The casual-dining leader is expected to close more restaurants this year than originally anticipated. IHOP's development progress is having similar issues.
Macroeconomic factors have put a damper on Applebee's development goals.
In the past two years, rising land acquisition costs, construction inflation, and pressure on franchise operating margins have resulted in low ROI on new builds and hampered unit growth. In November, previous Applebee's president John Cywinski predicted nine openings in the U.S. in 2022, but the chain finished with four. However, he also expected 15 closures—the fewest in a decade—and the brand shut down 13. That's a net of nine restaurant shutdowns, which was within Cywinski's range of five to 15 net closures.
Applebee's finished 2022 with 1,569 domestic units.
After shuttering roughly 300 underperforming U.S. restaurants across five years, Applebee's once predicted it would reach net unit growth in 2023. That won't occur. Tony Moralejo, who began his tenure as new Applebee's president in January, said the chain will open more locations than it did last year, but it will still see a net loss of 10–20 outlets.
"It's not where we want to be in the future," Moralejo said during Dine Brands' Q4 and full-year earnings call. "Based on my experience across multiple global restaurant brands, the rate or the pace of development, it comes down to franchisees believing there’s an attractive value proposition."
The chain's same-store sales increased 1.7 percent in Q4, making it eight straight quarters of positive growth. It lapped the previous year's 9.1 percent increase versus the same period in 2019. Average weekly sales per restaurant in Q4 were $52,500, which is $2.73 million in annualized AUV. Sales mix in the quarter was 76 percent dine-in and 24 percent off-premises (13 percent to-go and 11 percent delivery). For the year, comps rose 5.1 percent.
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Moralejo, who spent three years as president of Dine's international segment, nearly seven as an executive at Church's Chicken, and two-and-a-half at Burger King, said he will use his development background to work closely with franchisees to create new, financially attractive opportunities for the Applebee's system.
"We'll continue to drive AUVs, we're going to continue to improve franchisee profitability, and we're going to reassess our prototype to help Applebee's return to positive net unit growth," Moralejo said.
IHOP's development timeline was below expectations as well. The breakfast leader opened 37 restaurants in 2022. More stores were supposed to open in Q4, but they slipped into the first quarter. Ten of them have already opened in 2023. Brand president Jay Johns said the pipeline is still "robust," but he admitted that macro factors are still impacting the timing of openings. For this year, IHOP is targeting 45 to 60 net new openings, which Johns called a "more normalized and solid development year."
Supply chain and equipment delays have caused headaches, as well as local municipalities taking longer to approve plans. In response, IHOP is asking franchisees to pivot toward second-generation opportunities. The company has been successful at this strategy, with 600 currently in the system.
"If you just retrofit an existing space, it's actually much more beneficial," Johns said. "It's usually much faster to get the permitting approved. But we're trying to be responsible. Doesn't mean we don't potentially have upside on this. But we also have not gotten the proof yet that the issues we had last year have resolved themselves."
" ... So we've already opened 10 of the restaurants that we expected last year, in the first couple of months this year," Johns added. "So we're feeling very confident with all the work we're doing and building the pipeline, developing the pipeline, that we're still long term going to hit the goals that we were looking for, but it may get stretched out a little differently than what we originally anticipated."
IHOP ended 2022 with 1,677 U.S. restaurants, a net gain of 20 units year-over-year.
The brand's same-store sales rose 2 percent in Q4, marking its seventh straight quarter of growth. Average weekly sales per store in the fourth quarter were 38,200 ($1.99 million in annualized AUV), slightly ahead of the prior year's $37,500. Off-premises mixed 22 percent, comprising 14 percent delivery and 8 percent takeout. More than 1,200 restaurants offer virtual brands Thrilled Cheese and Super Mega Dilla. A third one, named TenderFix, will launch soon.
Fuzzy's Taco Shop, a Mexican fast casual that Dine agreed to buy in December for $80 million, generated more than $220 million in systemwide sales in 2022. AUV is $1.6 million, and newer stores are exceeding that. The brand has 137 restaurants and a pipeline of 125 stores that should open in the next several years. Ninety-eight percent of the chain is franchised. Of Fuzzy's three dayparts, dinner mixes 52 percent, followed by lunch (42 percent), and breakfast (6 percent). Off-premises accounts for 40 percent of sales.
Dine CEO John Peyton couldn't put a number on how big Fuzzy's will be, but it's meant to become a material part of business.
"We did a lot of research before we made this choice on several companies and landed on Fuzzy’s, including, pretty elaborate national tests and confirmed that we believe that the cuisine and the tacos and the design of the restaurants are applicable literally across the country, and that we can achieve a national footprint," Peyton said.
" ... When it comes to thinking about [would] any of our existing franchisees at Applebee's, or IHOP be interested in a Fuzzy’s, we have thought about that," he continued. "And we've had a conversation with a few of them. I mean our point of view there is, investing in a Fuzzy’s would be great, but that is over and above their current commitments to IHOP and Applebee's based upon their development agreements with us."