IHOP Buys Applebee's: There Goes the Neighborhood
IHOP, No. 25 among R&I’s Top 400 restaurant chains, has bet $2.1 billion it can turn around No. 11 Applebee’s.
By Scott Hume, Executive Managing Editor -- Restaurants & Institutions, 7/16/2007
When Julia Stewart abruptly resigned from Applebee’s International in 2001, her parting gifts included a “We appreciate Julia’s dedication and many contributions” announcement from then-CEO Lloyd Hill along with a reported 26,000-plus stock options valued at about $800,000.
Today, Stewart came back to get the rest of Applebee’s shares.
Glendale, Calif.-based IHOP Corp., for which Stewart serves as chairman and chief executive officer, announced it will acquire Overland Park, Kan.-based Applebee’s International and its Applebee’s Neighborhood Grill & Bar chain for $25.50 per share in cash, a deal worth approximately $2.1 billion.
Applebee’s--with nearly $4.7 billion in systemwide sales from 1,930 units in 2006--is the largest U.S.-based casual-dining brand and substantially larger than IHOP, which had $2.1 billion in sales from 1,302 locations, according to R&I‘s Top 400 report. IHOP is second to Denny’s among the largest U.S.-based family-dining chain brands.
Stewart left Applebee’s, where she had been president of the chain’s domestic division, at the same time the company announced its intention to name a new chief operating officer, suggesting Stewart knew she wasn’t going to get the job. David Goebel was named COO and last year succeeded Hill as CEO, with Hill becoming non-executive chairman. Stewart, meanwhile, joined IHOP as president-COO in December 2001 and became CEO in May 2002. She added the chairman’s duties in May 2006.
But if IHOP’s proposed acquisition of Applebee’s is personal, Stewart says it is only to the extent that she understands as well as anyone the value—and potential--of the Applebee’s brand. “I believe my familiarity with Applebee’s will help the relationship,” Stewart told analysts during a conference call following the acquisition announcement.
During her three years at Applebee’s, “we had a small re-energized turnaround, we began national advertising, we upgraded the menu and we really began to go from an almost regional player to a national player,” Stewart told analysts. “We were thinking and acting and acting like a national brand. We walked with national swagger.”
Soft sales have threatened to turn Applebee’s swagger into a limp. The company’s first announcement on July 16 was that for the five-week period ended July 1, 2007, systemwide domestic comparable sales declined 0.3%. Company restaurants saw a 3% to 3.5% decrease in customer traffic during the period. For the second quarter, domestic comp sales declined 0.9%.
Applebee’s problems hardly have been a secret, so Stewart and IHOP know what they’re getting: a brand that needs help. Stewart now gets to implement fixes she may have had in mind had she become Applebee’s COO six years ago.
In her conversation with analysts, Stewart—a double major in marketing and communications at San Diego State University—made clear that marketing changes will be needed to revive Applebee’s. It will need a tightly focused and communicated brand positioning that is reflected in everything from menu to restaurant design to advertising.
“Everything needs to come from having a crystal clear brand focus,” she said. “Everything should go through the brand filter, which is what we did at IHOP.”
Applebee’s ranked No. 9 overall in the casual-dining category of R&I’s 2006 Consumers’ Choice in Chains survey, earning relatively high marks from its customers for menu variety and reputation. But only 47% of consumers who had visited Applebee’s in the previous year scored it as a 4 or 5 (on a scale from a low of 1 to 5) for value; 66% did so for food quality (while category leader The Cheesecake Factory received high food-quality marks from 87% of its customers).
Just last week, Applebee’s completed a review of its national advertising account, selecting McCann-Erickson, New York City, to “take the Applebee’s brand to a whole new level,” according to George Williams, the company’s chief marketing officer.
Today’s acquisition announcement adds a whole new level of importance to the agency’s mission.
David Farkas, senior editor for R&I sister publication Chain Leader, contributed to this report.
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