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When IHOP acquired Applebee's in 2007 to form DineEquity Inc. (DIN), the primary area that needed improvement at Applebee's was the menu, said Applebee's President Mike Archer.
While the all-American grill-and-bar chain has attracted guests with its high-value proposition, the food quality was a big reason why people weren't coming back.
In fact, 30% of lapsed Applebee's frequenters cited food- and menu-related issues as the cause for their defection, according to a Morgan Stanley consumer-research study released this week, which was more than at any of the other 12 casual-dining chains included in the survey.
However, since Applebee's has been launching new menu items approximately every two months, the chain has been showing signs of improvement.
With the launch of Applebee's newest addition, three "Stacked, Stuffed and Topped" dishes, available Friday, more than 80% of the Applebee's menu is new or improved from 18 months ago.
When consumers who are visiting Applebee's more often were asked why in Morgan Stanley's survey, 60% cited "better food--especially new items" as the reason.
Applebee's domestic system-wide same-restaurant sales increased 3.9% in the first quarter, compared to the same period last year. It was the third consecutive quarter of positive same-restaurant sales for the restaurant, and the company said the gain was driven largely by menu improvements.
The key to designing the new menu has been finding a way to improve the quality while still maintaining strong profit margins, Archer said. Applebee's restaurant operating margin rose to 15.3% from 14.8% in the first quarter.
"We were really thoughtful about how to bring this menu to life," Archer said, with a focus on improving margins overall through cost-saving investments. "We've been able to do so without having an adverse impact on our margins."
The company saves big by leveraging the power of the purchasing co-op it formed with the 3,600 collective Applebee's and IHOP restaurants. "It allows us to achieve favorable ingredient costs," Archer said. "And, just because it's fresh doesn't mean it's more expensive."
With continued commodities inflation posing a major roadblock for most restaurant chains, DineEquity's co-op has offered some degree of protection because of its scale. To offset further costs, the restaurant can always raise prices a bit.
Given that value is its biggest draw, DineEquity said Applebee's has the price protection to pass on cost increases to customers if it needs to.
Applebee's is being cautious with just how fancy it gets with its new menu items, so as not to become too culinary forward for its guests.
In February, top competitor Darden Restaurants Inc. (DRI) launched promotional pasta dishes at its Olive Garden chain that turned out to be a step above the taste buds of its clientele. Despite doing well in testing, the dishes, especially the gorgonzola ravioli with shrimp, misfired when rolled out nationally, causing same-restaurant sales to be flat for the quarter, the company said.
Applebee's is advertising its new items as "familiar with a twist," Archer said, "so as to not get too far off from what we are known for and, if we do get too far out in front of the guests, we will find that out through the testing process."
-By Annie Gasparro, Dow Jones Newswires; 212-416-2244; firstname.lastname@example.org