After several years of paring down its system to prioritize well-performing restaurants and better compete in a saturated casual dining segment, Applebee’s is positioned for net new unit growth again as soon as next year.
That may come as a bit of a surprise given the how full-service dining category was disproportionately impacted by the COVID-19 pandemic from both capacity limits and apprehensive consumers.
Of course, the environment is wildly different than it was in mid-2020, but Applebee’s recovery is remarkable nonetheless and is driven by several factors. At the top of that list is pent-up demand.
“After nearly two years, people are hungry to dine out again. They’re anxious to get out and return somewhat to normal,” Applebee’s President John Cywinski said during an interview Wednesday evening following parent company Dine Brands’ Q4 earnings call.
With about 1,600 restaurants, the company also benefits from scale to help navigate significant inflationary pressures, and after the company pruned the system to navigate oversaturation, it was left with just 30 operating partners–another major benefit according to Cywinski.
“I have, I believe, the most unique business model in the industry and certainly in the casual dining segment by only having 30 partners. That’s compared to 3,000 or so I had with McDonald’s and 600 when I was with KFC. I can literally gather them in a room and it allows us to focus and to be nimble,” Cywinski said.
Such agility has never been more important than throughout the past two years when the company was forced to go into survival mode. Cywinski said he thinks the company is now on the other side of the pandemic’s impact and a look at the numbers may very well support this.
Compared to 2019, Applebee’s delivered comp sales of 10.5% in Q2, 12.5% in Q3 and 9.1% in Q4. On a full-year basis, 2021 comp sales were up 6.2% versus 2019. Weekly restaurant sales are now $50,500, which represents the chain’s highest sales volumes since it folded into Dine Brands in 2007.
Applebee’s average unit volumes are up to about $2.6 million, from $2.2 million five years ago.
Some of this sales momentum comes from pricing–much of the industry has increased menu prices to manage inflationary headwinds. But Cywinski emphatically notes that franchisee financial health is better than it’s been in the past five years because the system is more efficient.
“Our franchisee PnLs have improved significantly as we retained a third party (PricewaterhouesCoopers) that allowed us to reduce costs for things like food, labor and energy,” Cywinski said. “And, one of the big metrics I look at for franchisee health is how much bad debt they have. We deferred some royalty payments when the pandemic hit because we had to, but now–for all intents and purposes–our franchisees have no bad debt. We have done what we need to do to optimize the brand.”
Notably, Cywinski has a unique perspective into the past five years, as they mark his second go-round with Applebee’s. He was also with the company from 2001-06, during a sort of casual dining boom in which the chain was building 100-plus new restaurants a year.
Now the brand is positioned to get back to net new unit growth for the first time at least since he’s been back, signifying a major vote of confidence as measured by operators. In 2021, Applebee’s closed 25 restaurants–its lowest closure rate in five years–and opened 5. The plan is to double new restaurant openings in 2022, which will “mark the beginning of our development escalation moving forward,” Cywinski said.
“As we methodically reestablish our development pipeline, I expect to achieve net new unit growth in 2023,” he said. “From there, it will escalate at a run rate to be determined based on what’s best for our franchisees and our system. We know there is a lot of white space because the category has contracted. There is a big opportunity for us to gain market share.”
Several of Applebee’s new restaurants will include a drive-thru pickup window. The chain will soon open its third such location and Cywinski said there could be about 15 drive-thru models by the end of this year–both new-builds and conversions.
“The drive-thru opportunity is enormous. I can’t quantify it because it’s site and municipality specific, but we view this opportunity as significant for the brand. They cost money, but there are all sorts of guest and operational and financial benefits, and we will lean into them aggressively,” Cywinski said.
He notes the biggest believer in the drive-thru model is Alan Smith, president of franchisee Apple Arkansas, which converted the company’s first drive-thru model and is now building its third.
“What we know is the model facilitates a much more efficient model where it’s easier for the guest, better for the team members and more profitable for the franchisees,” Cywinski said. “Not everyone has an hour and a half to dine in, and this model will make us that much more attractive.”
No doubt the drive-thru opportunity is massive. Industry-wide, the drive-thru accounted for 42% of all traffic in November 2021, compared to 26% in February 2020.
Prior to the pandemic, an Applebee’s drive-thru may have created a bit of a disconnect with consumers. Now, however, anything goes. No more is this evidenced than by Applebee’s and its casual dining peers sustaining double-digit off-premise sales despite the lift of dine-in restrictions. This has blurred segment lines and leveled the competitive playing field, which likely plays into casual dining’s favor.
“There was a point in time in my career when I don’t feel that casual dining brands were a big part of consumers’ consideration set in some cases–if you didn’t have an hour and a half to sit down and dine,” Cywinski said. “We’re now part of that consideration set because of our off-premise business. We have a $4.2 billion brand and in excess of $1 billion of that is off-premise. That could be a whole other brand.
“Off-premise has become one of our core competencies.”
As such, drive-thru additions make plenty of sense. So, too, does Applebee’s virtual brand, Cosmic Wings, which was created last year and now operates out of about 1,000 existing Applebee’s locations as a separately-listed concept on Uber Eats and DoorDash. Cosmic Wings will be added to Grubhub in Q2.
Such virtual concepts generate incremental sales without much additional cost. They also appeal to younger, digital-native consumers. Cywinski is conservative about Cosmic Wings’ future plans as the brand ramps up on a new third-party delivery marketplace, but he makes it clear, “Our objective isn’t to compete [in the off-premise space], it’s to win.”
“Cosmic Wings is less about its size than it is its incrementality opportunity,” he said. “And it’s targeted for a younger demographic, which helps Applebee’s become a significant part of their consideration set when they’re looking for a good meal to go.”
That “balanced” demographic, combined with off-premise growth and continued investments in menu innovation, technology and marketing have all created a strong tailwind for the brand, Cywinski said.
“We have momentum where the growth is actually sustainable and reasonably predictable,” he said. “That’s when you start to garner market share from those less well positioned. Five years ago, it was an uphill climb. Now the question is if we can accelerate. I believe we can. We are better positioned to thrive than at any other point in my tenure at Applebee’s.”