Up to 100 locations could close in the next six months.
On the doorstep of Halloween in 2019, IHOP announced its largest franchise deal in brand history, dating back more than six decades. A partnership with TravelCenters of America promised 94 IHOPs over the next five years.
Notably, this wasn’t an outlier for despite its record-setting nature. Heading into 2020, IHOP franchisees and area licensees planned to debut 40–50 net new openings. Sister brand Applebee’s, meanwhile, expected to retract between zero and 10 locations. Dine Brands CEO Stephen Joyce said the previous quarter, “we are very bullish on IHOP’s growth and believe that it’s going to accelerate in the future.” From the IHOb campaign to refreshed marketing to multi-occasion menu innovation and even a fast-casual spin-off, the brand’s trajectory was rising. As this article details.
Yet as seen across multiple morning-focused chains, from Dunkin’ planning 800 U.S. closures to Starbucks accelerating the shuttering of units, COVID-19 has pressed the segment. It’s provided a landscape to reposition old and underperforming assets and left some unviable.
For IHOP, this will take form in the “net closure of less than 100 restaurants” over the next six months, Dine Brands said. Applebee’s expects to close about 15 in Q4.
CFO Thomas Song explained they’re currently evaluating “significantly underperforming domestic” IHOP restaurants hurt by pandemic setbacks. The review is ongoing, which is why IHOP didn’t share a concrete figure. Brand president Jay Johns said the chain is confident it can eventually replace these units, however many it ends up being, with better-performing stores—locations with volumes closer to IHOP’s pre-COVID-19 AUV of about $1.9 million.
IHOP progressed the top line in recent months but remains challenged by the pandemic and its affinity for disrupting early day business. One of the easiest meals to replace at home is breakfast. And that’s not even taking into account how many people have stopped driving to work.
Domestic same-store sales for IHOP
- Q1: –14.7 percent (0.6 percent leading up to March 8)
- Q2: –59.1 percent
- Q3: –30.2 percent
- Q4 through week ending October 25: –24 percent
Clearly, IHOP is improving trends. However, the segment challenges flash clearly side-by-side with Applebee’s.
Domestic same-store sales for Applebee’s
- Q1: –10.6 percent (3.2 percent leading up to March 8)
- Q2: –18.4 percent
- Q3: –13.3 percent
- Q3 through week ending October 25: –1.9 percent
Here’s a more detailed week-by-week look:
- Week ended July 5: –22.3 percent
- Week ended July 12: –17 percent
- Week ended July 19: –18.9 percent
- Week ended July 26: –15.6 percent
- Week ended August 2: –17.2 percent
- Week ended August 9: –15.2 percent
- Week ended August 16: –14.7 percent
- Week ended August 23: –13.4 percent
- Week ended August 30: –10.7 percent
- Week ended September 6: –10.6 percent
- Week ended September 13: –9.3 percent
- Week ended September 20: –6.9 percent
- Week ended September 27: 0.4 percent
- Week ended October 4: –1.6 percent
- Week ended October 11: –1.4 percent
- Week ended October 18: –1.9 percent
- Week ended October 25: –2.5 percent
- Week ended July 5: –40.4 percent
- Week ended July 12: –35.7 percent
- Week ended July 19: –39.1 percent
- Week ended July 26: –35 percent
- Week ended August 2: –33 percent
- Week ended August 9: –31.1 percent
- Week ended August 16: –29.9 percent
- Week ended August 23: –29 percent
- Week ended August 30: –28.5 percent
- Week ended September 6: –27 percent
- Week ended September 13: –12.2 percent
- Week ended September 20: –23.9 percent
- Week ended September 27: 23.5 percent
- Week ended October 4: –24.3 percent
- Week ended October 11: –26.3 percent
- Week ended October 18: –23.7 percent
- Week ended October 25: –21.7 percent
“The brand's performance continued to be impacted by the effects of governmental mandated restrictions on dining room operations and soft traffic across the daypart as consumers continue to mainly work from home,” Johns said. “I'd like to highlight that the overall breakfast category in general remains challenged as the morning meal has been oftentimes replaced at home due to the diminished work transit.”
Additionally, IHOP’s July sales reflected a resurgence in coronavirus cases and dining room restrictions put in place by state and local governments in response. IHOP didn’t use national media through the first weeks of July as well. The brand opted to discontinue marketing late in Q1 (except for some basic local campaigns and a brief off-premises push).
IHOP was down 40.4 percent for the week ending July 5.
In the 13-week period that finished September 27, however, IHOP’s comp sales and traffic improved 10 of 13 weeks. It also generated its best-performing seven-day stretch since early March.
Johns said IHOP outperformed family dining after trailing the category in Q2. “We're very focused on recouping the remaining 25 percent decline in comp sales. The opportunities we're addressing to restore sales include reopening units, safely reaching higher capacity in our restaurants, driving traffic to [additional] dayparts, plus continuing to pusher to-go business channels,” he said.
An example of this is the brand’s “IHOPPY Hour” launch in late September. The first afternoon- and evening-focused value menu in IHOP’s history offers $5 entrees ($6 in some markets), $3 Snack & Sides, and $1 or $1.50 beverages from 2 to 10 p.m. Longer in certain spots. It’s available for to-go orders at select locations as well.
The aim is to broaden IHOP’s appeal to guest at times other than breakfast. Not all that different from the lunch-centric IHOb push of burgers.
While still in early stages, Johns said the brand is seeing encouraging results. “We believe IHOPPY Hour will attract guests into our restaurant and increase traffic as governmental restrictions on dining rooms are eased and states gradually reopened,” he said.
And it’s a strategic longer-term play for IHOP—to focus on influencing guests to think about IHOP for value during non-peak periods when it typically doesn’t have capacity issues.
THE COVID ROAD SO FAR FOR DINE BRANDS
Johns added it’s intended to drive frequency and loyalty, and IHOP has done work and research around the platform for more than a year. It made sense to launch once a majority of domestic dining rooms came back on line.
As of September 30, roughly 95 percent of IHOP’s U.S. fleet was open with some restrictions, compared to 92 percent on June 30.
In certain restaurants and returning to the IHOPPY goal, Johns said consumer demand has outpaced restaurant capacity restrictions, especially during the weekend breakfast daypart. “We estimate that the weekend capacity impact is over 5 percent on total sales for the week,’ he said.
IHOP’s off-premises comp sales increased 154.1 percent. Online sales, even with dine-in returning, mixed 22 percent of total sales. Delivery accounted for 15.7 percent and Q3 sales mix and takeout 18.3 percent.
Applebee’s gets closer to normal days
Applebee’s progress through Q3 was clear. It moved from negative 18.4 percent in July to negative 15.2 percent in August to negative 7.4 percent in September. As noted earlier, it’s down just 1.4 percent through the first four weeks of October.
Brand president John Cywinski said the momentum coincides with Applebee’s return to national marketing in mid-June after a self-imposed 90-day hiatus at the heart of the pandemic. Applebee’s chose to pull back and keep the powder dry so it could accelerate once dining rooms returned, which is exactly what happened.
It’s been anchored by campaigns like the “Welcoming America Back to Applebee’s” spot, complete with “Welcome Back, Kotter” music, followed by the theme song from Cheers. “We coupled that with value propositions that were broadly appealing. We narrowed our menu. It makes it easier for our restaurants to execute. You add all that up and in the face of these headwinds that all brands face, we have a very solid trajectory and very optimistic and hopeful franchisee community as we look to next year,” Cywinski said.
Presently, there are about 1,600 U.S. Applebee’s open, averaging between $44,000 and $45,000 per week, with a mix of about 70 percent dine-in, 20 percent Carside To-Go, and 10 percent delivery.
Similar to IHOP, Applebee’s has felt the burden of restrictions at peak hours. In this case, Friday and Saturday dinner, “where demand is abundant, but restrictions have limited our ability to fully satisfy this demand. This, of course, varies by geography. It's also worth noting that Applebee's is disproportionately penetrated in the Midwest and Northeast where these restrictions are most prevalent,” Cywinski said.
“Now the good news here is that many geographies have been gradually easing these restrictions with 20 states having removed all capacity restrictions as of this call, while our own rigorous safety and sanitation standards remain firmly in place,” he added.
Cywinski also provided some color on Applebee’s virtual brand, “Neighborhood Wings by Applebee's.” It’s currently piloting in about 700 restaurants in partnership with Grubhub. By Q1 of next year, the chain plans to reposition the branding and menu, and then expand it throughout the entire system.
“We believe it's a significant incremental lever that we just haven't pulled that yet with any meaningful activity, but the learning is robust,” Cywinski said.
Applebee’s off-premise sales accounted for 34.6 percent of sales in Q3 compared to 60.5 percent in Q2. Delivery accounted for 11.5 percent of mix and takeout 23.1 percent. Online sales represented 12.2 percent of total sales versus 22.9 percent in Q2.