IHOP Corp., lauded for reviving the brand by entrusting nearly all of its restaurants into the hands of franchisees, is rolling out the same plan for Applebee’s.
Last week, the Glendale-based IHOP, a chain of more than 1,300 restaurants known for their pancakes, agreed to acquire the nation’s largest casual dining company for $2.1 billion.
“Applebee’s is a fabulous brand that just needs to be energized by highly invested, savvy, capable franchisees,” said Julia Stewart, IHOP’s chief executive, who will lead the management team of the combined company. She ought to know. She was president of Applebee’s domestic operation as its chief executive from 1998 to 2001 and led a dramatic turnaround. “It didn’t keep pace the last several years and now it has an opportunity to do so.”
Applebee’s International Inc. operates 508 restaurants while IHOP only runs 13. IHOP plans to sell most of Applebee’s company-owned restaurants and their underlying real estate, which will generate about $400 million to be used toward repaying the acquisition debt, according to JP Morgan.
About three-fourths of Applebee’s 1,943 restaurants worldwide are already franchised.
Just as IHOP cut 15 percent of its workforce when it stopped financing franchisees and opening company-owned restaurants, the restaurant chain will downsize Applebee’s headquarters in suburban Kansas City. Many of Applebee’s 500 corporate employees will face layoffs, Stewart said. Globally, the chain has around 100,000 employees.
The franchising model works from a purely strategic perspective, Stewart said. There’s less operating risk because the company is not running the restaurants and franchisees, who are likely to know their market, do all the heavy lifting, while the company is left to provide a clear vision for success.
Menu upgrade?
Applebee’s customers across the world won’t see much difference as they dine at the bar and grill for at least a year. But IHOP plans to hear their feedback soon, said Patrick Lenow, company spokesman.
“We really don’t know how Applebee’s will be improved until we talk to the guests. Everything from menu offerings and service to the restaurant look should reflect what guests want from Applebee’s,” said Lenow.
What makes the acquisition unique, said Ron Paul, president of Technomics Inc., a restaurant consulting firm, is the fact that IHOP is a smaller restaurant chain, carrying out its business strategy on a much bigger operation.
“That’s normally not how it works,” he said. “But given what Julia Stewart did at IHOP in terms of understanding the brand and repositioning the products and marketing, we can expect her to do the same at Applebee’s.”
Applebee’s has been unable to reinvigorate its ailing brand and show significant profits in recent years. IHOP share rose 8 percent to $60.88 last Monday when the company announced the deal while Applebee’s shares hovered at $24.84.
Michael Gallo, analyst at CL King & Associates, said allowing franchisees to run most of Applebee’s restaurants may be just the thing the company needs to improve profitability.
“Why support an expensive corporate overhead structure and spend a lot of time and effort running the stores, when you can apply all those resources in building a brand?” Gallo said.
