Apple of Our Eye

Megan Rowe

When Applebee's International was occupied with expanding its empire during the 1990s, the casual dining chain adhered to the “location, location, location” mantra, focusing on site selection and deepening its reach throughout the U.S. Now that the company has a solid foothold in 48 states, the new guiding philosophy is “execution, execution, execution.” “Once we were known as a powerhouse developer. Now we're balanced between development and solid execution,” says David Goebel, executive vice president and COO of the Overland Park, KS-based company, which surpassed the 1,500-unit mark last year and continues to take on an additional 100 sites a year. “We put a lot of attention on great execution.”

Execution, in fact, is a good explanation for how Applebee's has managed to pull so far out in front of the casual dining packñand maintained that position. Sharp execution has helped Applebee's evolve into the largest and fastestgrowing chain in the casual dining segment.

Morgan Keegan's Robert Derrington, who recently upgraded Applebee's stock to “ outperform,” observes that the chain “enjoys broad menu appeal, attractive unit economics and a pool of talented franchise operators. That combination has fueled six to seven percent annual unit growth and has lifted the chain to its dominant industry position.” The company's market share is double its nearest competitor's.

Goebel says the strong showing by Applebee's is the fruition of a number of strategic moves by management several years ago.

A big difference involves people. In the last few years Applebee's has strengthened its top management team with new operations, financial, marketing and, most significantly, human resources muscle. In 2001 Louis Kaucic joined the senior team as chief people officer (he is now also executive vice president); shortly after, the company rolled out programs designed to retain the best performers and gradually chip away at turnover.

“We made a conscious decision to invest in our people,” Goebel says. New associates undergo a more rigorous selection process, management training emphasizes the importance of retaining better-performing hourly associates and manager bonuses reflect their ability to hold on to those valued employees.

“Our focus on retaining the top 80 percent of associates and managers has led to some very impressive retention,” Goebel observes. In three years, turnover among hourly employees was slashed from 146 percent to 92 percent.

Menus, Service in Tune with the Times
The beefed-up senior management team at Applebee's also spent time fine-tuning the menu to keep it fresh; in fact, more than 75 percent of the items on the current menu have been improved or replaced since 2001. The takeout side of the business has taken off with Applebee's Carside To-Go program. The most recent innovation was the addition of a cobranded Weight Watchers section that simplifies the hassle of eating out for that group of 13 million dieters.

When a handful of casual dining competitors got aggressive about takeout, rather than rush headlong into this high-growth area, Applebee's decided to fine tune its offering. The packaging was examined from a practical and aesthetic standpoint. As a result, Carside entrees arrive not in standard Styrofoam clamshells but instead in tightly closed boxes with clear lids that help avoid accidents and ensure customers are getting exactly what they ordered.

Carside To-Go, in place at about 1,000 units and on track to be in place systemwide by early 2005, has been a hit, and not at the expense of dining room sales. About 80 percent of the orders are thought to be incremental business for the stores.

While it's too early to say what impact the Weight Watchers appetizers, entrees and desserts will have on business, this program appeals to restaurant patrons who say they want to eat healthier. It also simplifies the dining-out experience for Weight Watchers members, who tally points of everything they consume and often shun restaurants because they can't determine the points associated with restaurant choices. Points for each Weight Watchers item appear on the menu.

Applebee's chose to partner with the giant dieting organization on the premise that Weight Watchers, with 13 million members, is in it for the long haul. But what about all those Atkins devotees? “We believe that for years now, low-carb dieters have figured out how to use restaurants and our menu,” Goebel says. So they order the top sirloin and ask the server to substitute double vegetables for the potatoes.

Another new addition to the menu, Applebee's first attempt at popular baby back ribs, is likely to boost the system's $10-$10.50 check average.

Still a Neighborhood Joint
Despite Applebee's lumbering size, expect the tweaking of the menu and policies to continue. “Although we're the biggest, we realize we must demonstrate some nimbleness and aggressiveness toward new programs,” Goebel says.

One practice that has long been integral to the Applebee's strategy, the idea of creating a local hangout atmosphere, remains. The “neighborhood” in Applebee's Neighborhood Grill & Bar is a shrewd ploy that has gone a long way toward making the brand seem less of a commodity than its competition. The original blueprint for the chain called for making it a place guests could call their ownñthe antichain chain, so to speak. Each location achieves that in a number of ways, including:

That atmosphere taps into several consumer trends, including the maturing of the baby boomer generation, growth in household income and increasingly hectic lifestyles. All these factors contribute to a new role for the full service restaurant as a place not only for the occasional treat but as a provider of everyday meals. With a check average of $10-$10.50, Applebee's is especially well-positioned to capture those daily guests.

Can Applebee's stay on top of a highly competitive field? Management is always peeking over their shoulder and thinking about ways to sustain the momentum. “We have conversations every day about how we must ward off any temptation to become complacent,” Goebbel says. “In any industry or sport, number one or two are more hungry and aggressive.”

Observers like to speculate about Applebee's plans to branch out into a new concept, but Goebbel insists now is not the time. “We always have an open eye to the marketplace and new trends, but it's not a focal point right now,” he says. Meanwhile, that well-oiled development machine is on track to reach 2,300 units within a few years.

How Applebee's Stacks up

...in the overall casual dining scene

Top Seven Brands (2002 U.S. Sales in billions):
Applebee's 3.2
Red Lobster 2.3
Outback Steakhouse 2.3
Chili's Grill & Bar 2.2
T.G.I. Friday's 2.1
The Olive Garden 1.9
Ruby Tuesday 1.2

....against direct competitors in the varied menu category (Unit counts as of 12/03)

Applebee's 1,538
Chili's 854
Ruby's 676
Friday's 543

Source: Technomic Information Services and Morgan Keegan Research