 


But Roberts is pleased that Brinker is not just a go-to place for a beefy burger. "The challenge will be the staying power of burger-only concepts...it's a hot item now, and they have some good product out there, and it has challenged us all to do burgers differently."

The Chili's brand has laid the foundation operationally to serve even more interesting food to customers going forward, while tapping into the power of new technology to enhance the guest experience.

In partnership with restaurant tech firm Ziosk, all 889 or so company-operated Chili's locations now boast tabletop-ordering devices, which are being enhanced with new software features.

Last month, Chili's unveiled its "My Chili's Reward" loyalty program -- according to Roberts, it has quickly signed up over 1 million members. Customers can pay for their meals with reward points, which don't expire if a customer visits Chili's once every four months, encouraging more frequent visits. 

Chili's is also partnering with American Express (AXP)  to allow customers to pay for food on its tabletop devices with American Express rewards points.

In July, a new tech platform called "No Wait" will launch in the Chili's mobile app. It will enable customers to add their name to a wait list and then track their place in line, so they can show up when their table is ready. No more clunky plastic buzzers that light up when your table is open, or the need to constantly ask a hostess for an update on your table status.



Also, new, high-tech smokers have been installed that not only improve the flavor of Chili's ribs, says Roberts, but open the door to preparing different kinds of chicken products.

Thus far, the benefit to Chili's sales from its revamped menu and new technology has come at a measured pace. In part, that could be linked to time-starved American consumers preferring the ease and quickness of fast casual dining. Another factor may be the resurgence in Chili's competitors such as TGI Friday's and DineEquity's (DIN) Applebee's, which have undergone brand refreshes of their own in the past year.

Chili's same-restaurant sales for the quarter ended March 25, the most recent, rose 1.9% at company-operated locations, and 2.2% at U.S. franchisee-operated spots. Meantime, Applebee's domestic system-wide same-restaurant sales increased 2.9% for the quarter ended March 31, while Chipotle's same-store sales surged 10.2% and Shake Shack experienced an 11.7% improvement.

An argument could be made, though, that investors are not yet appreciating the investments being made by sit-down restaurants and how those could lead to stronger sales over the long-term as the economy improves. In effect, investors may be overvaluing fast casual restaurants, such as Shake Shack, which is now valued at a whopping $2.78 billion even as it operates a mere 40 plus locations worldwide.

Shares of Brinker International are down 2.8% year to date, while DineEquity has dropped 4.6% and shares of fellow sit-down eatery Buffalo Wild Wings  (BWLD) have plunged 14.8%.

"[Brinker's] brand work is bringing improved value and overall guest satisfaction scores," wrote JP Morgan restaurant analyst John Ivankoe in a March 9 report. Ivankoe, who rates Brinker International at the equivalent of a buy rating, added that he believes the new Fresh Mex and Fresh Tex categories "leverage the brand's credibility and heritage more effectively, and with a better margin structure than does a traditional limited-time only program."



Meanwhile, Brinker's Italian food concept Maggiano's Little Italy, which Brinker acquired in 1995, is battling through a period of soft consumer demand.

Maggiano's, which operates about 49 locations, saw its same-restaurant sales rise by just 0.1% in the most recent quarter, although it continued the chain's string of 21 consecutive quarters of sales gains, according to Brinker. "All these things cycle a bit, so they are in a little bit of a down cycle -- I think it will be short-lived, and will cycle back up," said Roberts regarding the Italian fare that Maggiano's serves up. 

Working in Maggiano's favor is the ability of its chefs to create daily specials as a means to differentiate its menu and keep customers interested. And Maggiano's food is made from scratch, unlike many other operators in the business. Maggiano's may face some strong competition from Darden's Olive Garden, which recently unveiled a new-look menu featuring breadstick sandwiches and lower-calorie Italian dishes.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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