FDD Talk 2018: IHOP Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the IHOP franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for an IHOP franchise, based on Item 7 of the company’s 2018 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for an IHOP franchise, based on Items 5 and 6 of the company’s 2018 FDD

• Section IV – Number of franchised and company-owned IHOP outlets at the start of the year and the end of the year for 2015, 2016, and 2017, based on Item 20 of the company’s 2018 FDD

• Section V – Presentation and analysis of IHOP’s financial performance representations, based on Item 19 of the company’s 2018 FDD, including information on the:

• 2017 average sales for the 25th percentile, 50th percentile, 75th percentile, and all franchised IHOP Restaurants in the “A,” “B,” and “C” building types, which are variations of the “A” Frame, an older prototype, and is further broken down by the geographic region in which the IHOP restaurants are located (in the Midwest, Northeast, South, or West)

• 2017 average sales for the 25th percentile, 50th percentile, 75th percentile, and all franchised IHOP Restaurants in the “D” building type, one of two former prototype buildings, and is further broken down by the geographic region in which the IHOP restaurants are located (in the Midwest, Northeast, South, or West)

• 2017 average sales for the 25th percentile, 50th percentile, 75th percentile, and all franchised IHOP Restaurants in the “G” building type, one of two former prototype buildings, and is further broken down by the geographic region in which the IHOP restaurants are located (in the Midwest, Northeast, South, or West)

• 2017 average sales for the 25th percentile, 50th percentile, 75th percentile, and all franchised IHOP Restaurants that are not configured in accordance with one of the former standard building types, including “Conversion” units, “End Cap” units, and “In-Line” units and would include the new “ICON” units, and is further broken down by the geographic region in which the IHOP restaurants are located (in the Midwest, Northeast, South, or West)

Section I – Background Information

23 Things You Need to Know About the IHOP Franchise

Teams Up With DoorDash to Launch Delivery From More Than 300 Locations Across the U.S.

1.  IHOP celebrated its 60th anniversary in mid-July 2018 and used the occasion to announce the rollout of its first national delivery program in partnership with DoorDash. The introduction of delivery at select IHOP restaurants across the U.S. is a critical step in expanding the brand’s IHOP ‘N GO (to-go) platform which already includes a fully-integrated online ordering system through IHOP.com and the IHOP mobile app.

2.  Customers ordering IHOP ‘N GO via DoorDash will have access to the full range of items off the restaurant’s regular and limited-time menus as well as the ability to fully customize any order. All IHOP delivery and to-go orders are placed in proprietary packaging that is designed to keep all-day breakfast foods and the brand’s other menu items hot and fresh while in transit.

3.  Darren Rebelez, president of IHOP, said, “For 60 years, IHOP has proudly served our guests freshly made breakfast favorites and more, all day, every day. Undertaking a national delivery partnership is an exciting new chapter in our story and builds on the foundational work we’ve done on IHOP ‘N GO this past year, including introducing a mobile app, online ordering through IHOP.com, and special packaging that preserves the quality of our food for takeout. Most importantly, our partnership with DoorDash helps us bring more pancakes, to more people, whenever and wherever cravings strike – something IHOP guests told us they wanted.”

4.  In addition to rolling out delivery services through DoorDash, IHOP had several other anniversary activities, including an in-restaurant, 60-cent short stack of pancakes deal on July 17. DoorDash customers also received free delivery on any IHOP order totaling $10 or more from Wednesday, July 18 through Sunday, July 22.

5.  At the time of the announcement, more than 300 IHOP restaurants were set up for online ordering through the DoorDash website and mobile app, with another 600-700 IHOP restaurants expected to be available for delivery by the end of the year.

6.  Rebelez added, “As a leading delivery provider with extensive national reach and a focus on strategically — and rapidly — expanding, DoorDash is an ideal partner to help us kick off the next phase of IHOP ‘N GO. Right now, about 300 IHOP restaurants are signed up with DoorDash with more coming online every day. Given the national matchup between where there’s an IHOP and DoorDash’s current and anticipated service areas, I expect to have close to 1,000 restaurants added to the DoorDash platform before the end of the year.”

Changes Name to IHOb for Viral Ad Campaign

7.  At the beginning of June, IHOP announced that it was changing its name to “IHOb” without specifying why. The announcement caused a lot of speculation and outcry across social media channels and online news outlets. IHOP waited a week before revealing that the “b” stood for burgers and was part of the marketing campaign for the brand’s new line of Ultimate Steakburgers.

8.  To show the brand was as serious about burgers as it is about its world-famous pancakes, IHOP flipped the “p” to a “b” in its iconic name for awhile, including its Twitter handle. A flagship “IHOb” restaurant in Hollywood, California, was completely re-burgered and hosted the VIB launch party the evening of June 11.

9.  Chef Nevielle Panthaky, head of culinary at IHOb, said, “Burgers are a quintessential, American menu item so it makes perfect sense that IHOP, one of the most iconic, all-American comfort-food brands in the world, would go over the top to create a delicious line-up of quality burgers that hit the spot any time of day. Our new Ultimate Steakburgers are made with all-natural, 100% USDA Choice, Black Angus ground beef that is smashed on the grill to create a sear that locks in the juices and flavor.

10.  Chef Panthaky added, “With seven different burger builds, all Steakburgers are custom built and piled high with premium quality ingredients and unique, signature sauces in between a buttered and grilled Brioche bun. There’s definitely a juicy Steakburger for whatever you might be craving at any time of day! The IHOP Culinary team took the creation of these Steakburgers as seriously as we take innovation around our pancakes, which means they’re soon to become world famous, too.”

11.  “IHOb’s” Ultimate Steakburgers come in seven varieties – each Ultimate Steakburger starts with 100% USDA Choice, Black Angus ground beef that is smashed on the grill to sear in the juices and flavor before being topped with premium ingredients and sandwiched between a buttered and grilled Brioche bun.

12.  The Ultimate Steakburgers lineup includes:

• Big Brunch – The Big Brunch Steakburger includes IHOP’s custom-cured hickory-smoked bacon, a fried egg, a crispy browned potato, American cheese, and a new signature burger sauce that complements the savory flavors.
• Cowboy BBQ – This Steakburger includes two thick, crispy onion rings, custom-cured hickory-smoked bacon, American cheese, lettuce, tomato, and tangy BBQ sauce.
• Jalapeño Kick – The Jalapeño Kick Steakburger features a spicy blend of sautéed jalapeños, Serrano peppers and onion, custom-cured hickory-smoked bacon, Pepper-Jack cheese, lettuce, tomato, and jalapeño mayo.
• Mushroom & Swiss – This Steakburger is topped with a classic blend of sautéed mushrooms and onions, Swiss cheese, and creamy mayo.
• The Classic – A true classic burger that features melting American cheese, lettuce, tomato, red onion, pickles, and the brand’s new signature Steakburger sauce.
• The Classic with Bacon – This Steakburger is made with custom-cured hickory-smoked bacon, melting American cheese, lettuce, tomato, red onion, pickles, and the brand’s signature burger sauce.
• Mega Monster – This large Steakburger has two premium Steakburger patties, American and White Cheddar cheeses, lettuce, tomato, red onion, pickles, and the brand’s signature sauce.

Releases Limited-Edition Clothing Line to Benefit the Children’s Miracle Network

13.  In early March 2018, IHOP announced the debut of PancakeWear by IHOP, a limited-edition clothing collection inspired by a love of all things breakfast. The colorful, one-of-a-kind lineup featured adult- and child-sized one pieces and lounge pants as well as socks.

14.  The exclusive clothing line was part of the IHOP “60 Days of Giving” campaign, with a portion of the proceeds from every purchase benefiting Children’s Miracle Network Hospitals. The limited inventory of the PancakeWear Spring collection was available for purchase on eBay for Charity.

15.  Stephanie Peterson, executive director of communications for IHOP, said, “Breakfast and laid-back loungewear just go together at IHOP so we thought it would be fun to design a limited-edition merchandise collection that reflects the spirit of the brand and what we see in our restaurants all the time — people in pajamas enjoying pancakes.

16.  Peterson added, “PancakeWear by IHOP was launched to celebrate our 60th anniversary as a brand, but also to do a lot of good for our largest charity partner Children’s Miracle Network Hospitals. A portion of proceeds from every sale of our breakfast-inspired one pieces, lounge pants and socks directly supports CMN Hospitals and the more than 10 million kids that are treated every year at their 170 affiliated facilities.”

17.  This year, IHOP aims to raise $5 million for children’s charities dedicated to treating and eradicating life-threatening illnesses during its annual giving effort. The centerpiece of the campaign, IHOP National Pancake Day, took place at the end of February and served as the largest one-day donation event for the campaign. Customers were able to contribute by purchasing PancakeWear by IHOP (price varies by product), available until sold out, or by making an on-check donation at any IHOP restaurant until March 31, 2018.

18.  Since 2006, IHOP, its franchisees, and customers have raised more than $30 million for charity partners.

Company History

19.  The first International House of Pancakes was opened in 1958 in Toluca Lake, California by founders Al and Jerry Lapin, along with early investors Al and Trudy Kallis. The first location was a success and franchising started in 1960. A few years later, the company started operating under the name International Industries after it acquired other brands, such as Orange Julius, Love’s Wood Pit Barbecue, the Golden Cup Coffee Shops, and many others.

20.  In 1973, a marketing campaign introduced the acronym IHOP for the first time and the brand started interchangeably using IHOP and the International House of Pancakes; by the end of the decade, IHOP became the company’s preferred name. During the 1980s, IHOP expanded its menu and launched unique breakfast items such as the Rooty Tooty Fresh ‘N Fruity pancakes. Throughout all of the changes, IHOP continued to expand and by the beginning of the 1990s, there were over 500 locations.

21.  IHOP closed out the 1990s reaching $1 billion in sales and within a few years had 1,000 locations. In 2003, IHOP started using the tagline “Come hungry. Leave happy.” IHOP still uses this tagline in all of its advertising today. Once again, IHOP expanded its menu and added Stuffed French Toast, which is now a popular item.

22.  In late 2007, the IHOP Corporation acquired Applebee’s International, Inc. and created the largest full-service restaurant company in the world. Recently, in 2018, the first hybrid IHOP/Applebee’s opened in Detroit, Michigan. Today, IHOP has restaurants operating across the U.S. and in countries such as Bahrain, Canada, Dubai, Guatemala, Kuwait, Mexico, the Philippines, Puerto Rico, Saudi Arabia, and the U.S. Virgin Islands.

Entrepreneur’s Franchise 500

23.  IHOP did not rank on Entrepreneur’s 2018 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of IHOP franchise costs, based on Item 7 of the company’s 2018 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on IHOP’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2018 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2015

• Outlets at the Start of the Year:  1,562
• Outlets at the End of the Year:  1,585
• Net Change:  +23

2016

• Outlets at the Start of the Year:  1,585
• Outlets at the End of the Year:  1,615
• Net Change:  +30

2017

• Outlets at the Start of the Year:  1,615
• Outlets at the End of the Year:  1,653
• Net Change:  +38

Company-Owned

2015

• Outlets at the Start of the Year:  11
• Outlets at the End of the Year:  11
• Net Change:  0

2016

• Outlets at the Start of the Year:  11
• Outlets at the End of the Year:  10
• Net Change:  -1

2017

• Outlets at the Start of the Year:  10
• Outlets at the End of the Year:  0
• Net Change:  -10

Section V – Financial Performance Representations (Item 19, 2018 FDD) and Analysis

• Each table below contains a schedule of the average annual Gross Sales during IHOP’s most recent fiscal year, consisting of the 52-week period ended December 31, 2017 for the designated type of IHOP Restaurant, the square footage, seating capacity, and configuration of which varies significantly from type to type.

• Each table shows the average Gross Sales of all IHOP Restaurants, as well as the averages within each percentile grouping, and is further broken down by the geographic region in which the IHOP Restaurants are located (in the Midwest, Northeast, South, or West).

• The tables and the sentences that follow the tables exclude:  (a) IHOP Restaurants which have been in operation less than 18 months as of December 31, 2017; (b) IHOP Restaurants which were closed for remodeling or for other reasons during part of the years 2016 and/or 2017; and (c) IHOP Restaurants located in the state of Florida, and one IHOP Restaurant in the State of Georgia, which are either operated by the company’s area franchisee or subfranchised units licensed by the company’s area franchisee for that state and which do not report weekly Gross Sales to IHOP (or its affiliate).

• IHOP compiled the figures presented in the tables and the sentences that follow the tables from sales reported by franchisees on a weekly basis. The sales information provided by these franchisees has not been audited or independently verified and has not necessarily been prepared on a basis consistent with generally accepted accounting principles

• The “West” consists of the States of Arizona, Colorado, Idaho, New Mexico, Montana, Utah, Nevada, Wyoming, Alaska, California, Hawaii, Oregon, and Washington.

• The “Midwest” consists of the States of Indiana, Illinois, Michigan, Ohio, Wisconsin, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.

• The “South” consists of the States of Delaware, District of Columbia, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, West Virginia, Alabama, Kentucky, Mississippi, Tennessee, Arkansas, Louisiana, Oklahoma, and Texas.

• The “Northeast” consists of the States of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, New Jersey, New York, and Pennsylvania.

• Sales of IHOP Restaurants open less than 18 months are often not reflective of, and tend to be higher than, how that Restaurant will do in the long run.

• The tables exclude the new “Small Prototype” building types, which are approximately 3,960 square feet in size and have approximately 123 seats since these building types have been open less than 18 months as of December 31, 2017.

Part 1 – Franchisees – Building Types:  A-B-C Building

• This building type is an older prototype, known as an “A” Frame, and includes the “A,” “B,” and “C” building types which are variations of the “A” Frame. These buildings are typically less than 3,000 square feet in size and have less than 100 seats.

• Some “A” Frames have been remodeled to increase both the square footage and seating capacity, beyond 100 seats and 3,000 square feet.

Total National Sales