IHOP Is Rethinking Its Real Estate Format To Get Back To Growth

During this latest go-round of earnings, breakfast heavyweights Starbucks, Dunkin’ and IHOP all reported impending closures totaling hundreds of locations–a consequence largely driven by a devastated morning daypart as commuters stay home. 

Dunkin’ and Starbucks, however, have the benefit of drive-thru-heavy footprints to promote their recovery. IHOP’s road may be a bit bumpier, as evidenced by its Q3 results in which same-store sales were down by 30% year-over-year. 

Though that road to recovery may be bumpy, the path itself is clear for IHOP President Jay Johns. 

“We think recovery is going really well. We’re not where we want to be, but we are slowly and steadily marching toward getting back to pre-COVID numbers and consistent week over week improvements,” he said, citing that the most recent week’s sales were down 21% versus that decline of 30% on the quarter as an example. 

During a call last week, Johns ticked off a number of pieces the chain has put into place to expedite IHOP’s recovery. For starters, it has been shifting some of its promotional focus away from breakfast. The chain launched IHOPPY Hour in late September, which marked its first-ever lunch and dinner-focused value menu. The promotion builds off of the much-talked-about IHOb campaign from 2018 in which the chain created a message outside of its signature morning daypart by pushing burgers.

“With IHOPPY Hour, it is starting to change how people use us,” Johns said. “I don’t think breakfast is dead. It’s still coming back. But people are forming new routines and we’re trying to intersect with their new habits. This has been part of our long-term strategy. We want to be more than just breakfast and get more frequency and loyalty from all dayparts. We took that first step with IHOb and are building on that with the IHOPPY hour.” 

Also, and like most of its casual dining peers, IHOP successfully pivoted to an off-premise business at the onset of the pandemic, including the addition “within weeks” of a curbside-to-go premise. In Q3 alone, off-premise comp sales at IHOP were up by 154%. Now, the off-premise mix is a little over 30%, split nearly evenly between delivery (16%) and takeout (18%). More than 20% of all orders are placed digitally, a habit not likely to go away in a post-pandemic environment. This digitally-driven, off-premise shift has Johns optimistic. 

“We started pushing about three years ago into off-premise, adding online ordering and delivery and launching new packaging to make sure our pancakes and other breakfast food was traveling well,” he said. “A lot of our foundation was already in place when this happened and that has been helpful.”

Even as dining rooms start to open across the country, Johns believes off-premise will continue to be a consistent driver of sales in the long-term for the 1,683-unit chain. 

“As our dining rooms open, those off-premise percentages may drop a little bit because dine-in numbers will go into that mix, but that doesn’t mean we’re losing those off-premise sales,” he said. “[Pre-pandemic], off-premise sales were incremental and now that has flipped where dine-in sales are now incremental. I think consumer behavior will shift permanently to to-go and delivery because people have learned how to use them and, frankly, it looks like they like them.” 

As such, IHOP is “thinking through” its future real estate prospects. Importantly, the chain still very much expects to grow despite closing up to 100 underperforming units. IHOP has opened 16 restaurants so far this year, in fact, half of which were opened after the pandemic hit and closures went into place. 

What does such “thinking through” look like exactly for a traditional family dining concept? A focus on that permanent customer behavior shift to off-premise. 

“We are looking at prototypes to think how we handle to-go orders more efficiently. What are better, easier ways to pick up food? Does that include a pickup window?” Johns said. “We’re thinking through a lot of ideas right now and the footprint itself, asking if we need as much space, or if we dedicate more for to-go, less for tables. If we look at real estate that automatically has a patio. We were already thinking about to-go differently, but now we’re thinking about it more and ideating the most optimal ways to pick up food.” 

No prototypes have been launched yet, though Johns said plenty of ideas have been drawn out. Not among those ideas right now is a virtual brand, though many of its casual dining peers–including sister chain Applebee’s–have jumped into the space to generate additional revenue. That’s not to say a virtual brand is completely off the table, however. 

“It’s not out of the question and we’ve ideated on it,” Johns said. “But right now, we’re focused on getting our dining rooms open safely and continuing to build those off-premise channels we have. We really want to get back to our core growth and that strong pipeline.” 

That strong pipeline, by the way, includes Flip’d–a concept launched late last year that marked IHOP’s foray into the fast casual segment. Flip’d, which is housed in a smaller, off-premise-friendly format, was put on hold when the pandemic started. 

“It’s been un-paused,” Johns said. “We put it on pause to put all of our resources and focus on our core business, but we’re far enough into our recovery now that we’ve relaunched the project. It’s somewhat fair to say Flip’d is more enticing now, but we may change how we think about how the product mix breaks down and tweak the design to make it more relevant.”   

He said “a few” Flip’d locations will open in 2021, which will be rolled into the chain’s development plans, which are set at around 75 a year. 

“We are going to have some closures but we will replace them with better performing, higher-volume restaurants and that will benefit our franchisees in the mid and long-term,” Johns said. “We’re bullish. We are coming back strong and we will be growing again very rapidly and that includes Flip’d.”