IHOP Corporation History

Address:

450 North Brand Boulevard
Glendale, California 91203-1903
U.S.A.

Telephone: (818) 240-6055
Fax: (818) 553-2009

Public Company
Incorporated: 1958
Employees: 4,392
Sales: $365.9 million (2002)
Stock Exchanges: New York
Ticker Symbol: IHP
NAIC: 722110 Full-Service Restaurants

Company Perspectives:

IHOP's vision is to be number one in family dining. Being number one means being best in class and leading the industry on all fronts--including development, operations, and marketing--to produce strong system-wide sales and comparable restaurant sales growth. Being number one requires strong leadership, shareholder support, and the commitment of franchisees and employees. It involves a genuine willingness to embrace change, rethink processes, promote innovation, and generate enthusiasm. We have that commitment.

Key Dates:

1958:: Al Lapin, Jr., opens the first IHOP restaurant.
1959:: The IHOP chain becomes an operating division of International Industries.
1975:: International Industries folds; IHOP gains independence.
1976:: The International House of Pancakes Inc. becomes the principal operating subsidiary of the IHOP Corporation.
1979:: Wienerwald Holding purchases a majority interest in IHOP.
1982:: Wienerwald declares bankruptcy; IHOP falls under control of Swiss holding company SVIDO.
1987:: An investment team led by Richard K. Herzer purchases IHOP.
1991:: IHOP goes public.
2003:: IHOP adopts a traditional franchise business model.

Company History:

IHOP Corporation operates and franchises the International House of Pancakes restaurant concept in the United States and Canada. Through a focus on franchising and a long-term program of unit renovations and menu diversification, IHOP transformed itself from a struggling chain of pancake houses into a three-meal-occasion family dining empire during the 1980s and early 1990s. In fact, IHOP is among those companies responsible for the prevalence of affordable full-service family dining. The company now stands as the third-largest family-style dining chain, just behind Denny's Corporation and Waffle House Inc. In 2003, the IHOP system included over 1,136 International House of Pancakes restaurants in 48 states and Canada. Each year, IHOP restaurants serve over 700 million pancakes, 20 million pounds of breakfast meats, and over 300 million cups of coffee.

Origins in the 1950s

The first International House of Pancakes restaurant opened in 1958 in Toluca Lake, California, under the direction of founder Al Lapin, Jr. After winning over consumers with its affordable pancake breakfasts and numerous flavored syrups, the business quickly expanded into a small chain of restaurants. Weekend patrons were often confronted with lines that stretched all the way out the establishments' doors. A year later, in 1959, the IHOP chain became an operating division of International Industries, a public company that held more than 20 different businesses and was strongly rooted in the franchising concept. Along with the newly acquired IHOP chain, International Industries franchised many other restaurant and food service concepts, including Copper Penney coffee shops, Love's Wood Pit Barbecue, and the Orange Julius chain.

While IHOP grew steadily throughout the 1960s, International Industries continued to expand its portfolio by obtaining additional businesses each year. By the early 1970s, International Industries was overflowing with businesses, but IHOP was one of only two that were producing a profit. The other, the Orange Julius chain, was sold to keep the company afloat, and IHOP's profits were used to support the rest of International Industries' holdings. IHOP soon began to suffer as well, unable to support International Industries' unprofitable ventures. By 1975, International Industries folded, releasing its unprofitable divisions and leaving IHOP on its own. Its chief financial officer, Richard K. Herzer, saw promise in the previously successful IHOP division and began working with its creditors to keep the IHOP concept alive.

Herzer had come to IHOP in 1967 as a controller for International Industries. He was appointed chief financial officer in 1974, just before the company folded. In 1976, he rearranged a payment schedule with the banks, and the International House of Pancakes, Inc., became the principal operating subsidiary of a new parent, the IHOP Corporation. The restaurant chain was suffering, however, having had none of its profits reinvested toward improvements and developments in years.

In 1979, a majority of IHOP Corporation's stock was purchased by Wienerwald Holding, a Swiss company that controlled other restaurant chains in the United States, including the 225-unit Lum's chain. With the purchase, Wienerwald inherited IHOP's debt obligations, momentarily lifting the burden from Herzer and allowing him to focus instead on restructuring and improving the IHOP chain. Herzer was appointed president of IHOP by Wienerwald's chairman, Swiss entrepreneur Friedrich Jahn. Herzer held to the belief that franchising the IHOP units would prove to be the best business strategy. He reasoned that an equity-involved franchisee would deliver superior restaurant operations to those of a salaried manager who had no personal stake in the company. IHOP implemented a process by which the corporation developed and operated each restaurant unit before eventually franchising it.

In 1981, IHOP became a private company when Jahn repurchased 52 percent of its stock. Unfortunately, while many thought that Jahn had used the profits from Wienerwald to enact the purchase, he had actually borrowed $8 million to complete the $12 million transaction. Wienerwald declared bankruptcy in August 1982, leaving IHOP to SVIDO, a Swiss holding company which had no restaurant management background and left IHOP's management in place to run the chain.

Restructuring in the 1980s

Herzer was named IHOP's chief executive and chairman in 1983 and began the long process of restructuring IHOP in order to position the restaurant chain as a dominant presence in the family restaurant business. First, the company assessed the financial well-being of each of its restaurant units, ultimately closing the unprofitable ones and beginning a refurbishing program for the rest. Slowly but steadily, the company began remodeling the 88-seat, A-frame units, making way for larger and more contemporary units with twice the seating capacity and a muted decor that was deemed more pleasant for family dining. The number of two-seat stations in each of the new units was also increased in order to accommodate more people (typical weekday patrons were individuals or couples on their way to work) and to decrease waiting time by freeing up larger tables for those who actually needed them. Unit renovations often also included the implementation of a double-galley kitchen, which consisted of two identical smaller-scale kitchens, one of which could be closed down during slow periods in order to avoid excessive operation expenses.

While the unit renovations were taking place, Herzer also began a long-term program to broaden the menu selections by adding more non-breakfast items, holding to his belief that success in all three meal segments would be the key to expanding the IHOP chain. Knowing that the company's earlier attempts to enter the lunch and dinner segment had been ineffective, the IHOP management engaged in an extensive market research program in order to formulate a successful approach. Herzer insisted that the new lunch and dinner items be designed to use each IHOP unit's existing kitchen equipment, so as to avoid the necessity of spending additional money on items such as ovens, which no unit possessed. Using advertising slogans such as "Man does not live by pancakes alone" and "Good things cooking at breakfast, lunch, and dinner," IHOP introduced 26 new lunch and dinner items to its menu between 1983 and 1987, phasing in each item gradually after testing it in the Los Angeles market first. To ensure the success of the new lunch and dinner program, an extensive training program for all employees was created.

IHOP also began offering special breakfast promotions and deals at its restaurants, believing that customers captured during the breakfast hours would be more likely to return at lunch and dinner as well. Promotions such as the Rooty-Tooty Fresh 'N Fruity Breakfast special, the T.S.B.S. (Truly Special Breakfast Special), and the Passport Breakfast Combo offered restaurant patrons heaping portions of fresh-cooked food in a full service atmosphere, at prices that were very competitive with those of fast food chains. For example, in 1985 the Rooty-Tooty Fresh 'N Fruity special--which included two eggs, two sausage links, two bacon strips, two fruit pancakes, and coffee--was offered in various markets for either $1.99 or $2.49. Similar dinner specials were soon introduced at most locations at prices that placed IHOP solidly into the budget and fast-food pricing arena. The lunch and dinner menu was also crafted to accommodate the eating habits of IHOP's more nutritionally aware customers by offering vegetarian plates, chicken, and seafood.

Shortly after the commencement of unit renovations and the introduction of lunch and dinner items, IHOP began experiencing a steady increase in sales. Most newly renovated IHOP restaurants doubled their annual sales, and soon many of them were breaking the $1 million mark each year, up from $300,000 a year before the changes. Many franchisees attributed this sudden success in the lunch and dinner market to the attractive prices offered at IHOP. One of IHOP's largest franchise groups, FMS Inc. in Florida, noted to Nation's Restaurant News that dinner at IHOP was "appealing to Florida's senior citizens as well as blue-collar workers and single parent families, all people on budgets who like to eat out frequently." While enjoying its financial success, IHOP continued the expansions and revisions, gradually restructuring the company into a solid, profitable entity.

Leveraged Buyout in 1987

Meanwhile, SVIDO had begun searching for a buyer for the IHOP Corporation. After approximately four years of unsuccessful attempts to sell the company to an outside suitor, Herzer and other members of IHOP's management began planning a leveraged buyout, enlisting the services of several different institutional investors. In May 1987, this investment team, led by Herzer, purchased IHOP from SVIDO for an estimated $50 million. IHOP went public again in July 1991 after four years as a successfully self-owned corporation. It sold over eight million shares of its stock in a public offering at $10 per share. This shift back into the public arena paid off for IHOP, and as its month-to-month revenue continued to increase, the value of its stock doubled in less than a year.

In early 1992, IHOP introduced "America's regular guy" Cliff Bemis as its television spokesman. Past spokesmen for IHOP had included MacLean Stevenson of the television show M.A.S.H. and Jack Snow of the Los Angeles Rams. Bemis began appearing regularly in nationwide television commercial spots, known only as "Cliff" and using the new promotional tag "Nobody does breakfast like IHOP does breakfast." This new slogan was designed to emphasize IHOP's historical strength in breakfast, once again supporting Herzer's notion that clientele captured during the breakfast hours would be likely customers at other meal times as well. Accompanying Bemis's emergence as the IHOP spokesman was the reappearance of meal specials from the past, such as the Rooty-Tooty Fresh 'N Fruity Combo. These efforts were very successful: by 1994 the IHOP corporate logo had achieved an 80 percent consumer recognition level, which was the second highest rating among sit-down restaurants in the country.

In August 1992, IHOP made another strategic move in its effort to dominate the family-dining market when it acquired 23 units in the Pacific Northwest from JB's Restaurants, Inc. Prior to the acquisition, this geographic area had been almost completely controlled by Denny's, Inc., another large full-service chain whose primary focus is family dining. IHOP's management saw the 23 JB's units as a prime opportunity to penetrate the Pacific Northwest market and quickly began converting the restaurants to the IHOP concept.

In 1993, IHOP introduced the first major addition to its menu since the 1980s, unveiling Country Griddle Cakes in September 1993, pairing itself with Nabisco, whose Cream of Wheat product was a primary ingredient in the pancakes. The partnership between the two companies came on IHOP's 35th anniversary and on Nabisco's 100th, and provided each with an excellent advertising opportunity. The new pancake was supported by television spots featuring Cliff, who promoted the new IHOP product as well as Nabisco's Cream of Wheat. Furthermore, almost 20 million coupons offering a free stack of Country Griddle Cakes with the purchase of an IHOP entree were distributed on Nabisco Cream of Wheat boxes across the country.

The introduction of Country Griddle Cakes came at an excellent time for IHOP, and the new pancakes and their advertising campaign were a quick success. The 1990s saw a more nutritionally aware clientele, and pancakes have a good overall nutritional profile. This was especially true for Country Griddle Cakes, which contain nonfat yogurt, Cream of Wheat cereal, and skim milk. A Restaurants & Institutions survey revealed that the top trends for the food service industry to follow were home-style value meals, combo breakfasts, anything in a skillet, and pancakes. It seemed that IHOP's strategic priorities were right on the money, and the company entered the mid-1990s in a position to strengthen its standing in the family dining market.

Success in the 1990s and Beyond

After years of slowly restructuring the company and reinvesting its profits in further improvements, IHOP and its stock were continuing to soar. Suddenly, financial analysts were taking note, hailing the corporation as an overnight phenomenon with the potential of a gold mine. Forbes magazine ranked IHOP 102 out of 200 of the best small companies in the United States, one of only three food service companies to be included. Analysts were predicting huge rises in the stock's value, some as high as 60 percent. Although IHOP had just brought attention to itself by entering the public arena in 1991, it had actually been enjoying increases in its revenues every month since the early 1980s. Roger Lipton of the New York firm of Ladenburg Thalmann & Co., Inc. expressed as much to Nation's Restaurant News, stating, "This company is not a 90-day phenomenon. They've always had a good value image and customers are comfortable with them. People are returning to IHOP."

By 1995, IHOP was opening more than 50 new restaurants each year in the United States, Canada, and Japan, and was planning to open almost 90 new units in 1996. Almost 90 percent of IHOP's units were franchised, with its largest concentrations of restaurants in California, Florida, Texas, and Japan. Systemwide sales continued to increase, positioning IHOP among the leaders in the family-dining market. In fact, by 1998 IHOP had secured $1 billion in sales. Analyst predictions of the early 1990s rang true when Forbes magazine once again added the company to its "200 Best Small Companies" list as IHOP's stock price rose by nearly 60 percent over a 12-month period. The firm moved from the NASDAQ to the New York Stock Exchange in 1999.

While IHOP enjoyed a period of overall growth in sales and earnings, its monthly same store sales results began to falter due to changing consumer demand and heightened competition. In response, IHOP revamped its menu. To call attention to its non-breakfast offerings, the firm launched an "After Breakfast" menu which included new items such as a southwest chicken fajita salad, a sourdough bacon cheeseburger, and herb-roasted chicken.

IHOP entered the new century focused on future growth. The firm began to restructure its debt in order to strengthen its financial position and brought in Julia A. Stewart as president and chief operating officer to head up the company's expansion efforts. Under her leadership, IHOP's management team began taking several steps to restore the firm's same store sales growth. Overall, 76 new restaurants were opened during 2001--including its 1,000th location--which bolstered revenue by 7 percent and profits by 14 percent over the previous year. IHOP's Japan licensee terminated its agreement with the firm in 2001, forcing the company to shutter its 32 Japanese restaurants. The closures were not expected to negatively impact profits.

Richard K. Herzer, credited for much of IHOP's success, retired in January 2003. With the CEO title under her belt, Stewart continued to make sweeping changes in company operations. The firm spent heavily on its new "Come Hungry. Leave Happy." advertising campaign, designed to increase brand awareness. Stewart also set plans in motion in early 2003 to change the company's business model from a company-financed growth platform to a traditional franchise development model. An August 2003, a Nation's Restaurant News article explained the difference between the two, stating that "under IHOP's previous business model, the company financed and opened restaurants for its franchisees. The company made sure the restaurants were producing a predictable revenue stream before turning the reins over to its franchise owner. In contrast, the company's new business model places franchisees in the position of starting a restaurant from scratch." Eyed for its ability to bolster profits and stimulate franchise growth, the traditional franchise model was expected to be fully implemented by 2005. In order to make a smooth transition, IHOP launched a corporate reorganization that included the creation of a new leadership team that would support its franchise operators.

Same store sales appeared to be gaining momentum in 2003 as IHOP management worked to position the company as the leading family dining destination in the industry. Usurping competitors Denny's and Waffle House from their top spots, however, was contingent upon the success of the new franchise model and the firm's aggressive branding campaign. Nevertheless, IHOP appeared to be on the right track for future growth.

Principal Subsidiaries: International House of Pancakes, Inc.

Principal Competitors: Applebee's International Inc.; Denny's Corporation; Waffle House Inc.

IHOP Corporation History

Company Perspectives:

Key Dates:

Company History:

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