Financing

Applebee's development plans hit a snag

The chain expected to return to net new unit growth this year. Instead it will close more restaurants than it opens again, citing high costs and underwhelming returns.
Applebee's exterior
Applebee's will shrink by 10 to 20 units this year. / Photograph: Shutterstock

2023 was supposed to be a landmark year for Applebee’s growth plans.

After closing about 300 underperforming stores since 2017, the chain expected this to be the year it would open more restaurants than it closed, returning the brand to a path of growth for years to come.

But the rising cost of building new restaurants combined with pressure on franchisees’ operating margins has thrown a wrench into those plans. Parent company Dine Brands now expects to end the year with 10 to 20 fewer domestic Applebee’s, a bigger decrease than last year.

“We’re going to open more new restaurants this year than we did last year,” new Applebee’s President Tony Moralejo said on an earnings call Wednesday, “but it’s not where we want to be in the future.”

In 2022, Applebee’s operators opened four U.S. restaurants and closed 13 for a net loss of nine stores, finishing with a domestic tally of 1,569.

And despite achieving record average unit volumes of $2.8 million last year, the ROI on new Applebee’s has not met the franchisor’s expectations, Moralejo said. He cited the higher costs of buying land and building things as well as commodity and labor inflation. 

The brand is now considering incentives for franchisees who agree to open new restaurants. It’s also looking at changes to its prototype to make new builds less costly. 

“The rate or the pace of development, it comes down to franchisees believing that there’s an attractive value proposition,” Moralejo said. He declined to reveal Applebee’s store-level profits. 

Meanwhile, Applebee’s sister brand IHOP is having development problems of its own. The breakfast chain in November lowered its 2022 net new openings target to 35-45, down from 50-65. It ended up adding a net 30 stores.

Some of the planned openings were pushed to this year, when it expects to open a net of 45-60 new restaurants. And it’s now encouraging franchisees to retrofit existing structures rather than build from scratch. 

“That’s how we’re combating the economic factors of, it costs so much to build a building right now,” said brand President Jay Johns.

These challenges are not unique to Dine. Restaurants of all kinds are scaling back aggressive post-pandemic growth plans because of permitting delays, supply chain backups and higher construction and real estate costs.

But the hurdles feel particularly acute for Applebee’s, which has gone through years of closures and now has to convince franchisees that opening new restaurants again is worth the investment. 

For the fourth quarter, Applebee’s same-store sales rose 1.7% year over year. Prices were 7.5% higher on average in the period, indicating that traffic fell. IHOP comps increased 2% on 10% average pricing. 

Dine’s consolidated earnings before interest, amortization and depreciation (EBITDA) for the year were $252 million, down from $253 million in 2021. For this year, the company expects consolidated EBITDA of $243 million to $255 million.  

The company’s newest brand, the 180-unit Fuzzy’s Taco Shop, generated $220 million in system sales last year on average unit volumes of $1.6 million. 

Dine executives declined to reveal near-term development plans for the growth brand acquired in December. But they expect it to become “a material part of our business,” said Dine CEO John Peyton.

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