flickr: Mike Mozart

Guests from middle America and abundant value positioning will be key to Applebee's turnaround.

Courting Millennials was a Mistake Applebee’s Couldn't Afford

As sales and stores keep dropping, the casual dining chain is getting back to its roots.

In president John Cywinski’s first 120 or so days at the helm of Applebee’s, he’s arrived at some stinging conclusions. Chief among them is what he referred to as “perhaps one of the brand’s strategic missteps.” Applebee’s decision to pivot its brand to a younger, more affluent demographic in recent years was a mistake.

“From my perspective, this pursuit led to decisions that created confusion among core guests as Applebee's intentionally drifted from its, what I'll call, its middle America roots and its abundant value positioning,” Cywinski said in a conference call following the chain’s second-quarter earnings release.

The former Brinker executive, who assumed the post in March, said the struggling chain is unwinding initiatives meant to bring Gen Xers and Baby Boomers back into stores, or “defensive repositioning,” as he called it.

In this, Applebee’s is taking aim at two target segments. The first Cywinski called routine traditionalists. These casual dining purists skew older and don’t mind spending more for good food. “And they tend to be creatures of habit, ordering familiar favorites more often than not,” he said.

This is a segment anchoring same-store sales of several leading chains. Texas Roadhouse, for one, is a brand that has been resistant to change, whether that’s in its menu, service, or delivery and off-premises dining.

“We're just doing the same things that we've talked about for many years now, which is just focusing on the basics,” said Scott Colosi, the 500-plus-unit chain’s president and chief financial officer in July. Traffic was up 3.1 percent and comp sales grew 3.8 percent at company-owned stores in the second quarter. While the brand rolled out some new menu items, the key, executives noted, was the fact loyal customers were the chain’s lifeblood. And if Texas Roadhouse kept performing and meeting expectations, they would keep coming back.

In Applebee’s case, shifting the focus toward millennial diners, and those “with a more independent or even sophisticated dining mindset,” sent Applebee’s down a convoluted path. Same-store sales fell 6.2 percent at the chain in the second quarter and are down 7 percent for the first six months of fiscal 2017 compared to 2016.

The second target segment Applebee’s is focusing on is “value seekers.” These guests, Cywinski said, jump from casual chain to casual chain looking for the best deal, not a specific menu item.

“Together, these segments are predisposed to like Applebee's a lot, and they make up a meaningful percentage of our core guests in revenue,” Cywinski said.

Now, how Applebee’s is going to get there is a multi-faceted question. The brand announced with its earnings, which reported revenue for the quarter of $155.2 million, that 105–135 stores would close in 2017. This was a serious boost from the 40–60 expected count announced following the first quarter.

Cywinski didn’t mince words on the subject, saying Applebee’s was shutting the door on locations that “need to close and perhaps should have closed long ago.”

They will fall into two categories: older locations in lapsed traded areas and underperforming restaurants that are well below average unit volumes and show unsustainable unit economics. These stores, which Cywinski said are “brand-damaging” in many cases, need to be shed from the 1,968-unit system. When they are, the brand will benefit from the reduction of substandard Applebee’s, he added.

“This removal of nonviable restaurants is an important tool to stabilize the financial health of franchisees, and I anticipate it continuing to a lesser extent in 2018,” he said. “It's also possible that we experience a consolidation of an existing franchise entity or the addition of a new franchisee before the end of this year as part of our ongoing optimization. Again, this is all part of our long-overdue portfolio rationalization that should have taken place probably in the normal course of business.”

Recently appointed Chief Culinary Officer Stephen Bulgarelli, the former senior director of culinary innovation at Chili’s, joined Applebee’s and will head up three culinary priorities for the brand.

No. 1: Reestablish a relevant innovation pipeline, Cywinski said. In 2016, Applebee’s focused almost solely on hand-cut wood-fired steak.

“So the broader pipeline requires replenishment. The good news is our testing process is now in place, in partnership with our marketing and insights team, and we'll begin to see tested propositions beginning early in Q1 2018,” Cywinski said.

Second, and this refers back to the guests Applebee’s is courting, is addressing quality and value gaps that emerged from the chain’s core menu satisfaction survey.

Cywinski said abundant value, presentation, taste, and possibly a reintroduction of guest favorites are in store.

Lastly, turn the spotlight to culinary. “Assess whether the brand gets credit—truly gets credit for hand-cutting steaks in the restaurant and whether we should continue with this approach. A tested guest and ops-driven decision will be reached with franchisees over the next few months,” he said.

Naturally, Applebee’s is repositioning its marketing efforts as well. Cywinski said the company has a new, fully developed 2018 brand-marketing plan, which has garnered enthusiastic support from franchisees. He said Applebee’s wants to become more relevant from a price-value perspective.

“Affordability has always been a cornerstone of the Applebee's brand and it's essential to our guests now more than ever. Bottom line, we've taken our eye off the ball here and we have work to do,” he said.

Also, better leverage guest insights and ensure strong correlation between test results and in-market performance. Thirdly, Applebee’s plans to reestablish its off-premises business as a growth engine with Scott Gladstone, the vice president of strategy, leading the charge.

The website is getting a redesign for enhanced branding in early Q4 as well.

Another note is beverage innovation, which Cywinski said Applebee’s will reignite as a driver of incremental check and revenue.

“Finally, we plan to reestablish ‘Eating Good in the Neighborhood’ as our core brand and advertising platform right out of the gate in 2018. There's equity and differentiation here and we plan to leverage it moving forward.”

“In summary, we're back to basics in virtually every respect, as we view 2017 as a transitional year for the brand,” he added. “Our optimization and turnaround is underway, but it will take time to restore Applebee's to financial health. And I don't expect that trajectory change in our performance until we begin to implement our initiatives in early 2018. We remain committed to our franchise partners and they, in turn, are aligned and enthusiastic around our vision for the future.”