Clearing the smoke from product intros

Enough with the handicapping of the presidential election. What we really need is an analysis of what this week’s menu changes mean for the country.

Let’s start with the scheduling. Once upon a time, restaurant chains would schedule their menu overhauls to correspond with the seasons—salads and beverages added in the summer, heavier fare like soups and stews featured in the fall and winter. Now chain parents are announcing menu changes either right before or immediately after releasing poor financial results.

Earlier this week, for instance, DineEquity announced that its IHOP brand had added Coffee Cake Pancakes. Simultaneously, the franchisor disclosed that its losses had deepened to $16.4 million. It was as if the company expected investors to say, “Whoa. Who cares if the company lost money. IHOP has Coffee Cake Pancakes!!”

Similarly, Popeyes parent AFC Enterprises disclosed last Friday that its domestic same-store sales for the third quarter had slipped 2.8 percent. On Monday, Popeyes announced that it was adding a new bowl meal and a chicken sandwich—the foundations of what the chain trumpeted as a whole new menu platform.

Is the new trend to use menu additions as a distraction from bad financial numbers? Two instances would’ve been merely a coincidence that suggested no. Then came today’s one-two announcements from Denny’s. In the morning, the company crowed that it was updating its late-night Rockstar menu with items supposedly developed by stars like Katy Perry, Taking Back Sunday and Hoobastank. Hot-selling rock bands, working together in their kitchens to come up with items like the Melty Grilled Chicken and Sausage Quesadilla. Sure, I buy that.

Nevertheless, roughly eight hours later Denny’s released its third-quarter financial numbers, including a 6.1-percent drop in same-store sales for franchised restaurants and a 2.7-percent decrease for company-run units. If three instances suggest a trend, we’re there.

Yet my smokescreen theory is severely undercut by Denny’s profits. Net income more than doubled, to $10.6 million. Why blunt good news like that with yee-haws about the new Hooburrito, supposedly a brainchild of the band Hoobastank?

Denny’s may be an exemption to that trend, but it certainly fits another pattern in how chains are announcing new products these days. Not so long ago, they tended to introduce a whole new menu and stress the additions. Afterward, they might’ve showcased a limited-time offer now and again. The introductions were either grouped together into one event of note, or peppered over an extended period in a bid to stay top-of-mind.

Contrast that with the approach that was taken yesterday by Jack in the Box. The (now) multiregional burger chain announced at 9 a.m. East Coast time that it was resurrecting its Teriyaki Bowls line; at 12, that it was bringing back its Mini Churros; and at 3:30, that it was introducing two new “homestyle” chicken sandwiches (translation: sandwiches made with fried chicken) in its central and southeastern regions. What would have normally been one news item became three web postings. Which, presumably, was exactly the point. By staggering the release of three separate press announcements, it garnered at worst a story and two updates, and at best three separate articles, without a penny in ad fees. Pretty smart.

And what of the products that were added this week? Clearly they prove that “new” is a relative term. Popeyes declared its new meal in a bowl to be new, but it’s been featuring similar items for years. And its new Big Easy chicken sandwich sounds exactly like an item it’s carried for some time.

And, with all due respect to Melty quesadilla creators Taking Back Sunday, or Hooburrito midwives Hoobastank, those items aren’t exactly groundbreakers.

Need we point out that two of Jack in the Box’s three menu additions were resurrected products, and that the third sounds conspicuously like McDonald’s chicken biscuit sandwiches?

So, what does all of this mean for the country? Clearly the emphasis is on recycling retreads, which raises some alarming questions about levels of creativity. But then again, the industry is showing surprising innovation in the most mundane of areas, how product introductions are handled. Business may be down, but it’s hardly lacking in craftiness.

Compromising position?

Moving to higher ground is a sound strategy if you’re running for president or trying to escape a flood. But what if you’re a broad-market restaurant chain that wants to out-class the sector? Consider what the heads of Ruby Tuesday and Applebee’s have to say on the matter. Then climb a mountain and ponder how such similar assessments could prompt them to move in such opposite directions.

Both have acknowledged to investors that management pushed the concepts beyond the comfort zones of longtime customers when they drove the chains up-market. ““We often overshot the brand in the pursuit of a more upscale customer while frankly failing to deliver on the expectations of our core users,” said Julia Stewart, CEO of DineEquity and the proclaimed chief strategist for Applebee’s, which the IHOP parent acquired in November.

Sandy Beall, founder and CEO of Ruby Tuesday, had similar things to say when he addressed analysts last week in a conference call. The past year was a tough one for the casual-dining chain in part because of the environment—“as difficult as I’ve ever seen it,” remarked Beall, who started the company in 1972. But, he admitted, “We also probably hurt ourselves.”

The company remodeled 650 restaurants in less than a year, which may have distracted the team, Beall explained. And some patrons may have been driven off by the new look—“lower-end guests who maybe felt less comfortable in our reimaged restaurants,” he observed.

Stewart has indicated that Applebee’s will shed its highfalutin ways and refocus on the brand’s traditional strength of offering reasonably priced finger foods and a centerpiece bar. In short, it’ll shift back to the concept’s longstanding position as an everyday dining choice—a true neighborhood option.

Contrast that direction with Beall’s pronouncement on Ruby Tuesday’s upscale push. “We now have a completely integrated high quality brand with consistency among its key elements of food service and the restaurant’s look and feel,” he told investors. “This is very, very important.”

He didn’t reconcile that enthusiasm over the chain’s new positioning with his earlier comment about alienating some customers. But he did add, “The soundness of our strategy is also indicated by the fact that our customer base is changing…For example, it is becoming a little more affluent, which is what we wanted, with 44 percent of our customers having income greater than $75,000 compared with 38 percent three years ago.”

Clearly he wants the brand to be more of an Acura, while Applebee’s is betting that a Honda is really what the market appreciates.

Both, of course, could be correct. Meanwhile, the industry as a whole seems to favor the third option of claiming the middle ground, whether that means sliding up or down the spectrum. Fast-feeders ranging from Burger King (with its Whopper Bar, a high-end diversification featuring cocktails) and Subway (with its Subway Café) are nudging their brands further up the pricing scale. At the other extreme are fine-dining chefs like Bobby Flay and their launch of burger concepts, like his just-opened fast-casual concept, Bobby’s Burger Palace. Like many a presidential candidate, restaurant operators seem prone at the moment to drifting toward the center.

Unless, that is, they’re already there, like the family dining specialists. Denny’s, for instance, is edging into quick-service turf with its scaled-down Express concept and B-FST 2GO program. And IHOP has aired intentions to diversify into the fast-service arena of airports.

It sounds like a mess, but it’s really a much-needed shake-up of the status quo. Brands are reconsidering what they are and what they want to be. Unfortunately, many are likely to discover that those are two extremely different things.

Applebee's to try a chill pill?

Consumers may soon be spying a stockpile of thermometers behind the bar of their nearest Applebee’s. The new parent of the troubled casual-dining brand is looking to put more fizz into alcoholic beverage sales, and one of the means it’s considering is the schtick used by a franchisee in Ohio. The operator touts his beer as the coldest beer in town, and proves it by putting a thermometer into each glass when he serves it.

Julia Stewart, chairman and chief executive of DineEquity Inc., the clunky new moniker of IHOP Corp., told investors last week that Applebee’s new executive team will likely check out the gimmick for possibly wider adoption. “Don’t laugh—there’s probably a notion there that I want to exemplify [sic] and test,” she said at the Goldman Sachs Investor Conference.

During the Q&A session following her presentation, Stewart noted that Applebee’s is already one of the nation’s highest-volume beer sellers, but observed that wine could represent an opportunity.

She also repeated an earlier avowal to avoid the prior administration’s mistake of trying to make Applebee’s menu more sophisticated than patrons would like. She indicated that the brand should stay within its niche with she characterized as finger-food-type items. But she also noted that the bill of fare needed an update. Deep-fried mozzarella sticks were cited in particular as a tired nod to yesteryear.

How IHOP plans to fix Applebee's

After crowing for months that it could revive Applebee’s, IHOP started talking this week about how it’ll do it. In a presentation to financial analysts, CEO Julie Stewart spoke of such nuts and bolts changes as scaling back limited-time offers, installing new kitchen equipment, paring down the menu to a few specialties, and, perhaps most important, remembering what kind of consumer is likely to visit the restaurants. “We often overshot the brand in the pursuit of amore upscale customer while frankly failing to deliver on the expectations of our core users,” Stewart explained.

The casual chain’s new owner has already yanked Applebee’s much-ballyhooed “Talking Apple” ad campaign, which featured the sassy comedienne Wanda Sykes as the voice of the apple that’s now part of Applebee’s logo. Both the new logo and the edgy campaign, carefully slanted toward a hipper crowd, were concocted by the chain’s prior regime, which Stewart ousted in short order. The new campaign, “It’s a Whole New Neighborhood,” harkens back to the chain’s earlier positioning lie, “Eating Good in the Neighborhood,” which Steward helped to develop while she was president of Applebee’s domestic operations.

The new spots spotlight food, without any pretenses about attitude or cheeky sophistication. Or, as Stewart put it, “Our message is clearly focused on classic grill and bar food that you can only get at Applebee’s.”

That process of stripping down the concept to its core strengths, then updating those traditional draws, appears to be the basis of Stewart’s revival plan. As she told the analysts, a crowd usually more concerned with ROI than Riblets, “Signature grill and bar items, such as appetizers, burgers, salads, steaks, as well as beer, wine and other specialty drinks, are the key to differentiating Applebee’s from the competitive set while remaining true to our brand position.” Translation: The chain will stop trying to be a Cheesecake Factory or a trendy independent.

Part of the process, she continued, will be paring back the menu and updating kitchens.

In an interview with USA Today, Stewart also spoke about putting more emphasis in Applebee’s marketing on the concept’s bar. Most consumers, she suggested, don’t realize how much the brand offers to patrons who want to unwind with a cocktail.

During the conference call with investors, one of the portfolio managers asked Steward why she was veering from Applebee’s traditional reliance on limited-time offers and frequent menu changes.

“The short answer is that [the] LTO strategy did not work,” she said. “The idea of forcing people to come in for a limited period of time and order that item and somehow come more frequently did not work.” After all, she said, “if your base business and your base menu and your base service platform doesn’t provide enough for the consumer, then the LTO isn’t necessarily going to get you where you want to go, right?”

Stewart said that IHOP has plotted out a new marketing plan for Applebee’s for the remainder of 2008, starting with another flight of ads that debuts Monday. In those spots, consumers will be invited to submit videos they’ve shot inside Applebee’s units.

In addition, Stewart and her team “have developed a road map for all of 2009 that should be finalized in the next couple of months,” she said. In particular, she added, the new operating group will look at takeaway and Applebee’s rights to market Weight Watchers-brand meals.

Stewart also revealed that IHOP plans to “amend” a unit-manager bonus program that squeezed margins at company stores during the first quarter, without commenting how that effort dovetailed with the plan to improve unit-level operations.

Are things bad all over?

If the restaurant industry has slogged through a worse reporting period than the last few weeks, a guy named Hoover was probably president—if not somebody named Voldemort. In a 19-day stretch, Domino’s posted a 55-percent freefall in net income, Ruby Tuesday posted a 48-percent plummet, Brinker notched a 21-percent decline, Wendy’s disclosed a 56-percent dive, P.F. Chang’s earnings sank 20 percent and IHOP finished $11.6 million in the red. For all but a few industry standouts (notably McDonald’s and Tim Hortons), the recent past has been the stuff of blues songs.

The industry has certainly shrieked through its share of rollercoaster drops before. As Ruth’s Chris CEO Craig Miller noted during MUFSO, the current ills of sky-high fuel prices and surging food costs are minor compared to what he saw in the 1970s, when President Nixon froze prices to check inflation and consumers couldn’t buy gas at any price because of an OPEC embargo. This is nothing compared to then, he suggested.

But what makes Quagmire 2007 unique, at least out of all the restaurant downturns I’ve witnessed, is its lack of discrimination. In past sales chills, business usually shifted, with the big brands wresting traffic away from the scrawnier players in a display that would have had Darwin smugly nodding. But this time, the dynamic seems to be more of a lowering tide. Many of the companies that reported their earnings with a decided wince were the very ones that filed their SEC documents with a swagger just a short while ago. This is truly a macro-effect, not a bad story with plenty of footnotes. The list of the unaffected is shorter than a mash note to George Steinbrenner.

Which, of course, underscores the question, What’s the industry to do? Miller offered his recollections of worse times to illustrate that better conditions will return eventually. But how can a chain hurry it along?

BJ’s Restaurants, one of the companies to clearly prosper during a period that most competitors characterize as a kick in the groin, has a very definite idea. “In this difficult operating environment, where consumer spending for casual dining occasions and the prime costs of doing business will likely continue to be under significant pressure on an absolute basis for the foreseeable future, we believe the more successful casual dining concepts will be those that protect their overall consumer 'approachability' for all dining occasions and that offer even greater quality, differentiation and overall value to the consumer," CEO Jerry Deitchle was quoted as saying in the company’s announcement of a 31 percent rise in net income on a 30 percent rise in revenues for the third quarter.

I’m not crystal-clear on what he means by “overall consumer ‘approachability,’” but I assume he’s trying to say that the objective is boosting customer frequency, a laudable goal. Certainly that’s more ambitious than the usual approach of trying to buy customers by giving them a deal, a reflex that can haunt a chain for years to come.

Avoiding that knee jerk to focus on “approachability” and differentiation—an objective that should trump the others, in my estimation—would be as much of a departure from the norm as this downturn itself seems to be.