The fast casual is 98 percent franchised with stores in 18 states.
Dine Brands CEO John Peyton is approaching two years at the helm of the Applebee’s and IHOP owner. When he joined in January 2021, Peyton was serving as president and CEO of Realogy Franchise Group, a title he held since 2016. The company, a wholly owned subsidiary of Realogy Holdings Corp, franchised real estate brands, including Better Homes and Gardens, The Corcoran Group, ERA, Sotheby’s International Realty, and Coldwell Banker Commercial. But previously, Peyton spent 17 years at Starwood Hotels and Resorts Worldwide, ultimately directing the global and North American food and beverage teams for the company, which oversaw on-property restaurants.
Simply, Peyton has spent a lot of time in hospitality identifying differentiated, consumer-facing brands.
Throughout Peyton’s tenure, Dine Brands has looked at “dozens of concepts” with the purpose of bringing a growth-ready vehicle into its portfolio. A highly franchised, asset-light brand in the 100–300-unit window with runway ahead—a regional brand with potential to play on a national stage.
Yet it also had to tick off the “aha” bucket consumers search for. “When I went to my first Fuzzy’s a few months ago as part of this process, in Denver, I walked into the restaurant and had one of those moments of wow, this is different; the experience is amazing; and they’re onto something here,” Peyton says.
Dine Brands, created in 2007 when IHOP purchased Applebee’s for $1.9 billion (DineEquity changed its name to Dine Brands Global in February 2018), has been talking publicly about acquiring a third chain really since 2017. Then-CEO Stephen Joyce, who’s tenure ended when his contract expired in February 2020, told Bloomberg Dine Brands was targeting a “founder-led chain” with potential to hit 1,000 locations. Likely, it wouldn’t be in the casual-dining space. Peyton reiterated that search in 2021.
It materialized Monday when the company announced an $80 million, all-cash deal—net of tax benefit, the purchase price is about $70 million—to acquire Fuzzy’s Taco Shop, a 138-unit fast casual that’s 98 percent franchised with units in 18 states. Dine Brands says Fuzzy’s has a development pipeline with over 125 contracted obligations. Today, there are 51 current franchisees, $1.6 million average-unit volumes, and $230 million in systemwide sales. Fuzzy’s same-store sales are up 3 percent, year-over-year. The Irving, Texas-based brand was founded in 2003.
Fuzzy’s kept checking boxes as Dine Brands explored its vitals, Peyton said: a strong ROI for franchisees and a compelling and uniquely positioned fast casual in a surging category. “We believe that Fuzzy’s is at a point—it’s poised to accelerate its growth from the 138 units it has and 125 units in the pipeline to doing something much larger than that,” Peyton says. “And by having them take advantage of Dine’s infrastructure and scale and our tech platforms, our purchasing coop, our learning platforms, our shared services, Dine plus Fuzzy’s will really help Fuzzy’s accelerate its growth.”
Compared to the burger, snack, pizza, and chicken categories in quick service, the Mexican field is relatively wide open. Taco Bell closed 2021 with 7,002 U.S. units and $12.6 billion in domestic systemwide sales. Chipotle was next at 2,966 and $7.547 billion, respectively. After, Del Taco (600 and $931 million), QDOBA (739 and $835 million), and Moe’s (659 and $661 million) follow.
Fuzzy’s spent its first four years as a one-unit brand before franchising. It then ballooned past 150 locations as 2020 arrived. Although its retracted, the company was already working toward growth before the sale. Dine Brands acquired Fuzzy’s from NRD Capital, its majority stakeholder since 2016. The taco chain showed interest in forming its own platform last year when Fuzzy’s and NRD announced the formation of Experiential Brands. Industry vet Paul Damico, named CEO in August 2021, noted last November, “when the corporate team and the franchisees’ rally cry is ‘make every day badass,’ that leads you to make certain decisions on how you thrive within that culture.”
And that culture was so novel that Damico, an executive who previously served as president of North America for Focus Brands and CEO of Global Franchise Group, felt Fuzzy’s could serve as the foundation of a larger, multi-brand company.
While Peyton can’t speak to Experiential Brands’ strategy or how this veered, the differentiated strength of Fuzzy’s remains the building block for something larger. “Our strategy is to build a portfolio of brands that diversifies us and enables us to take advantage of multiple aspects of the restaurant market,” he says.
Fuzzy’s, which serves “Mexican favorites with a Baja twist,” does 52 percent of its business at dinner; 42 percent at lunch; and 6 percent at breakfast. Forty percent of sales come via off-premises.
The deal allows Dine Brands to balance its daypart exposure since Applebee’s indexes toward dinner and IHOP the morning. Also, infusing a fast casual into the fold (Damico and COO Scott Shotter, who was hired in January, will continue guiding the brand from its Irving HQ) provides Dine Brands expertise into a field it’s begun infiltrating. IHOP’s counter-service spinoff, “Flip’d,” debuted in NYC and has designs for growth.
“We benefit from Paul and his team joining us because they’re experts in fast casual and they can coach our Flip’d team about what they know about that space,” Peyton says.
Dine Brands wants to foster a lineup of brands that cover different elements of the restaurant space while also enabling investments through tech, supply chain, learning platforms, etc., to pull from a collective center of strength. It’s not so different from how hotels have operated for decades—a larger unit with differentiated concepts that share a center of gravity. Dunkin’ owner Inspire Brands has developed a similar blueprint across its company. Inspire, too, is run by a former hotel exec in Paul Brown, who came over from Hilton Worldwide.
“We can do more for any one of these brands than they can do on their own, in terms of building out that kind of infrastructure,” Peyton says.
As part of its due diligence on Fuzzy’s, Dine Brands conducted a third-party study of its customers, competitors’ guests, and the category’s loyal users nationwide. It came away confident Fuzzy’s was broadly relevant with ample space to grow. The self-declared “bad-ass” returned strong consumer awareness and net promoter scores (intent to return or recommend). Fuzzy’s touts more boutique offerings than some, like shredded brisket and tempura shrimp tacos, and a full-service bar program. The music, décor, hospitality, and packed patios create a vibe that encourages customers to stick around as well, Peyton said. “It’s the sum of the parts of the experience,” he says. “This struck me as really unique and that they’re on to something.”
Dine Brands' lead focus, Peyton adds, will start with integrating the brand into its system and making sure Fuzzy's is positioned to take advantage of those collective benefits mentioned earlier. “The key takeaway is there is one reason we’re doing this and it’s because we’re adding to our portfolio to really fuel our long-term growth,” he says. “We love the brand and we love the category.”
On the topic of future deals, the company said it has no current plans for additional transactions, yet believes “this size and type of deal can represent a compelling M&A model for Dine Brands.”
Applebee’s and IHOP head into 2023 with momentum, especially the former. Applebee’s same-store sales grew 3.8 percent in Q3 year-over-year and 16.9 percent against 2019—the best three-year sales performance in the history of Dine Brands. Average weekly sales per restaurant were $53,000, equating to $2.76 annualized AUV. Back in 2017, the figure was $2.2 million.
After spending five years closing roughly 300 low-volume units, Applebee’s expects to close 15 restaurants this year, which would mark the fewest closures in a decade. Off-premises now exceeds $1 billion annually and mixes 24 percent of sales, split between carside to-go and delivery.
The company also recently opened its 10th drive-thru pickup window at Applebee’s. The brand is completely franchised after selling 69 company-owned restaurants in North Carolina and South Carolina to Thrive Restaurant Group.
IHOP's same-store sales increased 1.9 percent in Q3 year-over-year, marking the brand's sixth straight quarter of positive results.