The company says IHOP's menu has been responsible for steady sales declines
IHOP’s menu will be streamlined and engineered for value over the next 18 to 24 months as parent company DineEquity Inc. strives to turn around lackluster sales for the family dining brand.
In a call to analysts following the release of mixed results for the June 30-ended second quarter on Tuesday and the announcement that IHOP president Jean Birch would be stepping down, Julia Stewart, DineEquity’s chair and chief executive, said declining consumer confidence and economic headwinds have taken a toll on both the IHOP and Applebee’s brands.
Applebee’s, however, reported positive domestic systemwide same-store sales of 0.7 percent for the quarter, while IHOP’s domestic same-store sales declined 1.4 percent and have been negative for six consecutive quarters.
Stewart said the fundamental problem is IHOP’s menu, which, she said, has too many items, is too difficult to execute and must do more to offer guests better value.
“Guests are saying in general that it has gotten too expensive at IHOP,” said Stewart.
As the company searches for a replacement for Birch, Stewart said she will be very involved in the menu revamp over the next several months. While expressing confidence in the 1,557-unit IHOP’s management team, she said, “My involvement will only make it faster and better.”
For the first half of the year, IHOP’s domestic same-store sales were down 0.9 percent, mostly as a result of declining traffic that was partially offset by a higher guest check average, the company said.
Earlier this year, IHOP launched a new advertising campaign that aimed to embrace the brand’s heritage of . . With the tagline, “IHOP: Everything you love about breakfast,” the campaign focused on menu innovation and classic items the brand is known for, such as pancakes, omelets and stuffed French toast.
Internal research has shown that the campaign is effective in catching guests’ interest, however it hasn’t been enough to turn interest into visits because the menu still needs work, Stewart said.
Working in “pieces and parts” over the next 18 to 24 months, Stewart said the chain will streamline the menu, removing items that are underperforming or too difficult to execute. In the works are more "cravable" menu additions and items that will send a clearer message of value, said Stewart.
“We believe this strategy will culminate ultimately in driving sales,” she said. “We’ve done it before at IHOP. We’ll do it again.”
Over the past four years, the company has also revitalized the 2,018-unit Applebee’s brand, which was acquired in 2007. About 90 percent of Applebee’s menu has changed or been enhanced, and about 42 percent of the chain’s domestic locations have been remodeled with a new look.
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Stewart said the “two for $20” campaign at Applebee’s continues to be well received by guests, especially when new menu items are introduced.
For the first half of the year, Applebee’s domestic same-store sales were up 1 percent, largely because of a higher guest check average that offset declines in traffic. However, Stewart said, “There’s no question that economic headwinds have hurt us, especially at Applebee’s. It has been a lumpy and bumpy time.”
Promotions and events will continue to focus on building sales at lunch, dinner and late night for Applebee’s, she added.
Earlier this year, Applebee’s also debuted a new marketing campaign with the tagline “See you tomorrow,” highlighting new summer flavors and everyday value. Stewart said the campaign is being well received, but the impact will take time.
Applebee’s is also close to reaching its goal of becoming a 99-percent franchised brand, once three pending refranchising deals close later this year. That shift away from company-owned units, however, has also allowed for efficiencies between the two brands that will result in the loss of about 100 jobs, the company said.
Stewart said about half of the job cuts are tied to the pending refranchising deal that includes the sale of 65 Applebee’s in Michigan. The other half includes redundant positions between the two brands. The consolidation is expected to result in annualized savings of $10 million to $12 million.
Stewart said the drought in the Midwest this summer could also have an impact on commodity costs. Earlier this year, the company estimated food costs would increase between 4 percent to 5 percent for fiscal 2012, and that franchisees had room to take price increases — though continuing efforts to consolidate purchasing and distribution between the two brands is also expected to offset inflation.
“Franchisees shouldn’t have to price right now, unless something happens with the drought that I can’t predict,” Stewart said.
For the first six months, DineEquity’s net income available to common stockholders increased nearly 65 percent to $45.8 million. Revenues were down 16 percent to $474.9 million, largely because of refranchising efforts.
The company also reduced debt by about $88.3 million in the first half of the year with cash proceeds.