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Menu Change

By SLAV KANDYBA, Staff Reporter President and CEO Julia Stewart leads a reorganization and rejuvenation of the IHOP Corp. brand and the structure of the Glendale-based company’s franchise system as the restaurant chain moves to gain recognition as more than just a breakfast place Julia Stewart wants IHOP to be more than pancakes. If her vision for the company’s 900-plus stand-alone franchises comes to fruition, the International House of Pancakes brand will be known for more than its staple breakfast items. There’ll be complete and popular lunch and even dinner choices, a la Denny’s and Carrow’s. More importantly, customers will patronize IHOP at times other than the morning. If that happens, the New York Stock Exchange-traded company, based in Glendale, could see its fortunes increase. But before any of that happens, Stewart, who has been CEO since 2001, is stewarding the company through a dramatic business model change. Up to Stewart’s arrival and some time after, franchisors came to IHOP seeking capital for development and building out restaurants. IHOP would then get a share of the restaurant’s revenue via revenue streams including royalties. Under the old business model, most franchisees utilized up to $2 million apiece in IHOP funds to build restaurants. But Stewart decided it was time for a change and cut the funding pipeline. Franchisees are now responsible for raising their own capital. The change has meant fewer restaurants are opening, and, correspondingly, the company’s revenues are slipping. However, Wall Street apparently stands behind Stewart’s vision, as IHOP stock has held at close to its 52-week high of $39.40, trading at $37.10 in late September. The 52-week low was $31.88. As of Dec. 31, 2003, there were 1,165 IHOP restaurants, with franchisees operating 991 of them and licensees 130. IHOP operated 44 restaurants. Franchisees are independent third parties who are licensed by IHOP. In the first and the second quarters of 2004, revenues dipped from those same quarters of 2003. The company reported revenues of $94 million in 2003 Q1. In the same quarter this year, they were $91 million. In Q2, the gap widened, as reported revenues dropped from $103.3 million to $86.1 million, in 2003 and 2004, respectively. . The revenue reduction is directly attributable to the business model change, with IHOP no longer receiving revenue streams from financing development along with royalty payments. Nevertheless, Stewart is optimistic and believes the company will hold steady and grow with the new business strategy. Question: Why did you feel IHOP was due for a change of its business model, to have franchisees invest capital for investment? Answer: When I joined the organization in December 2001, the first real assignment the board of directors gave me was to go out and examine the organizations. So I spent the first 90 days on the job meeting with operators and franchisees (and other key staff). I began to formulate the strengths of the experiences and hired an outside consultant. I was beginning to think about this business model (especially) given our life cycle. We determined that the business model did need to be changed. We took the board of directors every step of the way. The real force of the effort was over a six-month period. Q: How did past experiences influence your decision regarding the business model? A: I had historically worked in franchise organizations. With that as a backdrop, I realized it’s got to be a win-win for us and the franchises. I thought that way my whole career. Q: How different is it to serve as CEO of IHOP as compared to the companies where you worked before? A: Before IHOP I worked at Applebee’s and Taco Bell. I don’t know if it was any different or any harder. It has to do with the life cycle: it’s communicating with the investors and Wall Street. It was so that everyone understood the business strategy; it’s about how effectively you can communicate. Q: What is your advertising strategy? Are you trying new media as platforms? A: The advertising strategy had historically been that franchisees bought locally and the ads didn’t resonate well with guests. It was just sort of random discussion What I have done now is (launch) an advertising campaign (drawn up and carried out by the) the second largest advertising agency. They are limited-time only and give you a specific reason (to visit an IHOP restaurant). We also have gone to local cable. It’s been a wonderful awakening of the brand. This year we added Hispanic cable. In local markets we do radio and billboard. There are obviously things we are continuing to look at (such as Internet advertising) we’re always looking. Q: You mentioned in previous media interviews that you manage by building rapport? What is your approach to that end? A: With (so many) franchises it will take a while for me to meet each one. The most important thing that you do when you work in a franchise environment is (make sure to get results). I have a board of advisers, about 14 of them. I am working with them and their constituents to come up with ideas to drive results. (The board of advisers) are voted by (franchise operators) in every region of our company. I like any franchisee who will work with that group to make sure I’m sharing strategies. First and foremost, however, I get the results I said I am going to get. It’s a fine line you walk. Q: You’ve earned a nickname “Velvet Hammer.” How? Who gave that to you and why? A: I heard that said about me many times. A franchisee coined it, because I am tough on standards and tough on our brand. But I am also collaborative and sensitive to needs. I care about what (people) think. Q: IHOP announced it is planning to remodel restaurants and change its lunch and dinner plans? What warrants that and why do you think it will be a boon to the company? A: One of the areas we said we were going to focus on is to drive more guests in for lunch and dinner. We said we would do three things: make restaurant ambiance more conducive to lunch and dinner, so we required remodeling every five years. Everyone will have to do this remodeling. The second way is periodic product promotion we would enhance our core menu with the kinds of things people really wanted. These kinds of strategies are now in effect. It’ll take five years for remodeling. Eventually we’ll get there. Q: Some of the restaurants opening in Cincinnati are prototypes. Can you explain how they will serve as prototypes and what strategies are being tested there? A: We have four restaurants under construction and expect to open at least three this year. (Cincinnati) will be the company’s market. The restaurants there are going to help us in new initiatives. It gives us a model that we control. The new prototype will help us test new ideas ( IHOP is mandating its franchises to remodel in the next five years to give the restaurants a different look. According to spokesperson Patrick Lenow, patrons will notice that the exterior of the restaurants have “additional use of the color red, the addition of a lattice behind the IHOP sign, a cobblestone entrance, new light fixtures and the addition of new planters. All of these changes are designed to make the exterior feel more welcoming and generate attention from traffic driving by.”) You’ll see similar prototypes rolled out. (Appearances) will be closely coordinated (between restaurants) in other states. Q: According to your financial statements, revenues have slid in the first two quarters of 2004 as compared to the same quarters in 2003. At the same time, you have raised your guidance for the rest of the year. Why? A: The overall number of restaurants that we’re opening is less this year because we changed the business models. The reason for the guidance being up is (that) sales are up. EPS is up because of royalties. It would be safe to say the investment community has responded well. They all seem to be on the same page and are pleased with what we’re doing. Q: Speaking of the investment community do you feel that you have its support? A: I think Wall Street sees a re-energized brand, cohesive leadership and franchises (are on the same page with us). I don’t think Wall Street can be any happier. If you spoke to someone on the Street, you would find (them saying that) we’re going to deliver on several aspects of our strategy. If you look at our growth, you’ll see that we’re doing all the right things. Everything we said we would do, we’ve done. SNAPSHOT – Julia A. Stewart Title: President and CEO, IHOP Corp. Age: 49 Education: San Diego State University, 1977, majored in Speech Communication Most Admired Person/s: Dr. Martin Luther King, Jr. and Jackie Trujillo (former Chairman of Harman Management, KFC’s largest franchisee) Career Turning Point: Moving from restaurant marketing into restaurant operations

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