Richard K. Herzer Titles: Chairman and CEO Company: IHOP Corp. Age: 69 Birthplace: Los Angeles Education: Bachelor’s degree in business from UCLA Most Admired Person: Winston Churchill Personal: Married 43 years; three children, six grandchildren IHOP’s Chairman and CEO Has Been Around Long Enough To Have Seen His Company Go From Bad To Worse To Great As chairman and CEO of what is arguably the country’s best-known brand for pancake and family-style breakfast eateries, IHOP Corp.’s Richard K. Herzer has been to the front lines and back again. He started in 1967 as vice president and controller of IHOP’s corporate predecessor, International Industries Inc. In 1979 he was named president and director, and in 1983 became the company’s top executive Over the last 30 years Herzer has seen the company go on, off and back on the market; has watched in anguish as it came within a hair’s breadth of bankruptcy; has handed in his resignation in disgust, changed his mind and stayed; and finally, with the help of new investors, came up with a plan to wrestle the company away from its Swiss owners for $40 million in a management-led leveraged buyout in 1987. This is truly a Valley company: The first IHOP restaurant opened in Toluca Lake on July 7, 1958. Today, IHOP is a publicly traded company with roughly 100 employees in Glendale, nearly 1,000 franchises in operation in the United States and abroad, and plans to establish 75 more restaurants this year. Those franchises are not your typical tilt-up businesses, quickly assembled and put on the market. The company takes long and arduous steps in selecting a site, buying or leasing property, constructing new stores or renovating existing buildings, long before it starts looking for a franchise buyer. Still, despite the great initial involvement of the parent company, according to Herzer, it is the franchisees, not the CEO, that drive the company’s success. He sees the company’s job as providing franchisees with quality locations that they can be successful in. He’s not an easy one to pencil in, but Herzer spoke to reporter Jacqueline Fox about his history with the company, how IHOP Corp. has transformed itself over the last three decades and what makes its franchises so popular with entrepreneurs. Oh, and by the way, his favorite syrup? Good old-fashioned maple. Question: How has IHOP changed over the last three decades and what have been some of the top challenges? Answer: Well, significantly, we’ll put it that way. Obviously, the dynamics of the marketplace are the driver. Thirty years ago the company was a high-franchise company called a conglomerate because that was the buzzword. And the concept was anybody could franchise anything, from clothing to paper. But subsequent to my coming in, I have said that we are a restaurant company, period. And we focus on the restaurant itself. Q: How did you get your start with IHOP and how did you come to be named its top executive? A: Well, at that time, like everyone else, I was out on the street looking for a job. So, in 1967 I interviewed with International Industries, which didn’t know anything about franchises, but then neither did I. In 1989 the new owner, a nice Austrian guy, took over but he didn’t know anything about the American market, and honest Injun, I’m not sure I did either. He led the company nearly into bankruptcy and the (Swiss bankers) took it over. They named me president and I took it, but I wasn’t sure I’d be around for long because of our differing views. I resigned, but then later (with the assistance of PaineWebber) we managed to take the company away from the Swiss through the leverage buyout in 1987. Q: How did the leveraged buyout change the company? A: The first thing we did was we established an (employee stock option plan) because the employees had never had anything in the company before. Then we started hiring people and building restaurants. But at the core, what we did was we financially engineered this thing so that we could sustain, even with a downturn in current sales. Q: Revenues from franchise operations and the number of new locations in 2000 were strong. What do you think was the driving force behind the growth? A: Franchise revenues are a continuing success pattern simply because they work very well. The (IHOP brand) is very well known in the marketplace. It has a high recognition rate and people generally have a very warm and wonderful feeling about it. Q: THE IHOP brand is synonymous with breakfast by virtue of its name alone. What does that do to sales of lunch and dinner items? A: Obviously, the need for additional revenue during lunch and dinner is critical because the cost of owning and running a restaurant continues to go up. We’d love to offer our customers, say, a huge T-bone steak dinner, but that’s just not who we are and that’s OK. Now people may come in and want bacon and eggs for breakfast, and that’s fine. But there is always going to be the veto vote among the group, and that’s what we have to focus on, taking care of the veto customer. Q: How many franchises are there in operation today and how many will you add this year? A: There are 897 franchises in the United States, Canada and overseas, and 71 co-operated sites. We anticipate putting between 70 and 75 on the street in 2001. Q: How strong is the franchise market and why are IHOP franchises so popular? A: It’s very strong. And the reason that people buy the concept is because it works, and people have learned to understand it. We have failures, but out of 900 restaurants, we will probably get five to 10 in a 12-month period. That’s peanuts to us. Q: IHOP’s franchise program is very hands-on, in terms of construction, renovation and acquisition of property. Why are things run this way? A: In my business, selling a pancake is the end result of many things. Building a facility for us is very critical because, as far as we are concerned, that’s a source of revenue for the company for the next 20 years. We will spend many months looking at a site, working with our construction team on a new site, renovating old buildings, etc., before we begin the franchisee stage. So, notice how far down the list the franchisee comes in. That building has to hold up for at least 20 years, so it’s very important. We are in there from start to finish, and we go back again. Q: The company is reportedly planning to spend roughly $94 million in capital expansions in 2001. Are those plans on target considering the slow-down in the economy and are you anxious about the future? A: Obviously, we are concerned. We would be irresponsible if we weren’t. But we haven’t touched our development schedule at this particular point in time because we have a unique concept in that, in recessions in history, we haven’t really diminished as far as our sales are concerned. People still eat, we are a family restaurant and our price points are not that far above fast food prices.
PANCAKES—On the Frontline of the Pancake Wars