IHOP Adds Applebee's To Menu

By Frank Ahrens
Washington Post Staff Writer
Tuesday, July 17, 2007

The International House of Pancakes, that blue-roofed flipper of flapjacks, announced yesterday that it will buy Applebee's restaurants for $2.1 billion. Converted to silver-dollar pancakes, $2.1 billion would form a very slender and syrupy column 8,300 miles high.

The restaurant sector as a whole is expecting some tough second-quarter earnings in coming days, thanks to high food costs and gas prices that can keep diners home. The industry's 935,000 restaurants are on pace to book a record $537 billion in revenue this year, according to the National Restaurant Association, but rising food costs have munched away at profitability.

Despite the rougher times, IHOP Corp. has watched its revenue crepe upward, showing a 2.5 percent uptick in second-quarter sales this year compared to last. The omelet-maker had been seeking an acquisition for more than a year.

Applebee's International, on the other hand, has seen its fortunes drop. June sales were down only 0.3 percent, but that's largely because the company jacked up its menu prices at the beginning of the month, part of an industry-wide trend. For the first quarter of this year, Applebee's earnings were one-third what they were for the same period last year. The company closed 24 of its 1,943 restaurants in March and was forced to add an investor critical of the company's poor performance to its board of directors.

Applebee's: Not feelin' so good in the neighborhood.

"Everyone has had their fill of riblets," said Ron Fournier, one of the authors of 2006's "Applebee's America," which examined the nexus of U.S. culture, politics and religion.

A decade ago, Fournier said, Applebee's restaurants excelled by becoming a community center in the American exurbs -- a landscape of newcomers searching for a neighborhood bar. Applebee's cultivated a strong sense of place in its restaurants; the walls were covered with pictures of local soldiers and sports teams. What it didn't cultivate was a signature dish.

As rivals in the highly competitive table-service restaurant sector promoted their trademark items -- Outback Steakhouse's "Bloomin' Onion" appetizer, Hooters' wings and Ruby Tuesday's ribs -- Applebee's did not, Fournier said. The restaurant has recently tried to add some sizzle to its menu by partnering with celebrity chef Tyler Florence.

"More and more, other restaurants are giving a sense of community and better food," Fournier said.

Applebee's referred media inquiries to IHOP yesterday. Applebee's stock closed up 53 cents at $24.91 per share. IHOP stock closed up $4.99 per share at $61.24.

IHOP's cure for Applebee's woes is franchising, the company said.

IHOP chief executive Julia A. Stewart, who previously headed Applebee's domestic operation, said that IHOP would convert Applebee's 508 owned-and-operated restaurants to franchises, significantly offloading capital and operating costs onto franchisees. (Applebee's restaurants will keep their name.) IHOP, based in Glendale, Calif., reinvigorated itself similarly nearly five years ago, remodeling stores, sprucing up the menu and converting nearly all of its restaurants to franchises.

It's a viable strategic option that did not exist until recently.

Over the past 10 years, potential franchise buyers have found more ways than ever to buy into a national chain, said Hudson Riehle, an economist at the restaurant association. "There has been a growth in the number of financing companies available to an individual restaurateur who would want to take on a brand name" such as Applebee's, he said.

Applebee's, based in Overland Park, Kan., began life in Atlanta in 1980 as "T.J. Applebee's Rx for Edibles & Elixirs," a name that sounds more like 1880. The brand was sold to chemical giant W.R. Grace in 1983 and went public in 1989.

Applebee's and its rivals were spoofed in the 1999 film "Office Space," an account of cubicle life in an office park. The film's restaurant is "Chotchskie's" and the oppressively ebullient wait staff wears suspenders festooned with buttons, or "pieces of flair."

Applebee's appeared so frequently in the 2006 Will Ferrell NASCAR parody, "Talladega Nights: The Ballad of Ricky Bobby," that it was nearly a supporting character.

As for 49-year-old IHOP, its royal blue A-frame roof may be second only to Stuckey's teal pagoda as an interstate highway treat. The company officially adopted its acronym moniker in 1973 (though it never quite explained the "international" part) and began trading on the Nasdaq in 1991.

Long an innovator in breakfast technology, IHOP pushed the limits of gastrointestinal capacity with the introduction of its "stuffed French toast" dish in 2003, as unstuffed French toast apparently had become inadequate for some diners.

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