The restaurant chain was a compelling target for casual-dining company Dine Brands because it is a heavily franchised, high-growth concept that can add long-term value.
In the casual dining segment, it doesn’t get more legacy than Dine Brands Global. The company owns both IHOP, established in 1958, and Applebee’s, founded in 1980.
So, the company’s acquisition of 19-year-old fast casual concept Fuzzy’s Taco Shop today may seem a little out of place on paper. But that’s hardly the case. According to Dine Brands CEO John Peyton, the addition of Fuzzy’s perfectly fits the company’s strategy to accelerate its growth over the long term.
“We think Fuzzy's is a dynamic, winning concept within the Mexican category, so a high-growth concept in a high-growth category. We’re doing this for one reason – to invest in our long-term growth,” Peyton said during a phone interview Monday afternoon.
Fuzzy’s should indeed contribute to Dine Brands’ long-term growth. The Mexican fast casual brand generated approximately $230 million in systemwide sales in 2022 and currently includes nearly 140 units across 18 states, with more than 125 units in the pipeline. Peyton said there is significant potential to take Fuzzy’s from a regional to a national brand and it plans to do so through its heavily (98%) franchised model. That model is what Peyton called the “sweet spot,” for the acquisition.
“We have been looking for a highly-franchised brand for quite some time with a lot of runway to grow and Fuzzy’s checked all of our boxes,” he said. "Having that asset-light model gives us less exposure to the ups and downs of the market and a much more consistent revenue stream."
Though the macroeconomic environment is wildly uncertain at the moment, and mergers and acquisitions activity has slowed to a crawl this year accordingly, Peyton said the timing was right to add Fuzzy’s nonetheless.
“We believe in playing offense and defense during tough times. We invested and built our IHOP loyalty program during Covid so we could lean into it as we emerged,” he said. “We have a new website, new apps, a new POS system, all put into place during Covid to make sure we’re winning on the other side. It’s the same with adding Fuzzy’s now. It’s an acquisition that will allow us to maintain a strong balance sheet while adding to our scale.”
Scale has become a key advantage in the industry throughout the past several years of crises, as it allows for operators to better negotiate everything from delivery to supplier contracts. Dine Brands has leveraged its scale, for instance, to build a more robust technology infrastructure, form a $2 billion purchasing co-op and more.
“Fuzzy’s will benefit from this scale. It is at a point where it needs to grow, but it needs the resources and infrastructure to help it do so,” he said.
Dine Brands will also reap some benefits from this acquisition. The company’s increasingly diversified portfolio, for example, will provide better insulation through challenging times, while Fuzzy’s brings nearly 20 years of experience in the fast casual segment, which could help inform the growth of IHOP’s fledgling fast casual concept, Flip’d.
“By adding Fuzzy’s, we are adding a third category, which is Mexican, and we are diversifying not only our portfolio, but our dayparts. So IHOP overindexes in the mornings, while Applebee’s does so during dinner. Fuzzy’s is about 40% at lunch and 40% off-premises, so we like that we’re now exposed equally to different dayparts,” Peyton said. “Fuzzy’s also brings that fast casual experience to us so they can give us a point of view on that category and help with our Flip’d strategy.”
Peyton noted the company is laser focused on this integration and therefore doesn't have a playbook for any potential future acquisitions. But, he added a successful integration could allow the company to consider looking at future brands down the road. He also adds that IHOP and Applebee’s will remain a priority focus and for good reason; both brands are coming off of a strong sales quarter with robust growth plans of their own.
“One of the reasons we like Fuzzy’s is because it has a strong management team that is focused on what they are doing and it will not divert any of our attention away from our core brands,” Peyton said. “We like their model, and it is consistent with what we have and what we’re doing.”
Notably, Fuzzy’s leadership team, including CEO Paul Damico, will stay in place following the acquisition and the brand’s headquarters will stay put in Irving, Texas, while Dine Brands will continue to operate from Glendale, California.