IHOP's Recipe for Success - Franchise Article

With average ticket sales of $7, IHOP franchisees have to make their money one waffle at a time.

But one Atlanta operator, Joe Scripture, has been selling enough coffee and omelets at his five existing IHOP restaurants that he wants to open seven more.

Scripture is taking advantage of Glendale, Calif.-based IHOP Corp. 's (NYSE: IHP) new franchise strategy, which lets operators pick their own store locations.

"Previously, I would have had to go far out of Atlanta to develop on my own," said Scripture, who owns the Buckhead IHOP on Peachtree Road, one in Austell and three in Cobb County.

"I'd have been dependent on [IHOP] to source and develop the location," said Scripture, who bought his first franchise in 1992.

Under the new strategy, Scripture and others will scout, develop and secure financing for stores on their own.

IHOP has 51 locations in Georgia , making it the state with the fourth-highest number of IHOPs after California , Texas and Florida . But franchise owners have plans to build more than a dozen new locations soon.

For Scripture, he hopes that's a recipe for success, which he's already achieved with his franchises. He was named IHOP's "franchisee of the year" in 2004, and now the 56-year-old hopes to replicate that by adding seven more stores over the next few years.

Scripture and business partner Jose Rodriguez -- who owns four Georgia IHOPs -- bought rights to develop stores in Carrollton, Peachtree City, Cartersville, Covington, Canton and Midtown, where, Scripture said, they still are scouting for a good space.

Another franchisee, Mohamed Ahmed, plans four more stores in the next five years, in Snellville and Jackson, Rockdale and Walton counties. A franchisee for 10 years, Ahmed also will open a Loganville store soon, adding to his current Conyers and Lilburn locations.

Scripture said the new corporate policy makes much more sense.

"Good franchisees who know how to operate a restaurant properly within the structure" can develop on their own, he said. The new challenge, added Scripture, is learning how to be competent developers and get financing.

For the corporate headquarters, the franchise change freed up needed capital to invest in management and national advertising for its 1,207 locations.

Scripture said about $100 million was moved from financing new franchises into corporate management, marketing and dividends. Now, the chain advertises nationally as opposed to fragmented by region, which Scripture said helped boost store sales.

IHOP spokesman Patrick Lenow said IHOP's success in Georgia could be attributed to the chain's family focus, popular breakfast and long history in the state. Plus, the chain tends to do well in the South, he said, as do many restaurants with breakfast. The first IHOP here opened in Savannah in 1965, followed by an Atlanta store in 1968.

IHOP also has had a comeback of sorts in the past few years, after it began renovating store interiors and beefing up its menu to include more lunch and dinner items.

But breakfast still is the core of the 45-year-old restaurant chain, where about two generations of consumers have gone to form bonds over coffee, eggs and pancakes.

When IHOP tried to de-emphasize breakfast several years ago, the marketing effort failed, said Walter Butkus, a partner with Fairfield, Conn.-based Restaurant Research LLC.

Now, learning from that mistake, the brand wants diners to come for breakfast, but remember IHOP for lunch and dinner too.

Scripture said that about 35 percent of the business in his five locations, which include Woodstock , Cobb Parkway, South Cobb Drive and Austell, comes from breakfast.

So while revenue from the three meals are split about evenly, he said many customers order breakfast all day long, which is one reason IHOP doesn't want to retreat from its market position as the place for breakfast 24/7.

The chain also is in a five-year renovation period, adding new lighting and interiors to its stores. Franchisees are required to do the $80,000 to $100,000 remodel every five years.

With the slogan, "Come hungry and leave happy," new menu items have bolder flavors like cheese blintzes (crepe-style pancakes filled with cheese, strawberry preserves and creme cheese) and grilled cod hollandaise.

All of these changes led to double-digit increases in year-over-year comparable sales in 2003 and 2004.

In announcing results for the second quarter on July 28, IHOP CEO Julia A. Stewart said the company's sales performance for the first six months of 2005 was "disappointing," but said she expected an improvement in the second half of the year.

The dip in sales could be due to renewed breakfast marketing from quick service restaurants such as Burger King, Butkus said.

"Typically in the restaurant industry, 2 to 4 percent growth is good. Six to 8 percent growth is not sustainable. It's a mature industry, so if you're up, it means someone else is behind. QSRs (quick service restaurants) have done very well, which would have a negative impact on family dining."

Still, IHOP believes the market can bear between 300 and 700 more franchises, Lenow said.