Personal safety is now on par with craveability, IHOP president Jay Johns said. While a completely implausible comment just weeks ago, nobody is arguing it today. And IHOP and sister brand Applebee’s are preparing to navigate this strange dynamic in real time.
Applebee’s head John Cywinski said last Wednesday dining rooms began to reopen in Georgia and Tennessee. By this week, it’s “certainly conceivable,” he said, the brand could have more than 200 restaurant dining rooms operating, with a “cascade of additional” units to follow. “As of [Wednesday], we’re applying best-practice learnings before we begin a smart, measured, and sequenced expansion in Texas, Oklahoma, Iowa, Utah, Alaska, North Dakota, Montana, Missouri, and, as of this morning it appears, in Nebraska,” Cywinski said. “We’ll be opening up as well with other geographies to be determined.” IHOP did not provide a specific target.
Both chains have taken a stiff sales hit in recent weeks. By the numbers, Applebee’s and IHOP have fared worse than some casual peers, but not entirely by mistake. On March 17, Applebee’s decided to discontinue all national media spending while other chains ramped up free delivery messaging and kept calendars rolling longer. It also cancelled 100 percent of its Q2 media commitments.
Cywinski said Applebee’s did this so it could jumpstart once restaurants started to reopen. As that happens, the company will divert held-back spend to informing customers it’s ready to serve again.
Dine Brands CEO Steve Joyce said they looked at whether or not COVID-19 ad spend would justify the incremental revenue. In the end, Applebee’s figured it would be better off waiting and then “having strong campaigns” as people come back.
So the difference (some are down 40–50 percent) you see today in sales between Dine Brands and some casual-dining competitors? “… We’re kind of thinking that’s going to be eradicated as we go forward and begin to market again to folks,” Joyce said.
In 40 years working with restaurants, Joyce said he’s never seen anything remotely comparable to COVID-19. And he lamented how it derailed what was quickly becomes a breakthrough quarter for Applebee’s. The chain was riding 10 consecutive weeks of positive same-store sales and nine straight weeks of positive comparable traffic. Yet despite that, Applebee’s same-store sales plunged 10.6 percent in Q1. IHOP’s drop was even steeper—14.7 percent. In the latter brand’s case, it snapped an eight-consecutive period of positive gains.
Applebee’s, meanwhile, was coming off three red periods and was lapping a positive Q1 2019 of 1.3 percent. “But let me tell you something, we were having a hell of a quarter,” Joyce said. “So it’s just a shame that this happened when it did and I think that gives us confidence going forward that when we reopen, if we just keep doing what we’re supposed to be doing, we’ll do just fine.”
The negative 10.6 percent figure really doesn’t capture the breadth of COVID-19’s disruption, since the period ended March 31.
Here’s a look at how same-store sales progressed (year-over-year):
Applebee’s:
- Week ending March 8: 1.9 percent
- Week ending March 15: –15.8 percent
- Week ending March 22: –76 percent
- Week ending March 29: –80.6 percent
- Week ending April 5: –76.2 percent
- Week ending April 12: –76.5 percent (838 Applebee’s closed on Easter Sunday)
- Week ending April 19: –64.9 percent
- Week ending April 26: –64.4 percent
IHOP:
- Week ending March 8: –3.9 percent
- Week ending March 15: –25.4 percent
- Week ending March 22: –75.3 percent
- Week ending March 29: –84.6 percent
- Week ending April 5: –81.5 percent
- Week ending April 12: –79.4 percent
- Week ending April 19: –76.3 percent
- Week ending April 26: –75.4 percent
Applebee’s saw its off-premises sales jump 12.5 percent in Q1 and 121.6 percent in Q2 to date. For IHOP, those figures are 15.7 percent and 131.7 percent, respectively.
As of March 31, 1,406 out of 1,657 domestic Applebee’s franchises remained open. Temporary closures accounted for 251 restaurants. Today, roughly 175 U.S. stores are closed, but that number should shrink pretty significantly in the next 10 days.
On the same date, 1,362 out of 1,709 domestic IHOPs were open, of which about 1,158 were operating only for off-premises business. Temporary closures totaled 347 units.
Essentially, Applebee’s is currently capturing about 35 percent of last year’s average restaurant volume. It’s average weekly off-premises sales have nearly tripled from about $6,500 per restaurant at the start of Q1 to $17,700 this past week. Carside To-Go moved from 70 percent of that mix in mid-March to 76 percent, with delivery representing the balance.
CFO Tom Song said some restaurants experienced “extreme stress level” results at times during the pandemic of just $700 in sales per day. Take has progressed more in the neighborhood of $2,000 to $3,000 recently, which is still well below the company’s $6,000 to $7,000 average, but is clearly a much more desirable level. At those numbers, operators can cover variable costs at the lower end and rent at the higher, Song said. The $3,000 point equates to about $1.1 million in average-unit volumes for the year. Applebee’s AUV last year was $2.4 million.
There are really two reasons IHOP’s sales are more challenged in comparison. Firstly, the breakfast chain started to ramp up its off-premises channels in just the last two or three years. Applebee’s has featured Carside To-Go for basically a decade. The second is the breakfast daypart in general. “They’re not working there at offices, they’re staying at home. So sometimes that stopping on the way to work, to get breakfast, et cetera, that meal is now gone,” Johns said. “It’s a very easy meal for parents that are busy working at home watching the kids to give them cereal or toaster pastries, et cetera. So it’s an easy meal to replace yourself if you’re doing your own cooking now.”
During COVID-19, customer behavior appears to be leaning toward dinner replacements, especially during the week.
However, IHOP pivoted quickly, Johns said, implementing curbside for the first time in its 61-year history. He said the service rolled to more than 1,000 restaurants. Curbside pickup doubled to 6.3 percent of total off-premises sales for week ending April 5 compared to the prior week. It then upped to 7.2 the following and 8 percent this most recent period.
Delivery sales in Q1 upped 57 percent compared to 2019 and now account for 39 percent of IHOP’s total off-premises business. “We may have fundamentally reset consumer awareness of not just our to-go and delivery capabilities, but also how portable our food is, as the guests are becoming increasingly familiar with our off-premises platform,” Johns said. Today, about 79 percent of the brand’s U.S. locations are open.
Johns said he believes COVID-19 will cast a shadow over restaurants for some time. It will not be business as usual. “In our view, guests will have a higher level of scrutiny than ever before. Restaurants that offer the most reassurance will win when they reopen,” he said.
Some key relaunch tactics include curbside pickup sticking around. Dining-room changes, such as removing items on the table, like syrup containers, until guests arrive. Everything will come from the kitchen. Areas will be wiped down. Gloves and masks everywhere. Dine Brands is also moving quickly, Joyce said, to enable customers to pick the payment option from their own devices.
These are the things Applebee’s is doing this week, in addition to following local regulations. In Georgia, for instance, there’s a limit of 100 customers per 500 square feet. Texas has placed capacity limits at 25 percent.
Joyce said Dine Brands had to furlough employees, although it didn’t say to what extent. But it hopes to add staff as dining rooms reopen and “you have the revenues to support it.”
He said there’s no projection for how many people will want to come back and dine at restaurants out of the gates. The hope, Joyce added, is the elevated off-premises levels stick around and dine-in business serves as an incremental lever for operators early on.
“What we’ll learn over the next month is at this point in the crisis, how many people are comfortable coming to the restaurant we are going above and beyond to demonstrate visibly and in reality, safety in the restaurants?” he said.
“But I think for the most part, I think our sense is, you know what, I know people are tired of being at home,” Joyce added. “So I think people are going to want to start venturing out more. And how many people feel good about coming out? We’re doing everything we can so that people view our brands as protecting their safety.
At the end of Q1, Dine Brands had $395 million of cash, with $345 million being unrestricted. Net income in Q1 totaled $22.3 million, or $1.31 per share, down from $31.6 million ($1.73 per share) last year. Revenue was $206.9 million compared to $237.2 million.
