Technically, the COVID pandemic has been in the rearview mirror for months, but the impact it had on unit growth hasn’t dissipated for Dine Brands.
As IHOP enters Q4, franchisees are still experiencing near-term headwinds involving permitting and construction delays, CFO Vance Chung told investors. Because of this, the breakfast giant lowered its 2023 guidance from 45-60 net U.S. openings to 20 to 30. Chung emphasized that IHOP’s pipeline remains strong and that operators are “excited to expand the brand.” Through three quarters, IHOP has opened 29 domestic stores and closed 25, equaling a net of four openings.
Applebee’s didn’t change its projection of 10-20 net domestic closures. Year-to-date, the chain has opened three U.S. locations and closed 28, a net drop of 25 units.
CEO John Peyton says the company hoped matters would return to normal this year, but the proverbial “light at the end of the tunnel” hasn’t become clear yet. The current environment is being viewed as the new normal until any material changes occur. The good news, however, is that the same number of restaurants will open. The timelines have just shifted to Q1 2024.
“Up until COVID, we were better able to forecast openings because the timing—from getting permits from local authorities, from equipment being shipped from overseas—has been very consistent for years and years and years,” Peyton says. “What we’ve seen in the past two years is that it’s harder to forecast with the same degree of accuracy that is in the past because those same items are just not what they used to be in terms of supply chain, logistics, permitting, equipment availability, and people to construct the restaurants.”
Applebee’s finished Q3 with 1,652 stores worldwide, including 1,544 domestically and 108 internationally. IHOP had 1,794 units, of which 1,681 were domestic and 113 were international.
Dine’s biggest weapon against these delays has been second-generation locations, which come with lower costs and quicker lead times. Seventy percent of IHOP’s development this year has been conversions. Each one saves about 30-40 percent in expenses, according to brand president Jay Johns.
“We’ve really been advising our franchisees to look at opportunities that are out there because there’s still quite a few and there’s more happening all the time,” Johns said during Dine’s Q3 earnings call. “And for ourselves, we’ve even got a smaller prototype, and that opens up even conversions of some quick-service locations that have pickup windows, etc. So there’s a lot of things you can do with the buildings that are out there, and the franchisees are becoming more and more excited about those as they see more and more results from others around them.”
Applebee’s is going after these built-out spaces as well. Peyton is unsure about the rate at which the brand will seek conversions, but he did confirm that a majority of openings in the next couple of years will be second generation. Three of the past four Applebee’s openings were conversions, and they generate AUVs above the system average.
In the meantime, Applebee’s is developing a new, low-cost prototype in partnership with franchisees and designers. Work will be done in the back of house and front of house to streamline square footage, equipment costs, and operational expenses. Peyton hints that automation and robotics could be involved. Previously, drive-thru pickup windows were a big focus for Applebee’s, but only as an add-on to existing restaurants. Going forward, it will be more so a component of new, ground-up prototypes. The ROI on remodeling a current store with the window isn’t as compelling. It’s still an option for franchisees who believe it would make sense for a particular market.
Applebee’s previous guidance is that it would return to net U.S. unit growth in 2024, although brand president Tony Moralejo declined to comment on projections beyond this year during the Q3 earnings call. He said the chain is optimistic about net unit growth down the line.
“Our franchisees recognize the benefits of conversions, including shorter construction timelines for openings,” Moralejo said. “As we leverage the benefit of conversions, we’ll work on new, efficient, and economical prototypes for the system. Collectively, these strategies, they should drive net unit growth. That’s still the goal. And we’ll keep you posted as we work through these challenges.”
IHOP’s U.S. same-store sales grew 2 percent in Q3, extending its positive streak to 10 quarters. The chain also outperformed the family-dining segment in eight out of 13 weeks in the quarter, according to Peyton. Average weekly sales per store were $37,800—$1.97 million annualized AUV—which still exceeds pre-pandemic highs. Off-premises mixed 19.5 percent, of which 12 percent was delivery and 7 percent was to-go.
In early July, IHOP introduced sweet and savory Pancake Tacos. The company sold nearly 2 million in four weeks, and the campaign had over 1 billion media impressions. The chain also introduced biscuits and expanded its waffle category.
Applebee’s domestic comps declined 2.4 percent in the third quarter. But average weekly sales per restaurant were over $52,000, surpassing pre-COVID highs. Off-premises accounted for 21.5 percent of sales, split evenly between delivery and to-go.
Applebee’s drove traffic in Q3 through multiple value offers, like the seven-week All-You-Can-Eat Boneless Wings program that sold 7.1 million pounds of wings. The campaign performed better than anticipated. It drove incremental sales and franchise margin dollars and brought in new customers, particularly Gen Z. Additionally, the Dollarita returned for the first time since 2020. Further menu innovation is on the way as Applebee’s culinary team has tested more than 200 new concepts in the past five months, ranging from different cuisines to spin-offs of current items.
The chains didn’t see any significant change quarter-over-quarter in terms of income levels, which is typically $50,000 to 75,000. They did notice customers slightly decreased their quick-service spending in favor of dining at their casual spots.
“They know that if they go to Applebee’s, they have the vibrant bar scene,” Peyton says. “They know that they’ve got televisions around the restaurant with all of their favorite sports on it. … In a world when they’re making very difficult choices about when and how to spend their money, they want the full experience of leaving the house, and we’re benefiting from that. And we’re well-suited for it.”