Making the argument that “strength is no longer about the number of a brand’s brick-and-mortar restaurants,” Dine Brands Global Inc. CEO John Peyton on Wednesday said the now more-off-premises-focused and higher-tech Applebee’s and IHOP are emerging from the pandemic stronger and ready for growth.
Over the past five years, Applebee’s made the strategic decision to close about 300 underperforming units, a process that was completed in fiscal 2021, Peyton said in an interview with Nation’s Restaurant News following the fourth-quarter earnings report. The chain ended 2021 with 1,578 units in the U.S.
Fiscal 2022 will be a transition year, with between five to 15 net fewer Applebee’s locations expected. But the almost-all-franchised chain will see net unit growth in 2023, Peyton projected, fueled in part by revenue from innovations that didn’t exist a few years ago, like virtual concepts, ghost kitchen and more drive-thru pickup lanes where they can be added.
Peyton argued that casual dining no longer faces a choice between focusing on the dine-in restaurant experience or off-premises. “It’s not a question of ‘or.’ It’s ‘and,’” he said.
“I would argue that, years ago, the most important thing was about having a large number of brick-and-mortar restaurants,” he said. “Today that’s not enough. Today, you have to have, obviously, a very large footprint to be everywhere our guests want us to be, and Applebee’s and IHOP — because there’s 1,600 of each of them across the country — we have the scale of bricks-and-mortar. And in order to be stronger, you also have to have the technology that enables you to serve your guests on their terms — when, where and how they prefer.”
Peyton pointed to tech investments over the past two years that have improved the guest experience, including the shift to QR codes to view the menu, the ability to pay with a smartphone, and the use of tablets by servers. This year, IHOP will get a new point-of-sales system, with Applebee’s to follow in 2023.
Both brands will get upgrades to their websites and apps, and back-of-the-house processes will continue to shift to better accommodate off-premises sales, like the offer of Carside Express at Applebee’s and Curbside at IHOP, using geo-fencing technology to locate guests and speed hand-off times. IHOP will also soon announce a new loyalty program.
The company is also resuming its experiment with virtual brands to more fully utilize restaurant kitchens.
Applebee’s Cosmic Wings brand, introduced last year but on hold due to the wings shortage, is back and will be available on the three major third-party delivery marketplaces by April.
In addition, IHOP is testing two virtual brands out of 50 restaurants in seven markets in Texas, Arizona and Kentucky: a grilled cheese concept called Thrilled Cheese, and a quesadilla concept called Super Mega Dilla. Both were created in partnership with a virtual restaurant developer, but the company did not disclose which.
Peyton said virtual brands are a “really big opportunity.”
He cited the advantages of low cost of entry, the ability to target dayparts and demographics. They offer the ability to seed and test new markets with ghost kitchens, and they can be tweaked at low cost and without impact to consumers.
For IHOP, the virtual brands will be available to make use of kitchens during slower dinner hours, and the menus make good use of the chain’s flat-top grills without the need to add evening staffing or SKUs.
IHOP ended the year with 1,751 units and the company projected that 50 to 65 restaurants would open in 2022, mostly with the traditional full-service format. Dine Brands is still watching the test of the fast-casual Flip’d variant in New York and Kansas, but Peyton said he expects more will open once the model is perfected.
For the Dec. 31-ended fourth quarter, Applebee’s domestic same-store sales were up 9.1% over pre-pandemic 2019. Year-over-year, Applebee’s domestic same-store sales for the quarter were up 34.8%, in part reflecting dining room closures at the end of 2020. For the full year, same-store sales were up 6.2% compared with 2019.
Average weekly sales for Applebee’s domestic locations increased 12.6% over 2019 to $51,900.
Off-premises accounted for about 27% of the sales mix at Applebee’s during the fourth quarter, which included 13% from delivery and 14% from Carside To-Go.
John Cywinski, Applebee’s president, said the brand would expand its use of ghost kitchens. A version of the Applebee’s menu is available for delivery out of two ghost kitchens in Philadelphia, and another is scheduled to open in Miami with “another handful” coming this year.
Cywinski said he is also “fired up” about the chain adding drive-thru pickup windows, which have been tested in two units, with a third coming in Columbia, S.C. Cywinski said as many as 10 to 15 could be added to existing units before the end of the year.
“I’m now more convinced than ever that our off-premises business is a genuine core competency and a very leverageable point of difference for the Applebee’s brand,” he said.
Peyton said the emergence of the Omicron variant “briefly agitated” staffing and traffic during the fourth quarter, but that impact had dissipated by mid-February and restaurants for both brands were close to being fully open for hours comparable with pre-pandemic levels. Applebee’s, for example, is still struggling to staff the late-night hours, Peyton said, but he was optimistic that restaurants would soon reach full staffing.
IHOP’s two-year same-store sales declined 3%, in part due to staffing challenges. The chain remains about 85% to 90% staffed nationally, and only about a quarter of domestic units are operating 24/7. The chain ended the year with 1,657 units in the U.S.
Year-over-year, IHOP’s comp sales were up 39.2% for the quarter. Average weekly sales at domestic units increased 0.5% to $37,500, and off-premises accounted for 23.7% of the sales mix.
Peyton said the worst of the pandemic, and related restrictions, are in the rear-view mirror.
“Despite these headwinds, we are increasingly encouraged that we’re at the beginning-of-the-end of COVID — and, as we transition to the endemic phase of the virus, we are optimistic that the days of mask requirements, proof of vaccination and capacity restrictions are behind us,” Peyton said during the earnings report.
Dine Brands reported revenues of $229.6. million for the quarter and $896 million for the year. Net income for the quarter was $19.8 million, or $1.14 per share, compared with a loss of $1.6 million, or 10 cents per share, a year ago. For the year, net income was $97.8 million, or $5.66 per share, up from a loss of $103.9 million, or $6.43 per share, the prior year.
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