Chili Franchise Opportunity Review

February 19, 2019


Chili’s is a household name in the United States. With their catchy Baby Back Ribs jingle and delicious skillets of sizzling fajitas, they have become one of the most popular casual dining restaurant chains in America. For a restaurant-savvy entrepreneur, opening a Chili’s franchise could be the turning point of their career.

 

40+ Years of Chili’s Restaurants

 

In 1975, the first Chili’s location opened in Dallas, Texas in a former Post Office building. Founder Larry Lavine got the idea after attending his first chili cook-off and falling in love with the idea. He wanted to open a restaurant that brought the same feel of a cook-off to all of his customers. With a one-page, handwritten menu, Lavine offered his signature burgers and Southwestern fare.

 

In 1983, Norman Brinker purchases all 23 Chili’s locations with aspirations of taking it public. Later that year, Chili’s would begin being traded on the New York Stock Exchange. They began selling franchise licenses in 1984, helping to boost their growth throughout the country. Throughout the remainder of the 1980’s, Chili’s would continue to grow their restaurants, expanding both their menu and their location count.

 

In the early 1990’s, Chili’s, Inc. changed their name to Brinker International, Inc. to include the several other restaurant projects they were focusing on. Throughout their history, Brinker had a hand in funding 15 other restaurants.

 

Since the early 2000’s, Chili’s has been working hard to find ways to stay ahead of the curve when it comes to restaurant trends and the economy. In 2009, with low sales, due, in large part, to the recession, they decided to completely refocus the brand and work on bringing themselves back up to an extraordinarily successful restaurant chain like they had been for years before.

 

Now, with restaurant locations opening up all over the world, Chili’s is on a mission to rebuild their numbers. After a rough few years of declining business and closing locations, Chili’s is looking to regain their former glory and are hoping to achieve that through the sales of franchise locations. They are currently accepting applications for consideration from potential franchisees in markets all over the globe.

 

Applying For and Attaining a Chili’s Franchise License

 

While in a rebuilding phase, it should come as no surprise that Chili’s is going to be selective about who they allow to purchase a license. Allowing inexperienced or under-funded franchisees into their business system could result in disaster for both parties, and cause a major setback in the growth goals of Chili’s.

 

They are currently seeking applicants that can prove financial strength. Opening a restaurant requires a lot of money and Chili’s likes to know that their franchisees have the liquid capital to cover the costs. In addition to financial acuity, they are also seeking candidates that have experience in restaurant ownership and operation. A strong background in this field gives the franchisor a sense of security in knowing that their name is in capable hands. Allowing someone with little to no knowledge of the restaurant industry to operate under your business name is a risky move that could lead to a publicity disaster. A company’s reputation can easily be affected by the franchisees that operate under that name.

 

Once the application process has been passed, the new franchisee will need to purchase their license. Chili’s currently sells their franchise licenses for $40,000. They do not offer any sort of financing assistance to purchase the license; the franchisee will have to have the money up front. The license will entitle the franchisee to the use of the Chili’s name, logo, and recipes. It does not afford the franchisee rights over their territory; another franchisee could open a different Chili’s location in the same community, assuming the franchisor approved it. Chili’s also does not offer any sort of discount for the purchase of multiple licenses. A franchisee looking to open several locations will have to pay full price for each license.

 

Opening the restaurant will come with a lot more expenses than just the license. As a casual dining restaurant, there are a lot of components that go into the structure, design, and equipment required to be functional. The estimated cost to open a new Chili’s location is between $1,235,000 and $4,267,000. Obtaining a space large enough to house the restaurant will take up a large amount of the estimate, as will purchasing all of the seating and kitchen equipment. Casual dining restaurants are generally larger areas and require more to operate properly.

 

Growth Patterns

 

With over 1,600 locations around the world, Chili’s has a large pool from which to compile their data. Admittedly, they have had a rough time since 2009 when the recession hit American families hard, and many casual dining locations saw a decline in customers. Over the last 2 years, Chili’s has been working diligently to crawl back from the losses and rebuild themselves.

 

Knowing that they suffered poor sales patterns for nearly 10 years, it is not surprising to note that Chili’s currently has a negative franchise growth rate. The national average growth rate is 97, but Chili’s is coming in with a score of -33. That being said, they are posting a healthy turnover rate of 2.09 percent. The relationship between these numbers varies depending on the franchisor’s size and specific circumstances, but from the data provided, it can be hypothesized that they are growing steadily, but have not yet climbed back up to the number of locations they once had.

 

Fiscal Performance

 

Chili’s is reporting that in 2017, the average revenue generated by each location was just under $2.5 million for the year. With responsible spending and good business practices, this could turn into some serious profits for the investor. When stretched out over the 20 year initial license period, the possibilities become even larger.

 

Knowing the issues that have proven prevalent in Chili’s past, the franchisee is warned to be cautious with the investment. Even with the high revenue averages, the expenses associated with operating a restaurant could quickly become damaging if control is not maintained. Chili’s has proven themselves to be vulnerable to struggles before, making their odds of future difficulties even higher than the average restaurant chain.

 

Perks of Investing with Chili’s

 

When deciding to invest in a restaurant franchise, there are several different factors to consider. After you have it narrowed down to your short list of potential franchises to those that show the best potential for success and lowest cost of acquisition, you’ll want to compare what you get for what you pay. For the $40,000 license fee charged by Chili’s you will receive some perks that a lot of franchises do not offer. For instance, Chili’s offers both classroom training and on-the-job training for new franchisees. A lot of franchisors offer one or the other, or neither at all. Having both of these forms of training can help new owners and their staff achieve greater results by being better prepared for the operation of the restaurant.

 

Something else that makes the Chili’s license stand out, is the incredibly low royalty fee rate that they charge. The average franchise royalty fee is 6 percent. Chili’s only charges their franchisees 1.3 percent of total sales. This number is virtually unheard of and can save the franchisee an incredibly significant amount of money over the life of the license. Chili’s does recoup some of their costs by charging double the average advertising fee. The 4 percent of sales that they charge helps to pay for the national commercials featuring those catchy jingles.

 

Even with the high advertising fees, the overall ongoing fees charged by Chili’s is still less than most franchises. Lower ongoing fees means higher profit margins for the franchisee, and more money to reinvest in the business.

 

Deciding to Join the Chili’s Team

 

As a prominent name in the casual dining market of the world, Chili’s provides its franchisees with a level of brand recognition that is difficult to achieve with a start-up. Knowing they have been around for over 40 years and that they are a popular choice for many people, a potential franchisee may feel strongly inclined to join their franchise team and grow their own business under the Chili’s name based on those facts alone. Making the choice to invest in an already well-established brand that has a fairly loyal following can make the business venture a little less risky than investing in a start-up, but it is never guaranteed.

 

The Chili’s brand has seen its fair share of struggles throughout its history. Knowing that several franchise locations closed during the last 10 years is a cause for caution before jumping in with both feet. A long history and brand recognition are great and offer a sense of security, but they mean nothing if the company is on a steady decline. Chili’s is doing their best to rebound from their troubles and appear to be focused on growing their numbers. On their website, they boast one million daily visitors at all of their locations worldwide. If they are able to maintain this kind of presence and growth, they are sure to reach their goals of bringing their brand back to its former glory, and helping their franchisees share in the success along the way.

 

Franchises can be a fickle beast. Working with a franchisor that has as long of a history as Chili’s can be both beneficial and detrimental. A larger group of data to work with gives a more objective overview of the brands profitability and potential, but it also provides a greater chance of finding flaws within the system. All businesses will struggle at one point or another, and finding flaws to obsess over, no matter how well the company may have rebounded, may cloud the potential investors judgement on whether or not to purchase a license.

 

Overall, Chili’s appears to be on an upswing and clawing their way back to the top. Getting into the game with them now may be the best bet for an aspiring franchise owner. As the brand grows and improves, their fees are likely to increase and the market is more likely to become saturated. Missing the opportunity to be a part of their comeback could be a big mistake.

 

Entrepreneurs are encouraged to inquire with Brinkers International about current franchising opportunities. Several markets around the world are open to the introduction of a Chili’s location, and they are looking to fill those spots.

 

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