Wednesday’s announcement that RMH Franchise, the country’s second-largest Applebee’s franchisee, is filing for bankruptcy protection offers more evidence that our regular hand-wringing over the state of the casual-dining market was on target. There are many reasons this segment of the foodservice industry has struggled over the past decade and a half, and the story of Applebee’s closings cycles illustrates many of them.
Full-Service Restaurant? Act Like It.
The continuing decline in unemployment, which hit a low 3.9% last month, is great news for everyone. Well, almost everyone: when the labor market tightens, foodservice establishments have more trouble finding and retaining committed and competent staff.
This is a challenge across all sectors, but especially for casual-dining restaurants, where the service experience is virtually the only thing that sets them apart from their fast-casual competitors.
Chains like Chipotle, Zoës Kitchen, and Sweetgreen have made such a significant dent in casual dining’s market share because they offer food of equal — and in some cases, higher — quality. Even some fast-food chains, notably Arby’s, have put new emphasis on the quality of their ingredients.
Now, diners choose Applebee’s over Chipotle not because they prefer the food but because they prefer the atmosphere. It’s nice to have a sit-down meal, where a server offers you insights into the menu, worries about getting your food to the table without spilling it, and makes sure everything meets your expectations.
Unfortunately, many of the decisions Applebee’s has made over the past two years work against this value proposition. For example, in 2016, the chain enabled tablet-based self-pay at all tables. While allowing guests to pay their bill at their convenience is certainly more, well, convenient, it strips the interaction of its human qualities. Not only that, but the hardware will quickly become antiquated, requiring the chain to refit its locations as technology improves. Foodservice simply can’t keep up with consumer tech when it’s deployed tableside.
Also in 2016, RMH Franchise — the same one that’s seeking bankruptcy protection — pioneered a system that turned sales, service, and side work into a game: employees got points for promoting specials and completing their tasks.
The program did improve customer satisfaction scores at 50% of its locations, but we’d argue that a less robotic training program that focused more on the idea of full service and hospitality would have a greater impact and instill a deeper connection between the restaurant, its staff, and its customers.
Investing in workers, by increasing wages and benefits, creating more in-depth training programs, and encouraging buy-in throughout the restaurant, will help Applebee’s recruit and keep the kind of employees that guests keep coming back to see.
Don’t Confuse Low Prices With Value
Almost across the board, when casual-dining restaurants began to see sales drop, they decided to offer deep discounts, like TGI Fridays’ misguided all-you-can-eat appetizer special.
Last year, Applebee’s announced that it would focus on “routine traditionalists” — long-standing customers who return to the chain regularly — and “value seekers” — folks looking for discounts and limited-time offers, like its Dollarita.
In fact, just a few hours before RMH announced its bankruptcy, Applebee’s CEO Steve Joyce appeared on CNBC’s Squawk Box, bragging about the restaurant’s recent all-you-can-eat riblets. The promotion sold so well that his suppliers couldn’t keep up, forcing them to end the deal a week early. An all-you-can-eat special might get guests in the door, but it won’t keep them coming back — especially after the riblets run out.
The casual dining segment can no longer differentiate itself on food quality, but that doesn’t mean it should fight the fast-food sector for price points. Deep discounts signal to guests that the restaurant doesn’t stand behind its products: they’re either so cheap, the company can slash the price and still profit, or the company is so desperate it’s willing to lose money on certain menu items.
Rather than lowering prices, casual-dining restaurants should focus on value. Customers derive value from the cost of their meals, of course, but they also find it in the intangibles: customer service, a distinct culinary perspective, and a commitment to the community the restaurant serves.
Applebee’s decision to pursue “traditionalists” and “value seekers” was a fairly significant departure from the business plan they had offered only a year before. In 2016, the chain announced a “comprehensive business transformation” that would set it apart from other casual-dining offerings. Besides self-pay tablets, the company also installed wood-fired grills at each location and began offering location-specific menu items.
A year later, president John Cywinski said these ideas were “in overt pursuit of a more youthful and affluent demographic,” which alienated core customers. In other words: blame it on the millennials.
Ironically, the answer to Applebee’s troubles was in its name all along: it’s the neighborhood grill. Sure, it invested tens of millions of dollars in new grills, but it failed to reconnect with the communities it serves.
Each restaurant should reflect its neighborhood in its design, marketing, training programs, and outreach. Applebee’s needed to win back market share block by block, neighborhood by neighborhood. Instead, it continued on as a couple thousand generic, value-engineered replicas that look, smell, and taste the same in Kansas City as they do in Kuwait City.
In 2016 and 2017, the chain closed 181 US locations, and it has announced plans to close another 80 this year. These closures correspond with mostly negative same-store sales.
Meanwhile, its parent company, Dine Brands, has focused on international expansion. Between 2014 and 2017, it opened 80 new international locations: IHOP has increased its Asia-Pacific footprint, while Applebee’s has grown in the Middle East. In Joyce’s Squawk Box appearance, he mentioned that he’d just spent 11 days in the Middle East and eaten at IHOP and Applebee’s every day.
This international growth is like a dying star: the casual-dining sun has already burned out, but its light still shines in international markets. The stagnation in Applebee’s international expansion efforts underlines this point: since hitting 150 stores in 2013, it’s barely added locations.
And it seems that Dine Brands knows this. The same day RMH announced its bankruptcy, Joyce told Business Insider that his company was looking to acquire a new brand.
Tellingly, he’s shopping for a fast-casual concept.