Applebee’s path back to net new unit growth has been littered with challenges and delays and has become a bit of a case study in patience.
That case study can be traced back to the first quarter of 2022, when then-president John Cywinski said the brand was on pace to open six traditional restaurants and close fewer than 15. He called it a “meaningful inflection point,” with the fewest number of closures in 10 years, “putting us on track for net new unit growth in 2023.”
That didn’t happen. Instead, Applebee’s closed 33 more locations in 2023 and expects 25 to 35 to close this year.
But that doesn’t mean the brand is flailing; there were 1,536 Applebee’s locations at the end of 2023, according to Technomic, and that 1% to 2% closure rate is a normal attrition rate for a 44-year-old brand. Otherwise, there’s quite a bit of momentum and plenty of optimism about the company’s ability to work past most of the hurdles that have hindered its plans while it builds a stronger foundation.
“I have unwavering optimism. There were some road bumps along the way, but I think we have the right strategy in place,” president Tony Moralejo said during a recent interview at parent company Dine Brands’ headquarters in Pasadena, Calif. “We know we’re pushing all the right buttons and it’s just a matter of time before we start to change some of the trend lines.”
Moralejo was brought on board in Q4 2022 and immediately began leveraging his previous experience leading Dine Brands’ international development and, prior, Church’s Texas Chicken’s global expansion. His priority shifted to franchisee profitability, driven by a three-part plan that included additional closures, and some relocations, of underperforming restaurants. Applebee’s, he said, was navigating changing consumer patterns in some instance, but also “a function of opening up many, many restaurants 20 years ago.”
Out of the starting gate, he launched a financial development initiative for franchisees and recently also launched the Dine Forward program aimed at incentivizing potential franchisees from underrepresented communities.
The company is also exploring dual-branded restaurants with IHOP and conversions as part of its strategy and created a new chief development officer role earlier this year. Perhaps the most meaningful tailwind, however, will come from Applebee’s new freestanding prototype, which is more cost-effective than a traditional restaurant.
Notably, Applebee’s developed a new prototype a few years ago as well, but against a pressured macroeconomic backdrop, it became too expensive to build, so the company is now coming up with a “value-engineered” version of that prototype.
“We’re also going to look at the kitchen. We haven’t touched the kitchen design in over 40 years and that’s where some technology can come into play to make it much more efficient,” Moralejo said. “If we do that, we’re able to build a much smaller footprint which takes the cost out of building a new restaurant.”
It’s too early to share details of those efficiencies, but Moralejo said there are some new pieces of equipment and technologies that are being evaluated. There will also likely be new features that support the company’s off-premises business.
“When we were building restaurants, off-prem was 8% of our business. It’s 20%-plus today. The restaurants weren’t necessarily built for off-premises, so you’ll potentially see a pickup window, a side door where the drivers can come in – things we’ll take into consideration,” Moralejo said.
Such consideration will be informed in tandem with Applebee’s franchisees, of which there are just 31 systemwide. Moralejo said this intentionally small number is an advantage as it allows the company to swiftly pivot if need be.
“We’re able to quickly get on the phone [with franchisees], discuss a potential change, make a decision and go to market rather quickly compared to other chains that have more franchisees,” he said. “This is a strategic point of differentiation for us that allows us to react to market forces in real time.”
He expects the prototype design to be completed next year and available for franchisees by the end of 2025. Simultaneously, the company is also sharpening its focus on conversions because costs tend to be more favorable.
“We’re focused on everything we can control in the short-term to improve the economic model ... In the medium-term, we’re developing a new prototype. And then on top of that, we’re working with our franchisees to share the risk, so we’ve got incentives in place to help defray part of the upfront cost that gives them a little hesitation to move forward because of the environment we currently exist in,” Moralejo said. “It has been well received.”
Indeed, the brand is getting votes of confidence from franchisees again, including the largest franchisee in the world – Flynn Group – which recently committed to opening 25 Applebee’s over the next couple of years.
Further, average unit volumes have jumped to nearly $3 million – a historical high – while flirting with $4 million at new restaurants. Store-level margins have steadily improved over the past several years as well. All of these pieces are creating a new sense of optimism for the company.
“If you can grow your topline sales, if you can improve your operating margins and if you can take the cost out of building a restaurant – that’s the trifecta to improve the return on investment for franchisees to build new units,” Moralejo said.
Contact Alicia Kelso at [email protected]
