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Applebee’s Tab Tops $75 Million

As consumer preferences continue to swing in favor of fast-casual restaurants, Applebee’s Neighborhood Grill & Bar and other casual-dining chains are losing market share. In an effort to regain those customers, the eatery has launched the largest rebranding campaign of its history. Much of the strategy behind the multi-million dollar effort, deployed by Applebee’s parent company DineEquity Inc. in Glendale, will consist of a revamped menu and new appliances. American-made wood-fired grills have replaced gas-powered grills in the chain’s kitchens, while hand-cut steaks, hand-cut pork chops and grilled chicken breasts – all with the USDA stamp – are now available at its 2,000 U.S. locations. “We are in the midst of a transformation at Applebee’s, and we are recommitting ourselves to every aspect of the guest experience,” said DineEquity’s Chief Executive Julia Stewart in a statement. “This goes beyond a few new menu items or a limited-time offer. This is the biggest investment in culinary excellence in the company’s history.” The cost of the revamp was absorbed by Applebee’s franchisees and represented an investment of more than $75 million – including purchase and installation of the grills, a combined 60,000 hours of training for 6,000 meat cutters and the marketing campaign. But will the new platform be enough? Analyst Michael Gallo with CL King & Associates in New York said it’s too soon to tell. “It’s a large change and that change brings some additional complexities,” said Gallo, who follows DineEquity. “The (new platform) is going to change the flavor and taste of 40 percent of the menu items. … It may be successful but they’ll have to track whether customers like it, whether customers are repeating and whether they’re losing existing customers.” Struggling segment Same-store sales for Applebee’s have been either flat or declining over the past several quarters, according to DineEquity. In the most recent quarter, Applebee’s suffered a 3.7 percent drop in comparable store sales while sales increased 1.5 percent for IHOP, the company’s other major restaurant chain. This marked the 12th consecutive quarter of positive comparable sales for the IHOP brand, according to filings. Stewart said IHOP has been performing well since it underwent its menu redesign in 2013 – and has been working to increase traffic beyond breakfast hours. Overall, DineEquity reported first-quarter adjusted net income of $25.2 million ($1.37 a share) on revenue of $163 million. That fell short of analysts’ expectations of adjusted net income of $1.69 a share on revenue of $166 million. DineEquity did not respond to requests for an interview. “Clearly, the results were not where we want them to be and reflect the challenges we are seeing in casual dining and issues specific to Applebee’s,” Stewart said during DineEquity’s first-quarter conference call. “I’ve mentioned this a couple of times, but I do believe there is a bit – from the consumer’s perspective – there is a perception of a sea of sameness in casual dining. And that’s the work that we are really doing, is to change that perception.” Casual dining restaurants – think TGI Friday’s or Outhouse Steakback – typically have wait staff, whereas fast-casual eateries like Chipotle and PizzaRev do not. Both segments are generally less expensive than upscale full-service restaurants. Applebee’s, which pioneered the “2 for $20,” still averages a price point of $15 to $20 for a meal and a drink. But lately, Applebee’s and other brands in the casual-dining segment have struggled to keep customers amidst competitors. Chains such as Chili’s and Olive Garden, which have faced slow declines of their same-store sales over recent years, have responded by shrinking the size of their restaurants. According to NPD Group Inc., a market research firm in Port Washington, N.Y., fast-casual concepts now dominate the restaurant industry. While consumers are back to eating at restaurants again at nearly pre-recession levels, according to NPD’s 2015 data, the casual-dining segment, which accounts for about 21 percent of all restaurant visits, saw a decline. Cal Marsh, the director of national restaurant accounts at Falcon Realty Advisors in Dallas, said the added pressure of rising labor costs is also negatively affecting the segment. “Labor continues to put pressure on not only operating a restaurant but compressing profit margins. Labor remains the biggest issue facing casual dining today. That will likely only get worse in 2017 and 2018,” he said. “(In addition), the majority of the consumer market is looking for more up-to-date and relevant concepts that are more in tune with healthier, sustainable menu items. Casual dining has been the slowest to respond to this trend, improving but generally overshadowed by fast-casual concepts.” New trajectory Besides the new grills and menus, Applebee’s is pursuing three key objectives to breathe life back into its brand. Tactics include optimizing guests’ experience through technology, improving operations by retraining staff at the front and back of the house and remodeling restaurants. The remodeling package, which is being finalized, will redevelop the restaurant exteriors to make them more contemporary, Stewart said during the first-quarter conference call. The chain also launched its new mobile app in April, allowing guests to now order and make reservations days in advance. Applebee’s big tech initiation was in 2013 when it brought tablets to its establishments to modernize its image and make the customer visit more efficient. Tables at Applebee’s feature “tablets on the table” for guests to place orders and pay quicker, with the aim of turning tables faster and raising sales revenue. Firing up So far, Applebee’s has installed the new wood-fired grills and the first items on them include top sirloin steaks and bone-in pork chops. To compliment the new items, staff have been trained to hand-cut the meat in-house before it hits the grills. “Our franchisees’ team members have undergone significant training in the front and back of the house to provide enhanced guest service and to support the new platform launch,” Stewart said during the conference call. “The new platform not only represents a major vote of confidence by our franchisees, but also a major investment. And most importantly, we believe it will significantly change the perception of Applebee’s.” Still, Gallo the analyst said there are a handful of challenges when making a change like this on a national scale. Changing the grill will affect a good portion of the restaurant’s menu, but it’s unclear (yet) if customers will respond well to the changes, he said. “There’s always an unknown element when you do something on a national scale,” he said. “(Applebee’s) is in a competitive category and it also remains to be seen how others in the category will respond if it does succeed. Other bars and grills have been seeing a small same-store decline for a decade now.”

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