IHOP President Jay Johns knows that reduced capacity restrictions, higher vaccination rates, and having more restaurants operating with standard hours or longer will be significant boosts for the latter half of 2021.
The tailwinds are already having an impact. IHOP’s U.S. same-store sales declined 3.4 percent in Q2 compared to 2019, including a drop of just 1.4 percent in June. That’s a major improvement from the 21.2 percent plummet in the first quarter. Additionally, domestic average weekly sales were $36,400 in the second quarter, which is a 98.9 percent recovery of pre-pandemic levels.
And there’s opportunity for more. Approximately 85 percent of U.S. restaurants are open for standard operating hours or greater, and roughly 27 percent are operating 24/7. On a typical basis, a little more than half of restaurants operate 24/7, and a small percentage on top of that does 24/2, or 24/7 hours on weekends.
Johns noted that restaurants are making progress and more are returning to full operations each week, but he can’t predict a full recovery. Those factors aren’t in IHOP’s control, especially with the Delta variant sprinting through the U.S. and forcing jurisdictions to consider mask mandates and more restrictions.
But IHOP isn’t waiting to see what happens. The chain is leveraging a multi-pronged strategy to deliver traffic and long-term sustainable growth, including a new approach to marketing, the launch of a loyalty program, increased unit development, and the exploration of virtual brands.
“The road ahead for IHOP looks bright, and I’m very pleased with our position,” Johns said during the brand’s Q2 earnings call.
Johns said IHOP is adopting a new marketing tone aimed at leveraging the emotional connection of guests and reminding them why they love the brand. The chain is using a multichannel approach, including digital channels that allow for more 1:1 marketing and targeted messaging.
The plan is already underway. At the end of June, IHOP announced its “We Could All Use A Pancake” campaign to celebrate the reopening of restaurants. The brand described the marketing effort as a “tongue-in-cheek campaign to spotlight everyday moments, fails and real-life funny follies overtaking newsfeeds and social feeds this past year.” IHOP partnered with reality star Chrishell Stause to elevate the campaign.
“We had pulled back the first part of the year,” said Johns, discussing the amount of marketing spend. “It didn’t make any sense to spend a lot of marketing driving people to restaurants that were partially open and maybe not staffed wonderfully. So the timing had been right to do that. We obviously picked that back up in the second quarter. And I think if you think about how the ad fund morphs and changes, how we do a budget for our marketing, it’s relative to how much ad fund dollars we’re going to have.”
“We get a percentage of the sales. As sales go up, you have more money to spend,” he continued. “So as you know, our sales for the first quarter, we didn’t have as much spend. We didn’t have as much money. As sales have improved, our ad fund spending has increased. And for the second half of the year and on into next year, it will be relative to what our sales are. The higher sales go, the more ad fund money we’ve got.”
The marketing strategy takes advantage of IHOP’s growing digital presence, as does the upcoming loyalty program and potential virtual brands. The chain expects to launch the loyalty program in Q3 to grow engagement, trial, and incremental visits from existing guests. Johns said the pandemic forced IHOP to refocus on its relationship with customers, and that played a role in its increased investment in CRM and customer-facing technologies.
As IHOP builds upon that foundation, off-premises comp sales skyrocketed 169 percent in Q2 versus 2019 and even 6.3 percent compared to 2020 when restaurants were under more restrictions. Sales outside the four walls mixed 26.1 percent in the quarter, down from 33.3 percent in Q1, but net off-premises sales in dollars improved each month in Q2. Of that 26.1 percent, 13.9 percent came via delivery and 12.2 percent came from takeout.
In Q2, IHOP parent Dine Brands invested further in off-premises by partnering with Flybuy Pickups, a location-based pickup solution that will roll out nationwide by the end of 2021. As part of the technology, guests place orders through the mobile app or website and then drive to the location without any further action. On the other side, restaurants receive updates on the location of the driver and estimated time of arrival. Orders are fulfilled and prioritized based on arrival time.
IHOP believes it will retain the majority of the off-premises sales growth it’s attained in the past 15 months, which is why the chain thinks it’s the right time to evaluate partnerships with third-party virtual brands. With 70 percent of U.S. restaurants having two full kitchens, IHOP has the capacity to take on more brands in the back of the house.
“We’re currently reviewing our daypart strategy and assessing how to best utilize our existing capacity,” Johns said. “Due to the fact we’re in the preliminary stage of this, it’s too early to discuss who we may work with as a virtual brand partner.”
Regarding unit development, IHOP is continuing its four-platform strategy of traditional stores, nontraditional outlets, a smaller prototype scheduled for testing later in 2021, and the revitalization of fast-casual spinoff Flip’d By IHOP. The first Flip’d restaurant is scheduled to open in Lawrence, Kansas, in Q3 and will have roughly 3,500 square feet and 55 seats. The next location will open in New York City in late Q3 with 1,800 square feet and 25 seats. Both restaurants will have the same menu and address all three dayparts.
Conversions will be key, as well. Roughly 42 percent of approved sites this year have been second-generation opportunities. IHOP finished Q2 with 1,747 restaurants systemwide, including 1,654 in the U.S. and 93 internationally.
In the fall of 2020, IHOP announced the net closure of 100 stores over the course of six months, but the initiative ended with only 41 shutdowns. The guidance on development is now more optimistic as the brand thinks it can develop 40 to 50 new restaurants in 2021. Through six months ending June 30, the brand has opened 17 new stores.
“There’s no bulk closure. We already did that,” Johns said. “I announced we thought we’d do 100. We really only did 41. So we’re in good shape. And that event that happened to do those big closures, that’s behind us now. So we’ll be back to kind of normal closure rates. And again, my growth rate looks like 40 to 50 for the year is what we’re looking at.”