IHOP's Resurgence is Just Getting Started

More operating hours and capacity are the keys to improvement, the brand's president said.

May 5, 2021 Ben Coley

Capacity restrictions are still hitting IHOP pretty hard on the weekends—just ask Adam Sandler.

In a viral video on TikTok, a woman showed footage of the comedian and his daughter leaving an IHOP because of a 30-minute wait.

“On the weekends now, we have a new name for it—it’s called the ‘Adam Sandler Effect,’” Dine Brands CEO John Peyton said during the company’s Q1 earnings call. “So if Adam can’t get into IHOP on a weekend, then we truly have capacity restraints.”

For the record, I only left the IHOP because the nice woman told me the all-you-can-eat deal didn’t apply to the milkshakes.
— Adam Sandler (@AdamSandler) May 4, 2021

It’s not just capacity restraints, either. IHOP is typically a 24/7 business, and franchisees are in the process of restaffing amid a labor crisis and adding more operating hours. It’s a slow process, and even slower in California, where a decent portion of stores reside. There’s also the fact people are still working from home, so not as many customers are stopping for breakfast—the pattern of business is just different.

Because of those factors, IHOP’s same-store sales were still down 4.7 percent in April compared to 2019, which is a far cry from Applebee’s 11.4 percent growth during the same period. Prior to April, IHOP’s comps declined 21.2 percent in Q1 versus 2019, including a drop of 27.1 percent in January, a decline of 27.9 percent in February, and a 12 percent fall in March.

IHOP president Jay Johns said he's made it his daily mission to close that gap. For example, IHOP’s comps skyrocketed 297.4 percent in April compared to 2020. Although it’s not as relevant of a comparison, the large number proves just how deep the hole was for IHOP last year, and how far it’s come in 2021.

Plus, major jurisdictions are starting to cooperate. Ninety-eight percent of stores were open as of March 31, compared to 70 percent at the end of December 31. Those figures are only getting better. New York City restaurants are heading to 75 percent capacity on Friday, and will move to 100 percent on May 19. Also, Los Angeles County moved into California’s yellow tier, meaning restaurants can allow 50 percent capacity, and up to 75 percent if all customers show proof of a negative COVID test or full vaccination. Even better than that, the entire state of California plans reopen its economy by June 15 if vaccinations and hospitalizations continue to go well.

Average weekly sales per restaurant have grown significantly in 2021, and even surpassed pre-pandemic levels at times during Q1, thanks in part to the added boost of stimulus checks. IHOP saw $26,000 in average weekly sales per restaurant in January, and that lifted to just under $36,000 in March. During that stretch, the figure reached a peak of roughly $40,000.

“When you're comparing versus 2019, which is what we’re all doing right now to see if you’re back to pre-pandemic levels, I think we can get there just with capacity and just with hours of operation. Everything else is going to be incremental. It makes us go up,” Johns said. “We do a great job with new menu items, we do a great job with innovation, great job with marketing. We’re going to steal share, we’re going to keep growing—that’s all upside I think afterwards. I think we can get back to where we were and beyond just with the capacity and the hours.”

IHOP

The breakfast chain is aiming to hire 10,000 new workers for its franchised locations in the coming months.

Part of the upside is the continued growth of off-premises, which lifted 123.7 percent year-over-year. The channel accounted for 33.3 percent of sales, or flat compared to Q4—that means the channel is sticking even as dine-in returns. In fact, while mix remained the same, off-premises weekly sales were higher in March compared to when IHOP was 100 percent off-premises last year.

It’s quite the turnaround, considering off-premises represented less than 10 percent of sales pre-pandemic.

“As I’m getting more business on dine-in, I’m getting the same lift on to-go simultaneously, which is why the mix is staying the same even though the total sales are going up,” Johns said. “Now long-term, I don’t know how well that will hold when we’re fully open and more people are willing to get out of the house and come out to eat. It’s quite likely that the mix will drop at some point and not stay at 33 percent, but I’m looking at those dollar sales. Those are important to me. If I can get back my full dine-in business, yet even if I have 20 to 25 percent off-premise mix, that’s way higher than what we did before the pandemic. That will all be incremental business and incremental flow-through for my franchisees on the backside of the pandemic.”

Another significant headwind is labor, something that isn’t unique to IHOP. The breakfast chain is aiming to hire 10,000 new workers for its franchised locations in the coming months. The brand plans to host a national recruiting day on May 19. IHOP and Applebee’s are making it easy for individuals to apply, whether it’s through text, email, or in person. Both brands are leveraging social campaigns to generate interest, as well. Peyton views it as a “point in time where the labor market is sorting itself out” as the country transitions from stimulus and enhanced unemployment benefits. He estimated that it’ll take three to six months to return to a steady labor market.

IHOP has also seen issues with the supply chain as growing customer demand is outpacing supply. But like the labor issue, Peyton viewed it as a moment in time. But for the time being, it is putting pressure on food costs. IHOP is looking at 1.2 to 1.6 percent food cost inflation, driven by paper and packaging, pork and chicken, and pancake mix.

IHOP

Flip’d by IHOP, a fast-casual offshoot, will make its debut in 2021.

Regarding how that affects menu pricing, Johns explained that franchisees historically take between 1 to 3 percent in price annually. It’s a balancing act, he said. Operators are going to take what they need to in local markets, but the challenge is how do you take price to offset costs, but not lose traffic?

“The top line is the absolute most important thing that franchisees can get right now,” Johns said. “If we can get our sales back, that helps your bottom line and your profitability more than anything. So I’m sure they will be taking price. I’m sure they’ll be in that 1 to 3 [percent] range.”

And profitability, of course, leads to further development. IHOP now has four platforms for franchisees to choose from—traditional, nontraditional, a slimmer prototype, and Flip’d by IHOP, the fast-casual offshoot that will make its debut in 2021. In Q1, operators opened eight restaurants globally. For the remainder of the year, IHOP expects to resume development that was paused because of the pandemic last year.

IHOP ended Q1 with 1,753 stores—1,660 domestically and 93 internationally.

Johns said the brand has the potential to exceed its annual average in the past decade of approximately 60 restaurants. He added that there will be a blended mix among the four platforms. In the near-term, most of the units will be traditional. But nontraditional continues to grow, and Johns said Flip’d and the slimmer prototype will accelerate as they get started.

“We really think we can ramp up development coming out of this pandemic," Johns said. "We’re already seeing our franchisees bring us a lot of sites that are conversions, and we’re very good at conversions. About one-third of our system used to be something else. So while we develop new prototypes and do a lot of prototypical work, we do a lot of conversions, as well, and I think that will ramp up in this environment coming out of the pandemic.”

“ … We’re already seeing franchisees bring us smaller buildings as conversions, as well,” he continued. “And we’re not only going to have new prototypical small prototypes we’ll be testing, but we’re going to be doing some conversions that include applying the small prototype theories and philosophies into conversions, as well.”

In terms of menu news, IHOPPY Hour continues to drive incremental sales, even as business improves across all dayparts. It’s traffic is two to three times higher than the rest of the day compared to September 2020 when it was first launched. Additionally, IHOP’s new Burritos and Bowls lineup is still capturing 8 to 10 percent of ticket order incidents even though it rolled out with minimal promotion.