Lookin Good in the Neighborhood

Patricia Hochwarth

At 1,500 units and growing, Applebee’s
is casual dining’s big kid on the block.

Lookin’ Good in the Neighborhood

Behind the folksy charm of its neighborhood eatery concept, characterized by hearty American grill cuisine and a cozily cluttered decor of local memorabilia, lies a corporate powerhouse that, last year, topped the casual dining segment in Technomic’s Top 100 chains.
Applebee’s International, backed by a formidable management team, towers above the pack with 2002 systemwide sales at a whopping $3.24 billion (an 11 percent increase over 2001). And, at a time when many restaurant stocks are sluggish at best, 23-year-old Applebee’s is a juggernaut year after year.

The 1,500-unit, Overland Park, Kansas-based chain is poised to penetrate even deeper into the casual dining market, with 100-plus units scheduled to open this year nationwide. The last 10 years has seen aggressive development, with more than 100 units opening yearly, covering 49 states. It’s also expanding internationally, with 38 units in Canada, the Mediterranean/Middle East and Mexico/Central America.

Key to its success is a close-knit, well-oiled franchise system, with a core of just 51 domestic and 16 international franchisees comprising 75 percent of the system. In fact, Applebee’s has lately turned away prospective franchisees, with limited opportunities available in just two states, Texas and Hawaii.

And the secret to keeping those franchisees happy? "Easy," laughs Bill Palmer, founder of the concept and president of Applebee’s Management Company, based in Atlanta. "Everybody got rich. But seriously, we’re very close and the company’s management is the best we’ve ever had." Adds Abe Gustin, Jr., former chairman of the board and c.e.o. and architect of the franchise system, "We’re like a big family. We never hesitate to ask for franchisees’ help. Participation is good for the system."

Indeed. Since 1992, Applebee’s has grown steadily, with c.e.o. Lloyd Hill projecting an eventual growth cap of 2,300 domestic units. Suburban locations are still the focus of expansion, although as it saturates these markets it will move toward more urban locales. In fact, its Manhattan eatery at Times Square, with more than $8.5 million in sales, is a top performer in the system.

"Our cash flow continues to increase as we generated EBITDA of $155 million for the year," notes Hill in the company’s 2001 Annual Report. "Combining this cash flow with our strong financial position allowed us to continue stock repurchases to enhance shareholder returns."

Hill attributes this growth to two key factors. "First, founder Bill Palmer had a vision of neighborhood and tight staff teams that knew their patrons and provided really good food at great prices—although I don’t know if his vision was for 1,500 restaurants," he chuckles. "The second factor was Abe Gustin’s vision for expanding Bill’s early dream. He set up a franchising system and built a franchise culture so that we would partner legitimately with our franchisees and share the concept’s growth with them."

So what is it about the concept itself that drives its success? "Neighborhood," Hill says simply. "There’s a certain comfort and familiarity here. We really are working hard to become America’s favorite neighbor and we take that mission very seriously. We want to be a non-chain chain. Everything the customer sees and tastes and experiences has some uniqueness to it. In each neighborhood restaurant, we honor local achievers through our hero wall." The hero wall salutes hometown champions, such as astronauts, musicians and sports teams with photos and memorabilia.

In today’s post-9/11 environment, Hill notes, "there’s a real need for continuity, value, convenience and being with people you love and perhaps people you might not know, but want to know. That’s one of the things Applebee’s offers.

"Also, we do our best to hire from the neighborhood," says Hill. "Whether they’re kids or grandparents, those ment turnover by 50 percent (from 30 percent to 20 percent). "You can’t affect this neighborhood attribute we’ve got if you’re constantly turning people over," notes Hill.

The turning point came two years ago with several concerted approaches to reducing turnover in its company units. This included implementation of a proprietary "mix-management" system that identifies high-, middle- and low-performing hourly associates based on their performance against specific core competencies, and setting aggressive retention goals for high- and middle- performers. In addition, the program calculates restaurant managers’ bonuses, in part, on their ability to aggressively retain high- and middle-performing hourly associates and openly compares managers’ success rates with their peers in holding onto these associates.

Menu Evolution
A connection to the surrounding neighborhood is also reflected in the menu. While a core optional menu dictates that 60 percent of any menu in the system reflect corporate standard offerings, the remaining 40 percent is left to the local franchisee to determine, based on regional preferences.

New menu initiatives, according to the annual report, include a redesigned core menu featuring a blend of new items, signature items and long-time favorites. "To enhance our price/value perception, we also enlarged the portion size of some items," says Hill. "For example, we’ve increased our signature Fiesta Lime Chicken by about 70 percent, while raising the price just 12 percent, so the value is huge. Also, we’ve recently added new items with bolder flavors and higher spice profiles." Checks average between $10 and $10.50 in company markets.

"There’s a specific reason why early on Abe and Bill named this a grill and bar as opposed to a bar and grill," continues Hill. "Food is the predominant portion of our mix. We’re about 14 percent bar and the balance food. While we offer various bar programs from time to time, our focus is on food."

Last year Applebee’s looked to enhance and promote its takeout operation, anticipating significant sales. "Phase one recognized that to-go is a rapidly growing component, that people expect it, and that we needed uniformity," says Hill. "So systems are in place to answer the phone, and new see-through packaging keeps the food warmer. Vents prevent things like French fries from becoming soggy and containers are sized specifically to fit bags and prevent spillage. It’s more expensive than styrofoam, but we think it’s a worthwhile investment to please the customer." Phase two focuses on curbside pickup, with over 150 units currently testing it and a full roll-out planned for this year.

Staying On Top
Surf network television any night of the week and you’re likely to catch an Applebee’s commercial, with its kinetic energy and can’t-get-that-jingle-out-of-your-head "Eatin’ Good in the Neighborhood." According to its annual report, "our system size provides us with significant funds to leverage our advertising clout on national television." Significant is an understatement. Applebee’s backed its ad campaign with a 13 percent increase in network advertising spending last year; the total is more than $50 million.

A new unit prototype is slated to roll out this year, encompassing both exterior and interior design updates. "This will bring us into the new century, and beyond the 1980s look where we started," says Palmer. "While we’ve made changes over time, requiring restaurants to update every seven years, customer studies show that it hasn’t really been noticed. They see the same Tiffany-style lamps, the same tabletops. We are addressing design issues related to the waiting area, the smoking issue, handicapped access and a more colorful, less monotonous look."

While Hill demurs when pressed about future concept plans, it is definitely on the corporate agenda. "Looking forward, we see that for the next three to five years we’ll be able to produce earnings growth around 14 to 17 percent without a second concept. And that’s important for our shareholders. Having said that, yes, we’ll have a second concept in the future but not at this moment. However, we don’t want to wake up one day and see we’ve missed the next Applebee’s.

"I think our greatest challenge is simply improving ourselves," reflects Hill. "Our biggest competition isn’t the other concepts in our segment as much as ourselves—in focusing on what we know and do well and making sure we raise the bar, twice a year at a minimum, on our food and service excellence."

So where does Applebee’s go from here? "Good question," laughs Palmer. "While we’ve always done well, we’ve never really had it all together at one time—in terms of the marketing at the same time as the food and the right people in place. But now we’ve got it all and I wouldn’t want to be a competitor in the next few years because we’re gonna be the 800-pound gorilla. That’s just the way it’s gonna be." Sounds like fighting words.