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Applebee’s, IHOP Parent Pushes Latest Recipe for Casual Eateries: Smaller Formats, More Deliveries

Dine Brands Global Aims to Add Locations and 20,000 Needed Workers Amid Pandemic Sales Recovery

Photo Courtesy of Dave Willman.

The parent of Applebee’s and IHOP is looking to return in the next eight months to pre-pandemic location growth by incorporating new strategic ingredients used by more full-service casual restaurant properties: investment in smaller formats and delivery-only brands.

Executives of Glendale, California-based Dine Brands Global told analysts the operator of more than 3,500 full-service casual restaurants in 17 countries aims to start 2022 at a pre-pandemic pace where it can open 10 to 15 new Applebee’s and 40 to 50 IHOP locations annually, though specific targets have not been finalized.

“We think we can really ramp up development coming out of this pandemic,” Dine Brands CEO John Peyton said during a first quarter earnings call Wednesday.

Dine Brands joins several full and limited-service dining chains, such as Outback Steakhouse, Chipotle Mexican Grill, Shake Shack and Taco Bell, looking to shrink location footprints while catering to carryout and delivery that's accelerated in the pandemic. And national chains know that smaller buildings can be more profitable.

The expansion of Applebee’s would follow a trimming down of locations for that brand that took place over the past few years. Many new restaurants will deploy smaller formats, such as Flip’d by IHOP, which launched last year with locations about half the size of its traditional restaurants, making it possible to fit into more potential locations.

Of course, there's no guarantee the new strategy will work once dining habits return to pre-pandemic patterns. And there's no certainty that there still won't be further twists and turns in a health crisis that saw coronavirus cases ease and then surge last year.

Even so, other Dine Brand eateries are expected to be opened in spaces vacated by rival restaurant operators and retailers, with potential locations being put forward by the franchisees who operate about 98% of Dine Brands’ restaurants and opened 10 new U.S. locations during the first quarter.

“We’re already seeing our franchises bring us a lot of sites that are conversions,” Peyton told analysts. “We’re very good at conversions – about a third of our system used to be something else. So while we develop new prototypes… we do a lot of conversions as well.”

Property Use Shift

The pandemic accelerated a push by restaurant chains to favor digital ordering for food pickup and delivery instead of counter-based services in physical dining rooms, where customers might linger without buying more food. Dining rooms also come with added costs for food service and cleanup. Now some big chains are tinkering with smaller-format locations emphasizing services like drive-up lanes for food ordered in advance and tight meal preparation space for delivery orders.

“Adapting for more to-go business, full-service restaurants may shrink dining rooms, while enlarging takeout areas,” analysts for financial services firm Morgan Stanley have predicted, saying U.S. digital restaurant sales could account for 16% of all restaurant sales by 2022.

Several limited-service chains, such as Chipotle and Jack in the Box, have already reported that digital sales now make up 40% to 50% of total sales. Consumer research and consulting firm NPD Group reported that U.S. digital restaurant orders by customer count were up 145% in December from a year earlier.

“Digital orders for pick-up and all off-premises modes will be a growth engine for the U.S. restaurant industry moving forward,” said David Portalatin, a NPD Group food industry adviser, in a report this year. “Consumers, both new and former users, have now experienced the convenience of digital ordering, especially for carry-out and delivery, and will continue using these services long after the pandemic is over.”

Dine Brand executives said first-quarter sales rose almost 15% to $25.6 million, partly by its testing of a “virtual kitchen” concept called Cosmic Wings, with chicken wings being prepared in existing kitchens of 30 Applebee’s franchisees solely for delivery through third-party services. Dine Brands plans to test out other delivery only concepts, joining rivals including the parent firms of Chili’s and Outback Steakhouse now using existing real estate to boost sales.

Executives said 99% of the company’s domestic restaurants are now operating in some form as pandemic restrictions ease in most states, with on-site dining room sales rising with vaccination rates and consumer confidence.

Applebee’s President John Cywinski said that brand during March and April registered some of its highest sales volumes of the past decade. “I really believe that restaurants are an essential part of society and people want a place to gather and celebrate,” said IHOP President Jay Johns. “And after 13 months of being locked in our houses, Americans are ready to do that.”

Like other companies, Dine Brands has ramped up hiring over the past few weeks but is struggling to staff up its restaurants to meet rising customer demand. Various operators have cited factors including safety concerns and higher stimulus-related unemployment compensation payments for the slow return of restaurant workers, though Peyton said he expects an equilibrium between labor supply and demand to be reached over the next three to six months.

According to the National Restaurant Association trade group, U.S. industry sales in 2020 totaled $659 billion, down $240 billion from pre-pandemic projections. The industry employed 12.5 million at the end of 2020, down 3.1 million from levels that were expected prior to pandemic lockdowns and business restrictions that started in March 2020.

To adjust to a rising sales climate, Peyton said the company will be joining franchisees for two online recruiting sessions in mid-May, aimed at bringing in 20,000 new workers nationwide.

Source: 2021 CoStar News.

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