Applebee’s posted a 1.6% decline in same-store sales for the third quarter, while its sister concept, the IHOP pancake chain, generated a 0.3% gain. Yet it’s the former’s performance that parent company Dine Brands Global feels good about, and the latter’s that it calls disappointing.
“On the Applebee’s side, we were pleased because we were exactly where we thought we’d be," CEO Steve Joyce said in an interview with Restaurant Business. He explained that the brand faced tough comparisons with the year-ago quarter, when several blockbuster promotions lit a rocket under sales. Price-oriented come-ons, including an offer of all-you-can-eat riblets and chicken fingers, boosted comps that quarter by 7.7%, the chain’s biggest jump since the 1990s.
At the same time, Joyce said, competition intensified, giving value-hunters a reason to turn elsewhere. “In ’18, we were very aggressive,” he explained, citing deals such as $1 margaritas, aka Dollaritas. “In ’19, our competitors got very aggressive, and we got less so. Our franchisees took a lot of pricing. We think our competitors have reacted,” dropping their prices on cocktails and casual-dining staples. “We did not as much.”
Instead, Applebee’s promoted a new fajitas line, without citing their bargain price in marketing materials. The chain has acknowledged that the price omission was a costly misstep. The chain recently introduced a limited-time offer of boneless Buffalo chicken wings for 25 cents each specifically to draw value hunters, who represent about 20% of its clientele.
The situation has prompted Dine Brands to downgrade its expectations for the full fiscal year. It now anticipates same-store sales to be flat or down as much as 1.5% for 2019, instead of holding steady or rising by as much as 1.5%.
IHOP, Joyce continues, had a far different experience in Q3: “We were disappointed with IHOP. We thought we’d be a lot more positive.”
The chain turned its promotional spotlight on a new chicken product, buttermilk-battered fried chicken. A similar introduction was a blockbuster for Cracker Barrel. For IHOP, not so much.
“We just didn’t drive a lot of traffic, in part because it was the summer of chicken,” said Joyce. During the quarter, McDonald’s, Popeyes Louisiana Kitchen and a number of other quick-service chains introduced chicken products with hefty promotional backing.
Going forward, “we feel pretty good about IHOP,” though the family chain’s performance in Q4 could be affected by its tie-in with the new “Addams Family” movie. A year ago, the pancake specialist hooked its promotional efforts to “The Grinch,” a major hit.
Overall, Dine Brands expects IHOP to finish 2019 with a same-store sales gain of 1% to 2%, a slight downgrade from the previous guidance of 1% to 3%.
For Applebee’s, “when we start looking at 2020, we feel pretty good,” said Joyce. The chain expects to start growing again, after closing about 200 underperforming stores, including 30 to 40 this year, most of them in the United States. Previously, it expected 20 to 30 to shut in 2019.
The franchisor also notes that eight franchisee transactions were completed in the past two years, which brought the exit of some weaker operators. It adds that no franchisees are currently behind in their royalty and advertising-fee payments, a departure from the past three years. The situation should provide a 4.25% marketing war chest for 2020.
Applebee’s recently completed a study of franchisees’ profitability and gave the system a high grade. The move was intended in part to assure investors that the chain wouldn’t repeat what happened during the first half of the decade, when a number of franchisees fell behind their obligations. “We want to be able to step in and help franchisees,” said Joyce. Plus, “all the franchisees benefit from looking at their peers’ performance: ‘What can I do to get better?’”
Joyce acknowledged that he’s a little more reserved in assessing the chain’s turnaround today, though still bullish on its future. “I actually got carried away with our success last year,” he said. “The year we had in ’18. I was surprised that it got that much better that quickly. This year is one where the competition got more aggressive. We were not as aggressive.”