FDD Talk 2019: 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 2019 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 2019 FDD

• Section IV – Number of franchised and company-owned IHOP outlets at the start of the year and the end of the year for 2016, 2017, and 2018, based on Item 20 of the company’s 2019 FDD

• Section V – Presentation and analysis of IHOP’s financial performance representations, based on Item 19 of the company’s 2019 FDD, including information on the:

• 2018 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)

• 2018 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)

• 2018 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)

• 2018 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

19 Things You Need to Know About the IHOP Franchise

Celebrates Birth Year with 58-Cent Pancakes

1.  IHOP celebrated its birth year of 1958 by serving 58-cent short stacks of its Original Buttermilk pancakes on Tuesday, July 16, 2019, from 7 a.m. to 7 p.m. at participating restaurants nationwide.

2.  Alisa Gmelich, vice president of marketing for IHOP, said, “This has been another incredible year for the IHOP brand and we’re celebrating by giving our loyal guests a can’t-beat deal on the pancakes that made us famous. For more than six decades, we’ve focused on innovation across our menu as well as how we can bring the best all-day breakfast foods and more to millions of guests every day. Whether guests visit us at an IHOP restaurant or choose to order takeout and delivery, they’ll get the same incredible dining experience we’ve been known for since 1958.”

Launches $1 Million Fundraising Campaign to Assist Military Families

3.  At the beginning of May 2019, IHOP kicked off a national partnership with Children of Fallen Patriots Foundation (CFP) as part of the brand’s broader commitment to helping families in need. In honor of Military Appreciation Month, IHOP launched a charitable giving campaign throughout the month of May to raise $1 million to fund college scholarships and educational counseling for military children who have lost a parent in the line of duty.

4.  IHOP customers were able to support CFP and military families in their community by visiting any IHOP restaurant from May 1 through May 31, 2019 and making an on-check donation or purchasing a $5 wall sticker at participating locations, with all proceeds going directly to CFP. Customers who purchased a wall sticker to show their support also received a $5 off coupon good for a future purchase of $10 or more.

5.  Darren Rebelez, president of IHOP, said, “Taking care of kids and families is at the heart of what we do every day at IHOP and has been a part of our brand philosophy since we first opened our doors in 1958. It’s an honor to partner with Children of Fallen Patriots Foundation and help make a meaningful and lasting impact on communities across the U.S. Fallen Patriots’ scholarship program directly addresses the gap in educational funding for military families and is a chance to honor the servicemen and women who made the ultimate sacrifice to protect our country.”

6.  According to CFP, since 1983, more than 20,000 children have been impacted by the loss of a parent killed in the line of duty, leaving the families of fallen servicemen and women with a financial strain and questions about their future. Of the military families who have lost a loved one, 60 percent report having trouble making ends meet, particularly as 63 percent of surviving spouses make less than $50,000 per year. CFP works to ensure that every Gold Star family receives all necessary college funding and educational counseling.

7.  Rebelez added, “IHOP and Fallen Patriots share the belief that children are our future and that together, we can set tomorrow’s leaders up for success. As a veteran myself, I’m incredibly proud of our franchisees and what we’re doing as a brand to help raise $1 million on behalf of Gold Star families, many of whom are family members, friends, neighbors and guests.”

Continues Expansion in Asia with Deal to Bring Brand to Pakistan

8.  In mid-March 2019, Dine Brands Global, parent company of IHOP, announced a deal with several principals of Gerry’s Group, a leading Pakistan-based logistics and Food and Beverage group, to bring the IHOP brand to the Islamic Republic of Pakistan. The deal calls for 19 IHOP locations throughout the country over the next 9 years, 9 of which will be franchised by the principals of Gerry’s Group with the other ten sub-franchised.

9.  The first location is expected to open in Karachi by the end of 2019 and continues the brand’s expansion into the Asia Pacific market. IHOP, which was founded in 1958, has been a global brand since 1969. IHOP already has a presence in India, Thailand, and Guam as well as 11 other countries and Puerto Rico.

10.  Steve Joyce, chief executive officer of Dine Brands Global, franchisor of IHOP and Applebee’s Grill+Bar restaurants, said, “My commitment as CEO of Dine Brands Global was to return it to a growth company, and our international development is certainly a major component of that growth. Key to our international strategy is identifying and entering new markets, such as Pakistan, that have a rapidly growing economy, are contiguous to existing markets to offer an economy of scale, and above all, have an appetite for IHOP’s unique guest experience of warm hospitality with world famous pancakes, breakfast and other menu items.”

11.  Joyce added, “The opportunity to partner with principals from Gerry’s Group as franchisees was also a major factor in our decision. Under their ownership, Gerry’s Group is an experienced, established company based in Pakistan with multinational experience across a broad number of industries as well as Food and Beverage, including operating and owning 40 Costa Coffee locations in the United Kingdom.”

12.  Akram Wali Muhammad, managing director of Gerry’s Group, added, “We are delighted to be bringing the world famous American IHOP experience to our country and to our portfolio of successful companies. While IHOP will be a new brand in Pakistan, there is already significant awareness of and excitement about IHOP and we look forward to the opening of our first location later this year.”

13.  Asia Pacific has been targeted as a key area of growth for Dine Brands, along with Latin America, Canada, and the Middle East. The company has already signed deals to bring the IHOP brand to South America in Peru and Ecuador in 2019, and to expand its presence in Canada to Atlantic provinces of New Brunswick, Prince Edward Island, Nova Scotia, and Newfoundland and Labrador. Dine Brands is also actively exploring opportunities to bring the IHOP brand to the United Kingdom.

Company History

14.  IHOP was founded as the International House of Pancakes in 1958 by Jerry Lapin, Al Lapin, Albert Kallis, and Trudy Kallis with help from Sherwood Rosenberg and William Kaye in Toluca Lake, Los Angeles, California. From the beginning, IHOP offered affordable pancake breakfasts and a wide variety of flavored syrups, which were an immediate hit with customers. With the success of the first IHOP location, the company began to open additional restaurants through franchising in 1960.

15.  Over the next decade, IHOP continued to grow across the United States and the company also began acquiring other franchised brands, including Orange Julius, Love’s Wood Pit Barbecue, Golden Cup Coffee Shops, The Original House of Pies, Wil Wright’s Ice Cream Shops, and many more.

16.  Although IHOP maintained its success into the 1970s, many of the other brands that it owned were unprofitable and were sold off so that it could focus on keeping itself afloat. Also in the 1970s, the acronym IHOP was used for the first time and the last of the company’s iconic A-frame restaurants was built.

17.  As IHOP kept growing, the brand expanded its menu in the 1980s, adding unique breakfast items such as the Rooty Tooty Fresh ‘N Fruity, as well as lunch and dinner items. By the early 1990s, IHOP had over 500 restaurants in the U.S., Canada, and Japan. The company continued to grow at a rapid pace over the next decade and by 2001 there were over 1,000 locations around the world.

18.  In 2007, IHOP acquired the bar-and-grill chain Applebee’s in an all-cash transaction, valued at approximately $2.1 billion. Following the acquisition, IHOP established a parent company called DineEquity, which is now called Dine Brands Global, to oversee both IHOP and Applebee’s. Today, there are IHOP restaurants around the world, a majority of which are franchised.

Entrepreneur’s Franchise 500

19.  IHOP did not rank on Entrepreneur’s 2019 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 2019 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 2019 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

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

2018

• Outlets at the Start of the Year:  1,653
• Outlets at the End of the Year:  1,687
• Net Change:  +34

Company-Owned

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

2018

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

Section V – Financial Performance Representations (Item 19, 2019 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, 2018 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, 2018; (b) IHOP Restaurants which were closed for remodeling or for other reasons during part of the years 2017 and/or 2018; 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