IHOP's Tasty Plan

IHOP (NYSE: IHP  ) serves millions of breakfasts to hungry Americans trying to get their fix of eggs and bacon -- and, of course, pancakes. The company has been doing it for 47 years. It makes money and plenty of it.

"What's the big deal?" you ask. "There are many public companies in the restaurant industry doing that. Tell me something that makes IHOP unique -- something that screams 'Growth is coming!'"

Well, IHOP has essentially been operating its franchise system upside down from the rest of the world. Most companies grant a franchisee the rights to operate in a particular area in return for an up-front franchise fee plus ongoing royalties, with all start-up costs financed by the franchisee. IHOP, on the other hand, would take care of all the phases of start-up. Once that was completed, the company would secure the appropriate franchisee. It was a great business model for the inexperienced operator but incredibly expensive to maintain.

In early 2003, CEO Julia A. Stewart worked with the board on a reorganization plan that would take the company to the next level while at the same time putting something extra on the bottom line through permanent cost reductions, including a 15% downsizing of non-store employees. The net savings on an annual basis were $3 million with a onetime reorganization cost of $1.5 million, most of which was taken in 2003.

The IHOP plan was simple: Focus on marketing and operations rather than restaurant development. In the end, you'd have a company that was more supportive of its franchisee and operation teams while reducing the overhead that was required to maintain such a large development group. If done properly, the company could grow revenues faster than it could under the previous plan, with fewer new restaurants coming online.

How is IHOP doing so far? If you look at the 2004 first-quarter report, there are some very encouraging signs that the plan is a smashing success. The figure that really jumps out is the 7.1% increase in same-store sales. That is the biggest increase the company has seen in 10 years. Further, IHOP reduced capital expenditures from $27.3 million in the first quarter of 2003 to $4.3 million in 2004.

The plan was to make the existing stores more profitable while reducing the costs associated with the previous business model. Judging by the latest news, I'd say the company isn't only making the customers happy, but the shareholders as well.

Hungry? Take a test-drive of our Fool Community and check out our Food & Drink discussion boards.

Fool contributor Will Ashworth lives in the Great White North and owns no shares of IHOP.


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