Applebee’s and IHOP Lean Into Value Strengths

The casual leaders are settling in after the post-pandemic reopening boom.

August 4, 2023 Danny Klein

Toward the end of the first quarter, Dine Brands began to notice hesitancy among customers. This was hardly unique to Applebee’s and IHOP, whether deflated tax returns, interest rates, or any of the many other macro pressures at work were to blame. But one thing the company observed, reflective of its standing amid the inflationary arena, is while traffic declined, average check remained consistent year-to-date. So the Applebee’s and IHOP guest proved more likely to cut back on visits than trade down to less expensive alternatives, Dine Brands CEO John Peyton said.

As jagged as trends have been, this gives Dine Brands belief it’s tracking toward long-term solutions, he added.

Same-store sales at Applebee’s declined 1 percent in Q2, which ended a nine-quarter stretch of positive comps. IHOP lifted 2.1 percent to extend its streak from eight to nine consecutive periods.

The percentage of guests selecting from limited-time and value offerings at Applebee’s hiked from 15 to 19 percent, quarter-over-quarter. And although the company’s off-premises business remains elevated from pre-COVID days (it represented 22.6 percent of sales mix, or per restaurant average weekly sales of $12,300 at Applebee’s and 20.7 percent and $8,000 at IHOP, respectively), it noticed a shift in mix from delivery to pickup in Q2—“a deliberate decision to avoid extra cost associated with delivery and fees,” Peyton said. Applebee’s 23 percent broke apart as 11 percent to-go, 12 percent delivery. That was 7 percent and 13 percent for IHOP.

Overall, Applebee’s weekly take of $54,000, even with softer traffic, is 12 percent above 2019 marks. IHOP is 6 percent better at $39,000.

“All of this indicates that the pandemic reopening boom of 2022 may now be returning to historically normal and more sustainable levels,” Peyton said.

It all brings Applebee’s to a place it’s not unfamiliar with. If there’s a casual chain in America with a thick value playbook, it’s the concept “built for the average American,” as brand president Tony Moralejo phrased it to investors.

“Experience is the key word, right? And what attracts the guest to our restaurants or any restaurants in the full-service category is two things,” Peyton said in an interview with FSR. “It’s the experience, which is the way in which they interact with our servers. It’s the décor. It’s the overall environment and buzz in the restaurant. And it’s also about the value. And our brands excel at delivering value, which we would define not just as price, but also the portion, the generous portion you receive of great-tasting food, and then enjoying that with a great experience. And all of that is what equals value.”

The fact guests are still coming to “enjoy the full offerings of both brands,” he added, “provides a great data point for us that demonstrates that it’s not discounting, but we’re using the value offers to bring in guests in a way that resonates with them.” One example being Applebee’s two for $25 offer in June that added steak as a premium this go-around.

Dine Brands has a few drivers to lean on. One is technology. IHOP added a new point of sale and Applebee’s server handhelds continue to help turn tables quicker and generate loftier tips for servers. “When they do that, they’re even happier as well,” Peyton said. “That leads to better service.”

The company partnered with Flybuy on pickup in summer 2021 as it invested in app functionality, with options such as dine-in order-in advance and the ability to join wait lists for seating, as well as different payment options and reviews.

IHOP and Applebee’s appointed new executive chefs this year (more on this in regard to IHOP shortly). Peyton said Dine Brands made a deliberate effort to target younger consumers with its media and is “getting better and better at finding them on social channels and talking to them in a way that they want to interact with us.”

“And so, our success in growing our younger guests at our target income level is a big part of what’s enabled us to post nine quarters in a row of comp sales growth for IHOP and nine out of 10 quarters for Applebee’s,” he said.

Engaging menu and market innovations, in general, are playing a lead role in the top-line sustainability. Peyton hinted IHOP plans to further expand its portfolio of virtual brands and dip deeper into CPG—it recently launched branded coffee at grocery and retailers in partnership with Kraft Heinz. That product is available at more than 25,000 retail locations.

Additionally, the company will further grow development initiatives such as dual-branded restaurants, conversions, and new prototypes. The first Applebee’s-IHOP dual-brand opened last quarter in Dubai. Since, Dine Brands added three more in the Middle East and expects to have six to eight open by year’s end. “We’re proving that dual branded restaurants present compelling benefits like having a shared kitchen that allows for more efficient staffing and most importantly, consistent sales across all four dayparts due to the complementary business periods of the two brands,” Peyton said.

Dine Brands is also en route to open roughly 30 new ghost kitchens this calendar, including fresh markets in Spain, Columbia, and Japan. That would bring its total to north of 90.

The Dine Brands’ portfolio has already begun to benefit on a cross-sell from the December-announced deal to buy Fuzzy’s Taco Shop for $80 million as well. The Fuzzy’s team last month executed a 20-store development deal with one of the company’s largest IHOP franchisees. Meanwhile, a Fuzzy’s franchisee got into the Applebee’s business.

Dine Brands isn’t sharing financials for Fuzzy’s just yet. But Peyton said the integration has gone as planned thus far. Senior leadership from the fast casual remained intact and the 140-unit brand enjoyed a 19-percent sales bump on Cinco de May—a fully digital campaign Peyton said provided marketing learnings for IHOP and Applebee’s to absorb.

“They’re nimble. They’re agile. They make decisions quickly,” Peyton said of Fuzzy’s. “They’re really close to their restaurants in their markets and they have a lot of great perspective to add for us.”

Fuzzy’s Taco Shop

Fuzzy's Taco Shop entered the Dine Brands family in December.

Returning to some of the levers in motion, IHOP’s International Bank of Packages loyalty program—the brand’s first rewards offering—launched in April 2022 and has already climbed to 6.5 million members. Customers purchase food, earn “PanCoins,” and redeem those points for coupons for more experiences at IHOP and other prizes.

The program presently accounts for about 6 percent of sales. Peyton said IHOP sees some 8,000 downloads of its app per delay, which more than 3X what it was before the chain launched in association with a loyalty program. “That’s really speaks to the level of engagement,” he said. “And now, we have the opportunity to begin to interact with these guests on a much more personal level. And obviously the goal is to drive frequency as well as share of wallet and average check.”

To point out, Fuzzy’s loyalty base, which is more than 500,000 members, mixes 12 percent of sales, giving IHOP a figure to shoot for, Peyton said.

IHOP’s culinary efforts have ramped up of late, too. It launched its largest menu evolution in brand history in March with fresh takes on Sweet & Savory Crepes, Eggs Benedicts, Ultimate Steakburgers, like a new Four-Cheese Crisp, and the return of Cinn-A-Stack Pancakes. The brand said the change was inspired by internal brand research that identified what guests were looking for.

“Pancake Tacos” arrived in July. These are best described as they sound: pancakes rolled into tacos and stuffed with fillings. Peyton himself taste-tested the product on social media. IHOP then tapped TikTok creators to weigh in whether these are, in fact, pancakes or tacos.

Peyton says IHOP sold two million of them. And likewise to the earlier point, #PancakeorTaco allowed the chain connected with younger guests.

More closures ahead as growth adjusts

Applebee’s now excepts 25–35 net fewer locations in 2023, down from the 10–20 guidance the brand previously outlined.

Moralejo, who began his tenure as new Applebee's president in January, set a three-part plan into motion that began with taking a fresh look at underperforming restaurants and ways to improve profitability, Peyton said. That lead to “some additional closures.”

He noted the pool includes older units and areas that have become “unstainable due to changes across trading area dynamics in a post-COVID world.”

Applebee’s is still looking at chances to relocate some of the underperformers and finding success in recent new builds, he added. AUVs for the class of 2022 opens annualize at nearly $4 million, which is well ahead of the system average of $2.8 million, “reflecting the compelling relevance of the brand, when it's in the right market,” Peyton said.

Applebee’s also continues to work on a more efficient design it plans to unveil new year. The prototype will incorporate the post-pandemic business model and operations efficiencies and will address inflation, he said. IHOP already has a smaller prototype in rotation that trims development figures. Additionally, about 75 percent of IHOP’s new openings and its pipeline are conversions. IHOP expects between 45 and 60 net new openings in fiscal 2023.

Moralejo said closing sagging units will open new trade areas and opportunities for Applebee’s growth. “Sometimes it's loss of property control where the franchisee is unable to renew a lease with the landlord,” he explained further. “And I think you also have to keep in mind that this is a function of opening up many, many restaurants 20 years ago, and there's cycles, right? And every year is a little bit different. In some years … you may have some more non-renewals than you did in a previous year, et cetera. So it can be a little cyclical as well.”