DINE BRANDS, GLOBAL (DIN) – IHOP and APPLEBEE’S – INITIATIVES GALORE – CHANCE OF SUCCESS?

Dine Brands Global, previously Dinequity, operator and franchisor (franchisor mostly) of the IHOP and Applebee’s brands, has had its share of challenges in recent years. Applebee’s has been in a “dogfight” within the competitive “bar and grill” or “neighborhood pub” segment, competing against the likes of Red Robin, Chili’s, now bankrupt Ruby Tuesday’s and the up and coming fast casual burger concepts such as Shake Shack and Five Guys. IHOP has been battling the resurgent Denny’s as well as other family dining operators.

From a long term strategic standpoint, it is an interesting question as to whether hundreds of millions of dollars should have been spent in stock buybacks and a high dividend, when the needs to invest in systems to support two franchised brands are so obvious, especially in retrospect. This situation has essentially provided a “teaching moment” to private as well as public investors relative to the need to invest part of the presumed “free cash flow” of these “asset light” franchising companies to support and protect the long term value of the brand. Franchise systems do not prosper and grow without ongoing investment to keep the brand current.

Applebee’s suffered most, as franchisees were left to their own devices to protect market share. The system got behind the curve in terms of product development, service initiatives including mobile app technology, delivery capabilities, new production systems, labor saving approaches, and more. While not “shooting the lights out”, IHOP has been the more consistent performer in recent years, mostly sustaining traffic trends while competing with the resurgent Denny’s chain and other breakfast oriented operators.

There have been many moving parts at both brands. Most of them have been typical within the industry: product development, service improvement without excessive labor, mobile app and online ordering, delivery, curbside pickup, replacement of broadcast by social media and others. Two particular unusual initiatives caught our eye in the last week or so, namely: Remote ordering at Applebee’s, to be immediately consumed at a restaurant table reserved at a particular time, and : IHOP becoming IHOB (“B” for “Burgers”), first announced as permanent, apparently now adjusted to be a temporary attention getter.

The Applebee’s innovation, ordering a meal at a particular time, to be consumed in the restaurant, on the surface seems appealing, to certain “on the go” customers as well as the restaurant operator who can make better use of the real estate by turning tables faster. However, the devil is in the details (as usual) and there seem to be a lot of elements that can go wrong,  and cost more customers than the strategy will attract. (1) If the customers don’t arrive on time the food will be waiting and deteriorating, even under warming lights (2) The food must be ready on time, and the table also, or the customer will very quickly become disenchanted with this newly offered service (3) The meal’s “staging” may vary by customer, some wanting everything on the table at once, others wanting the meal in segments, and the non-standard time between courses could confuse operations (4) Table service is still a requirement, but the customers may reduce the tip which will not encourage the wait staff for these tables (5) The whole dining “experience” will differ from normal, almost becoming a different business within the restaurant, potentially upsetting operations that are trying to serve the standard guests.  Overall, there seems to us to be lots of room for error here, and this approach will not be tolerant of mishaps. Under normal circumstances, a few minutes one way or another, or some portion of the experience that is not just right, will not upset guests. This approach, however, is supposed to be time saving and reduce stress, which too often may not be the case. Our opinion: Give it a shot, if you must, but be prepared to move on. Too many of the new ideas at Applebee’s are working well. It ain’t broke right now, so let’s not snatch defeat from the jaws of victory.

IHOB?? – It better be a darn good burger, at a darn good price. We hear that more than a few loyal IHOP customers are reacting negatively to their favorite pancake house becoming a burger joint. As we understand the developments, DIN backed off from changing the name of the chain to just using IHOB as a promotional device when customers started expressing themselves. While it seems like an obviously desirable strategy to build on the dinner daypart which it seriously underutilized, hardly any chains have ever been successful in building new dayparts that are not natural attractions. McDonald’s did it with breakfast but it took them over ten years and hundreds of millions of dollars. IHOP has more than a fifty year old identity as a breakfast destination, with pancakes as the signature item. If they happen to serve a really great burger, the customers will figure it out over time and tell their friends. To point out the obvious, flour and water provides a lower food cost than beef, so the last thing IHOP wants to do is have an existing customer order a burger rather than pancakes. Another thing that must be avoided is confusion of the customer, and the name change, if only temporary, may turn off more existing customers than attract guests to this newly self proclaimed “burger authority”. (Red Robin has already assumed that nomenclature.)

In summary: We admire the creative thought process, and there has been a lot of it lately at DIN, especially productive at Applebee’s which is apparently moving in the right direction. However, we think the new ordering (and dining) option at Applebee’s is far from a game changer and could be disruptive. IHOP’s burger gambit runs the risk of confusing (and losing) some customers, so we have our doubts here as well. That’s the problem these days in the restaurant industry. There is no easy way to differentiate your commodity. We’re fond of saying that the only hope is to create, and then build upon, a hospitality “culture’ that is strong enough to get the consumer off the couch, away from their computer or TV set, for a literal and figurative “taste” of the real world.

Roger Lipton