IHOP Transforms into Sophisticated Digital Company

The brand is growing through new virtual brands and an upcoming loyalty program.

March 7, 2022 Ben Coley

Nearly two years into the COVID pandemic, off-premises has proven to be more than sticky at IHOP, and the breakfast chain is planning accordingly.

In the fourth quarter, sales outside the four walls mixed 23.7 percent, and averaged about $9,300 per week, which is slightly above the $9,200 mark from Q4 2020 and more than two times 2019 numbers.

The breakfast giant also expanded flip’d by IHOP—the brand’s smaller, off-premises-focused fast casual—and opened its first virtual store in Toronto in partnership with Ghost Kitchen Brands.

“This is a largely incremental business that we intend to nurture and grow,” Dine Brands CEO John Peyton said during the company’s Q4 and 2021 earnings call. “To-go packaging is also nextgen. It keeps food hot longer and it's designed to showcase our menu with supercharged technology investment and adoption, and throughout 2022, Applebees.com, ihop.com, flipd.com, and their associated mobile apps will all be brand new.”

To further leverage this growing business, IHOP began piloting virtual brands Thrilled Cheese and Super Mega Dilla. Both concepts were created by Nextbite, a company that supplies delivery-only menus to restaurants nationwide.

Thrilled Cheese offers a selection of six, cheese-filled sandwiches, like the “New Wave Fave,” which features American cheese, bacon, tomato, over-medium eggs, and avocado on multigrain bread. Meanwhile, Super Mega Dilla consists of sweet and savory quesadillas, such as the Mega Chicken Ranch Dilla, made with crispy chicken tenders, ranch, bacon, pepper jack cheese, and avocado.

It started with an initial test in nine restaurants across Dallas-Fort Worth, Phoenix, and Lexington, Kentucky. After promising results, the small-scale experiment widened to 50 locations. The virtual brands need some new equipment to execute, but they don’t compete with the breakfast daypart and require minimal new SKUs.

“We've evolved our strategy to adapt to the changes in consumer behavior brought on by the pandemic,” IHOP President Jay Johns said. “As a result, our plans to grow sales extend beyond traditional brick-and-mortar locations. Expanding our presence through virtual brands out of our existing domestic restaurants provides an opportunity to drive incremental sales with lower capital requirements.”

To increase frequency and enhance 1:1 customer engagement, IHOP will launch its first loyalty program by the end of the first quarter. Johns described it as a “true earn-and-burn program that allows our guests to collect and redeem rewards when they dine with us.” The executive also hinted that users may have opportunities to earn experienced-based rewards through special programs with vendors.

“A lot more details to come on this. But we think the guests are really going to be excited about the program,” Johns said. “It’s going to be very unique, I think, in our segments. And I believe, it’s really going to help us drive guest behavior.”

Nextbite

Several big names in the restaurant industry entered the loyalty space in 2021, including McDonald’s, Burger King, and Jack in the Box. On the full-service side, Logan’s Roadhouse and Red Robin both rolled out new loyalty programs and apps.

About 80 percent of adults—90 percent for Gen Z and millennials—said they’d probably join a loyalty program if it was offered at their favorite local restaurant, according to the National Restaurant Association’s 2022 State of the Industry.

“It’s a way also for us to engage with our fans, we will say at breakfast, and get them to come at another time of the day, so we can expand our base to other dayparts,” Johns said.

The off-premises business provided a boost for IHOP in Q4 as it strives for positive growth once again. Domestic same-store sales declined 3 percent and 1 percent in October and November compared to 2019, respectively, but dropped even further to 4.6 percent in December. Negative sales were attributed to Omicron, labor shortages, and rolling over the high-performing Addams Family promotion in 2019. Average weekly sales were $37,500, which was 0.5 percent above 2019 levels.

Currently, stores are 85–90 percent staffed and 86 percent of restaurants are holding standard operating hours, up 3 percentage points from Q3. About 26 percent are open 24/7, which is consistent with the third quarter. Johns said it’s a step-by step process; franchisees typically move to 24/2 (24/7 on the weekend) before extending hours throughout the week.

“I'm confident we'll get back to the pre-pandemic level, but I just can't give you an answer to exactly when that will be,” Johns said. “Clearly, the pandemic is waning. I think that staffing is improving slowly and we're getting back to full standard operating hours. … It is slowly getting better. And I think that once we get to kind of the full operating hours of the standard business, you'll have franchisees that will start opening more and more.”

Dine Brands is in the process of implementing a new POS system to improve the in-restaurant experience for both employees and customers. The technology involves a new kitchen management system and servers using tablets, meaning more tables and higher earnings potential.

IHOP is rolling out its system this year while Applebee’s will do the same in 2023. Peyton said technology will streamline front and back-of-house operations for franchisees and build top-line growth.

“On weekends when [IHOP restaurants] got 90-minute waits, turn tables faster,” Peyton said. “That benefits us, as well. So the technology benefits Dine, as well as the franchisees.”

IHOP finished 2021 with 1,657 stores domestically, or a net decrease of 13 units year-over-year. In 2022, the breakfast brand expects net new expansion between 50 and 65 restaurants.