IHOP To Applebees' Rescue and Other Chain Restaurant Stories

For some odd reason, I've taken an interest to IHOP's acquisition of Applebees. I call it odd because I rarely eat at chain restaurants and would go out of my way not to eat at either IHOP or Applebees. When I look at Applebees, I see all sorts of lessons in business strategy. From a case study point of view, the restaurant chain is intriguing. Now that it has been acquired by IHOP, I'm watching with interest how Applebees will try to return to its former glory.

There was in interview with IHOP chairwoman and chief executive Julia A. Stewart in Saturday's New York Times. IHOP is riding high right now and believes Applebees is a strong brand and good strategic fit. Here's an excerpt:

"Q. You surprised a lot of people with your announced plans to buy Applebee’s International for $1.9 billion — in cash — plus the assumption of debt. How did the deal come together?

A. We announced in January 2006 that we would be looking at strategic alternatives, which included an acquisition.

It had to be a concept that did not compete with our base business. So it couldn’t be in the family dining category, because we didn’t want to jeopardize our terrific relationship with our franchisees. It had to be something in either casual or fast food or specialty.

Secondarily, it had to be something of significant size. It had to matter. And it had to be something that would really fit with our core competencies. It had to be a strategic fit.

Q. Morningstar aid the deal was an “outright steal” at that price.

A. At $25.50, it is certainly a 4 percent premium to the day before the announcement was made. But it is a significant premium, upward of 20 percent when they announced they were going to consider selling the company.

Q. This is a critical moment in your career — you are basking in the glory of 18 consecutive quarters of growth at IHOP and a strong stock price. What if you bet wrong on Applebee’s?

A. I don’t see it that way. I see it as we successfully turned IHOP into this fabulous successful brand, as measured by top-line sales and franchisee health and consumers — and we are now doing the same exact thing at Applebee’s, so to me, it’s just more of the same. I don’t see it as a turning point but a repeat."

What happened to Applebees? It didn't stay fresh. In a Motley Fool article from November 2005, Mike Cianciolo described the company's problems:

"Back in April, I pointed out a plethora of reasons supporting the likelihood that the restaurant chain would sustain its run of moderate growth. I also spoke of strong trends in its market and its ability to keep itself fresh.

Well, so much for that.

For its third quarter, Applebee's posted earnings of $22.1 million, or $0.28 per share, a 23% drop from last year. Minus charges, the company earned $0.31 per share, still missing its guidance of $0.32 to $0.35 per share. And while revenue climbed 8.6% to $305.3 million, it still came up short of expectations.

Although Applebee's did manage its 29th consecutive quarter of same-store sales growth, an increase of 0.9% is nothing to write home about. Company restaurants continue to falter, with comps falling 1.6%. Franchise locations, meanwhile, kept the streak alive, with a 1.8% gain."

Just six months earlier, Cianciolo praised Applebees for its "strong effort to distinguish itself." Its Curbside To Go and pairing with Weight Watchers were two of the little differences "that seem to allow Applebee's to remain fresh."

It's not just Applebees. The entire casual dining segment is having a tough go of it. Analysts downgraded a number of dining stocks earlier this year. Maybe it was Applebees' menu that was the main problem. Red Lobster has its Endless Shrimp and Olive Garden has its Never Ending Pasta Bowl. Applebees has...Weight Watchers. I don't know much about the casual dining chain restaurant experience, but I do know that Americans love a gluttonous bargain. Feed them and then overfeed them. If the portion/price ratio hits that magical number, Americans will keep coming back.

Chipotle is now where Applebees used to be, in a growth stage, growing like a weed and making a lot of money for investors. The Motley Fool posted about Chipotle a few days ago.

"Chipotle's stock lapped the $100 mark earlier this month. That nice round number says little in terms of valuation, yet the rarity of an eatery stock trading in the triple digits is leading investors and financial journalists to wonder whether Chipotle's shares have gotten too spicy for their own good. Just check out the following headline out of this weekend's Barron's, in Johanna Bennett's Weekday Trader column:

  Has Chipotle Gotten Too Hot? 

You can probably guess the answer. A high P/E multiple, negative trends in restaurant stocks, and a history of sizzling casual-dining IPOs that went on to fizzle out of favor are working against Chipotle, claims the article. 'Investors looking to spice up their portfolios may want to order something else from the menu,' Bennett concludes."

The Fool recapped the struggles of other restaurant chains like Baja Fresh and La Salsa ("both hit brick walls"), and Panera and P.F. Chang's ("had their brushes with mortality, but they've gone through expansion pains").