Chain restaurants like Chili's are coming for fast-food giants in the latest bout of the value wars

Fast-food prices are climbing, and chain restaurants like Chili's are coming for fast-food giants with meal deals and new burgers.

• As fast-food prices increase, customers are finding more value in chain restaurants.
• Chains like Chili's are rolling out deals and portion sizes that could best fast-food chains.
• Chili's new Big Smasher burger is the latest offensive move in the value wars.

At Chili's Dallas headquarters, I watched as a staffer dressed in Boyz II Men-themed Chili's merchandise glided through the company's spacious lobby while carrying an oversized margarita. It wasn't even 11 a.m.

This, apparently, was the place where everyone lived, ate, and breathed Chili's, and it was the first sign I was in for a memorable experience inside where its menu items are born.

The second sign was a half-pound burger smashed down, topped with lettuce, crunchy pickles, and a creamy Thousand Island dressing.

The Big Smasher burger, Chili's newest menu item, was served in the company's test kitchen before its official launch on April 29. At the company's invitation, I had traveled 1,500 miles from New York to try this burger and other new menu items in development. With the first bite, I knew it was worth the turbulent four-hour flight.

As the cheese-covered meat, tangy sauce, and freshly buttered bun hit my taste buds, I thought: This was a burger good enough to take on the Big Mac — but would it best it in a head-to-head competition?

It feels like Chili's is open to answering that question as fast-food restaurant prices rise. And if the sheer size and taste of the Chili's burger are anything to go by, it has a shot at beating fast-food chains in the value wars.

Competitive pricing and generous portions at restaurants could spell trouble for fast-food chains

Fast food has long been considered the cheapest way to dine out, but that may no longer be the case.

In New York City, a McDonald's Big Mac meal, including a medium-size order of fries and a medium drink, costs $13.89, excluding tax. (McDonald's told BI that local franchisees set pricing, which varies by restaurant.) Similarly, a Burger King Whopper meal combo costs $13.99, excluding tax.

Chain restaurants are using promotional deals to get people through the doors, such as Chili's "3 For Me" combo that allows customers to order an entrée like a burger, a side of fries, an appetizer, and a bottomless drink for $10.99. Customers also have the option to upgrade their drink and appetizer for an additional $3.99 each.

The chain argues that, based on size, Chili's burgers are a better value than those at a fast-food restaurant. All Chili's burgers weigh a half-pound versus the 3.2-ounce pre-cooked patty weight of a Big Mac.

It's not just Chili's offering discounted combo meals.

Applebee's "2 for $25" meal deal includes two entrées and the choice of an appetizer or two side salads, while Red Lobster's "Shrimp Your Way" gives customers the choice of three shrimp dishes for $25 or two for $21.

Unsurprisingly, the meal deals are popular. In January, Restaurant Business News reported the percentage of Chili's orders that included a promotional deal like the "3 For Me" or margarita of the month rose to 31%, up two points from the previous quarter.

After Applebee's added steak to its "2 for $25" deal in June, John Peyton, CEO of the chain's operator Dine Brands, said the percentage of Applebee's customers ordering limited-time-only or value offerings grew from 15% to 19% quarter over quarter, Nation's Restaurant News reported.

Outback Steakhouse also recently brought back its limited-time-only Steak & Lobster deal, which starts at $19.99. It includes a 6-ounce sirloin steak, lobster tail, and two sides. The chain announced the rerelease of the deal in a simple Instagram post: "Back by popular demand."

Fast-food chains are hiking prices and making customers mad

Fast-food establishments typically raise prices by about 2% each year. Still, McDonald's chief financial officer Ian Borden told analysts at the UBS Global Consumer and Retail Conference in March that the chain raised US prices by around 10% in 2022 and 2023, blaming inflation.

Despite the price increase, last year's sales remained steady. McDonald's reported that comparable year-over-year sales increased 8.7% in 2023.

However, 2024 has brought even more price hikes for customers. The recent implementation of California's $20 minimum wage for employees in limited-service restaurants has led to across-the-board increases in menu prices throughout the state.

Still, squeezed franchise owners know there's a limit to what customers are willing to spend.

"We have looked at price, although I can't charge $20 for a Happy Meal," Scott Rodrick, a McDonald's franchise owner who operates 18 restaurants in California, told CNN. "My customers' appetite to absorb menu-board prices is not unlimited."

In a February earnings report, McDonald's CEO Chris Kempczinski said the chain had declining visits, and customers earning $45,000 a year or less were spending less.

"We certainly know consumers are more wary — and weary — of pricing and we're going to continue to be consumer-led in our pricing decisions as we look forward to 2024," Borden said on a February earnings call, CBS News reported.

Customers have also taken to social media to bemoan the increases.

"Outback can do Steak and Lobster for $19.99, but McDonald's can't keep their prices in check. The death of fast food is upon us," one Reddit user commented.

A McDonald's spokesperson told Business Insider in a statement that the chain "always strives to strike the right balance of value for money" when asked to comment on competing with casual-dining chains to attract value-driven customers.

Chain restaurants are coming out swinging with new products similar to fast-food favorites

Chili's Big Smasher burger is the latest example of how chain restaurants are following fast-food chains' playbooks by delivering what customers love while offering better value amid price increases.

The burger costs $12.99 but comes down to $10.99 when part of the chain's "3 For Me" meal combo.

"We've always had incredible burgers on our menu, but for about a year now, we've been hearing more and more frustration from fast-food fans over rising costs," Chili's director of culinary, Brian Paquette, told Business Insider, adding that it's one of the reasons the chain wanted to deliver "some of the favorite drive-thru flavors" on its menu.

When Paquette described the Big Smasher during my visit to Chili's headquarters, I noticed its similarities with McDonald's Big Mac, which I've eaten many times. Both burgers include shredded lettuce, onions, pickles, American cheese, and a Thousand-Island-style dressing.

It's a comparison Chili's is leaning into.

In a press release, Chili's said the new burger has "flavors fast food lovers will recognize." And a new ad released by the chain takes direct aim at McDonald's most famous burger, saying their iteration is better than "a tiny drive-thru burger" while showing their "3 For Me" combo next to a lone Big Mac.

Chili's half-pound burger — "twice the meat of a Big Mac," Paquette said — is made using a hand smasher, and the patty is seasoned with a spice blend on both sides.

The result, which is both juicy and crispy, was far better than any fast-food burger I've had recently, thanks to its size and the quality of the toppings. It tasted like a gourmet restaurant burger, as opposed to a fast-food joint burger speedily thrown together.

Leaning into meal deals can win over customers, but chains can risk cutting their prices too much

Promotional deals, while popular among customers, can threaten chains' profits if they're not sustainable.

Earlier in April, Bloomberg reported seafood chain Red Lobster is considering filing for bankruptcy after a blundered roll-out of its signature all-you-can-eat deal.

Red Lobster's "Ultimate Endless Shrimp" deal, which has run for over 18 years, offered unlimited shrimp dishes for $20. Initially a one-day-a-week deal, it became a daily promotion last summer to attract more customers. In 2023, Red Lobster raised the price twice, eventually landing at $25 to cope with demand and improve profits.

Despite the increased price, the all-you-can-eat strategy backfired. Operating losses of $11 million and $12.5 million were reported in the quarters following the daily endless shrimp promotion launch in 2023. By 2024, the deal is only available on Mondays.

Chili's executives are aware of the dangers of using discounted meal deals to attract customers. Felix said there was a focus on discounting to drive people into restaurants in years past, but Chili's recently made strategic shifts to pull back on discounts and avoid training the chain's customers to rely on them.

"You're seeing a lot of kind of desperate value plays out there that might work in the short term, but you're paying for the traffic and the gains you're seeing versus doing it in a sustainable way," he continued.

Felix told BI that while the "3 For Me" promotion wasn't designed to compete with fast food, he agreed it could do just that.

"Fast food and drive-thru prices have gone up," he said. "I think that's just the start of the conversation, and the sticker shock is real."