FDD Talk 2020: 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 2020 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 2020 FDD

• Section IV – Number of franchised and company-owned IHOP outlets at the start of the year and the end of the year for 2017, 2018, and 2019, based on Item 20 of the company’s 2020 FDD

• Section V – Presentation and analysis of IHOP’s financial performance representations, based on Item 19 of the company’s 2020 FDD, including information on the:

• 2019 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)

• 2019 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)

• 2019 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)

• 2019 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

18 Things You Need to Know About the IHOP Franchise

Announces Plans to Debut New Fast-Casual Concept in Spring 2020

1.  In mid-December 2019, IHOP announced plans to launch Flip’d by IHOP, a new fast-casual concept, in the U.S. The new brand aims to fill a gap in the restaurant space by focusing on freshly-made breakfast foods and beverages with speed and convenience in mind, directly addressing a growing consumer demand in densely-populated city centers. Popular lunch and dinner items, including the brand’s Ultimate Steakburgers and Buttermilk Crispy Chicken, will also be available.

2.  IHOP plans to open its first Flip’d concept in Atlanta in April 2020 with additional sites in New York City, Washington D.C., Denver, and San Francisco currently under exploration.

3.  Jay Johns, president of IHOP, said, “In looking at what exists today in terms of fresh, fast menu options – particularly at breakfast – there’s still tremendous opportunity for growth. After talking extensively with consumers in large cities across the country, we designed Flip’d by IHOP to deliver on what folks told us they want and need from a trusted brand like IHOP in a fast-casual setting, putting an emphasis on quality ingredients, speed, to-go and delivery.”

4.  The Flip’d by IHOP menu will borrow inspiration from iconic IHOP favorites – including the brand’s world-famous buttermilk pancakes – but put a unique twist on flavors and portability in a way that only IHOP can. For example, pancake bowls with made-to-order pancakes served in a bowl to enjoy on the go and finished with toppings like fresh berries and sauces, or savory ingredients including scrambled eggs, hickory-smoked bacon pieces, and Jack and cheddar cheeses.

5.  Johns continued, “Today, millions of Americans are settling for sub-par breakfast foods that are either microwaved or have been sitting under a heat lamp because they’re forced to grab something while at their usual coffee spot. With Flip’d by IHOP, guests don’t have to compromise – now they can get freshly-made, all-day menu items like Pancake Bowls and Egg Sandwiches along with a hand-crafted espresso beverage for a good price and in a matter of minutes.”

6.  Other items on the Flip’d by IHOP menu include:

• A build-your-own pancake bar with a choice of made-in-house pancakes or oatmeal as a base and a variety of mix-ins and toppings from the Top It Off bar, such as fresh blueberries, strawberries, and pineapple; fruit compotes; chocolate chips; caramel sauce and more;

• Egg combos with choice of breakfast meats and an assortment of egg sandwiches made with two scrambled eggs and premium toppings on a toasted brioche bun;

• A variety of made-to-order breakfast burritos and bowls with options like the Bacon Temptation with two eggs, hickory-smoked bacon, roasted tomatoes, and queso over crispy breakfast potatoes, or The Garden with baby arugula, sautéed mushrooms, roasted tomatoes, and avocado cream sauce over crispy breakfast potatoes.

• Ultimate Sandwiches with choice of an all-natural Black Angus Steakburger, Buttermilk Crispy Chicken from all-natural breast meat, or grilled chicken breast;

• Freshly-squeezed orange juice, signature coffee brews, including nitro and specialty espresso beverages; and

• Grab-and-go salads and wraps, freshly-baked goods and more.

7.  Flip’d by IHOP is different from the sit-down experience guests have come to expect and enjoy at IHOP for more than 60 years. Upon entering Flip’d, visitors can order from a digital kiosk or directly at the counter. Guests will also be able to order their food online in advance and pick-up their items from a designated to-go area or have it delivered. Catering will also be available with guests choosing large servings of build-your-own pancake bowls, breakfast sandwiches, and a burger bar.

Announces Plans to Open Nearly 100 Restaurants at TravelCenters of America Over the Next Five Years

8.  At the end of October 2019, IHOP and TravelCenters of America (Nasdaq: TA) announced that the two companies have entered into a franchise development agreement and plan to open up to 94 IHOP restaurants over the next five years in TA and Petro branded locations across the United States. At the time of the announcement, there were four IHOP restaurants already in TA’s travel center network, including one that opened in Jackson, Georgia.

9.  The agreement, which pairs two of the world’s most recognizable brands in foodservice and interstate travel, fulfills their joint commitment to bring guests quality meal choices and exceptional service while on the go. The IHOP restaurants in the portfolio will be operated by the TA Restaurant Group, a division of TravelCenters of America.

10.  Guests visiting IHOP restaurants located at TA travel centers will be able to enjoy the brand’s full menu of made-to-order items, such as its world-famous buttermilk pancakes, oversized omelettes, Ultimate Steakburgers, Crispy Chicken, and more. The deal with TravelCenters of America marks the single largest IHOP development deal in the brand’s 61-year history.

11.  Jay Johns, president of IHOP, said, “We’re thrilled to be partnering with TravelCenters of America to open up to almost 100 new IHOP restaurants over the next five years in TA and Petro travel centers across the U.S. The TA brand, a trusted hospitality leader in the industry and with consumers, shares the same values as IHOP when it comes to delivering an outstanding experience to guests on-the-go. We’re looking forward to serving the great-tasting, freshly made menu items we’re known for at breakfast, lunch and dinner, to the millions of guests who stop at TA and Petro locations each year.”

12.  Barry Richards, president and chief operating officer of TravelCenters of America, added, “When it comes to serving our customers, IHOP and TA’s missions and cultures align. Adding such a highly regarded brand like IHOP to our restaurant group shows our commitment to bringing the best possible dining options to both professional drivers while they’re away from home and to local families living in the communities we serve. An important part of our restaurant strategy is focusing on growing our partnerships with trusted brands like IHOP that appeal to broader audiences, and today’s agreement will enable us to accelerate that process.”

Company History

13.  IHOP (which stands for International House of Pancakes) was founded 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 start, IHOP specialized in offering affordable breakfast options, in particular pancakes served with a variety of different flavored syrups.

14.  Originally, IHOP restaurants were built in a steep-roofed A-frame building with a distinctive blue roof, which was a part of IHOP’s brand identity for several decades. While IHOP no longer uses A-frame buildings, many of these restaurants are still around.

15.  The IHOP concept was an immediate success and franchising was launched in 1960. IHOP grew quickly around the U.S. over the next few decades and as part of the brand’s growth, IHOP acquired several other brands including Orange Julius, Love’s Wood Pit Barbecue, Golden Cup Coffee Shops, The Original House of Pies, Wil Wright’s Ice Cream Shoppes, among others.

16.  During the 1980s, IHOP expanded its menu to include lunch and dinner items. By the early 2000s, IHOP had grown to 1,000 locations around the U.S. While IHOP no longer owns many of the brands it acquired back in the 60s and 70s, in 2007, IHOP purchased Applebee’s in an all-cash transaction, valued at approximately $2.1 billion.

17.  IHOP began expanding internationally in the early 2010s in the Middle East. In 2019, IHOP also started opening restaurants in South America. That same year, IHOP announced plans to open a fast-casual restaurant, Flip’d by IHOP.

Entrepreneur’s Franchise 500

18.  IHOP did not rank on Entrepreneur’s 2020 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 2020 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 2020 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2017

• Outlets at the Start of the Year:  1,617
• Outlets at the End of the Year:  1,655
• Net Change:  +38

2018

• Outlets at the Start of the Year:  1,655
• Outlets at the End of the Year:  1,689
• Net Change:  +34

2019

• Outlets at the Start of the Year:  1,689
• Outlets at the End of the Year:  1,696
• Net Change:  +7

Company-Owned

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

2019

• 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, 2020 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, 2019 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, 2019; (b) IHOP Restaurants which were closed for remodeling or for other reasons during part of the years 2018 and/or 2019; and (c) IHOP Restaurants located in the state of Florida, and 4 IHOP Restaurants in the State of Georgia, which are either operated by the company’s area franchisee or sub franchised 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.

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