Applebee’s International, Inc.

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Applebee’s International, Inc.

4551 West 107th Street, Suite 100
Overland Park, Kansas 66207
U.S.A.
Telephone: (913) 967-4000
Fax: (913) 341-1694
Web site: http://www.applebees.com

Public Company
Incorporated: 1983
Employees: 18,150
Sales: $669.58 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: APPB
NAIC: 72211 Full Service Restaurants; 72241 Drinking Places (Alcoholic Beverages); 53311 Lessors of Nonfinancial Intangible Assets (Except Copyrighted Works)

Applebee’s International, Inc. is the leader in the casual dining segment of the United States restaurant marketplace. The company franchises and operates more than 1,100 restaurants under the Applebee’s Neighborhood Grill & Bar name, about a quarter of which it owns. The eateries offer moderately priced, high-quality food and drink for all ages in a friendly, informal atmosphere. Applebee’s is continuing to expand, with 1,800 outlets the company’s stated goal. A smaller restaurant format has been designed for areas with populations under 25,000, to facilitate penetration of previously untapped markets.

Origins

Restaurateur William Palmer and his wife opened the first Applebee’s restaurant—named T.J. Applebee’s—in Atlanta in November 1980. Offering a unique menu and comfortable atmosphere, the Atlanta eatery was a success. Palmer’s goal with Applebee’s was to create a neighborhood-like pub and restaurant where patrons could order high-quality food at a relatively low price. Specifically, he hoped to provide an alternative for all ages to fast-food restaurants, steakhouse franchises, and similar chains, which Palmer believed were offering relatively impersonal service and mediocre fare. The concept, while simple, was so successful that T.J. Applebee’s began to get the attention of larger food companies. To that end, Creative Food ‘N Fun Co. purchased the concept from Palmer in 1983; Creative Food ‘N Fun Co. was a subsidiary of the giant holding company W.R. Grace & Co.

W.R. Grace hoped to use its deep pockets to parlay the T.J. Applebee’s concept into a large chain of franchised restaurants. Grace, through its wholly owned Creative Food ‘N Fun Co. subsidiary, set up a separate Applebee’s division in Kansas City to operate the newly incorporated Applebee’s. Palmer remained as president of Applebee’s. Between 1983 and 1985 Palmer added new Applebee’s outlets in the Atlanta area. In addition, Applebee’s began franchising the concept to other regional restaurant developers.

Among Applebee’s first regional franchisees was Burton “Skip” Sack, who purchased the New England franchise rights to Applebee’s restaurants in 1984. His experience was representative of other Applebee’s franchisees during the late 1980s and early 1990s. Sack had started out as a bus boy at Howard Johnson’s, where, over a 22-year-period, he progressed to senior vice-president of the company. He left “HoJo” in 1983 and bought the Red Coach Grill chain of eateries. When his first Applebee’s restaurant was an instant success, he sold off his Red Coach restaurants and concentrated on developing more Applebee’s outlets. During the late 1980s Sack developed a small network of Applebee’s outlets in various parts of New England. “We waited a year and a half to see if it was just a fluke,” Sack said in the May 3, 1993 Union Leader, adding that “In 1988, we opened our second restaurant in Franklin, Massachusetts, and it did even better.” By 1993 Sack was operating about 15 outlets that were generating earnings of nearly $18 million annually, and he was planning to open several more stores.

Sack and other Applebee’s franchisees generally prospered during the late 1980s and early 1990s. Perhaps the most successful franchisee, however, was Tom E. DuPree, Jr. DuPree opened his first Applebee’s restaurant in 1986 and rapidly expanded his chain to become the leading franchisee in the system. “We felt it [the Applebee’s concept] hit all the demographic shifts dead center,” DuPree explained in the July 5, 1994 Atlanta Constitution. “People are tired of plastic drinks and cardboard food,” he noted. Dubbed “Apple South,” the Atlanta-based company that DuPree created through which to operate his restaurants generated huge sales gains throughout the late 1980s and early 1990s. Indeed, between 1986 and 1991, DuPree opened 52 new outlets. Incredibly, he doubled that number during the next two years by expanding its chain to more than 100 stores. Furthermore, average per-store sales steadily increased.

Sale to Gustin and Hamra

Applebee’s major growth spurt began in 1988, after W.R. Grace sold the company. Grace had succeeded in bringing new franchisees into the system but had only achieved moderate growth and profitability. Even by 1986, total revenues from franchise fees and other sources were less than $5 million. In addition, despite the success of individual stores, Applebee’s lost money each year between 1985 and 1988, with the exception of a small surplus in 1986. Recognizing that Applebee’s had much greater potential were Abe J. Gustin, Jr., and John Hamra. Hamra was serving as chairman of Applebee’s board at the time. In 1988 Gustin and Hamra decided to buy the company from W.R. Grace and try their hand at owning and managing the organization. The Applebee’s organization was comprised of 54 units at the time, most of which were franchises. That number would surge during the next few years.

Hamra and Gustin were well suited to run Applebee’s. Hamra was already acting as chairman, so he had the connections and expertise to pull off the buyout. Gustin, though, would be the driving force behind Applebee’s stellar gains during the next five years. He had started his career as a teenager, toiling in his brother’s Birmingham, Alabama, barbecue hut. After that, he served a 15-year stint with Schlitz Brewing Co., where he started out driving a beer truck and worked his way up through the marketing side of the company. In a 1993 article in the Nation’s Restaurant News, Gustin discussed the impact of his mentor at Schlitz, Tom Rupus: “Tom Rupus, vice president of sales when I was at Schlitz, had a huge impact on the direction of my career.... He told me, ‘I don’t care what you’re doing; you’re gonna look like a businessman.’ So I used to ride in the beer trucks and unload beer in a suit and tie.”

Gustin was hired away from Schlitz by ABA Distributors, a wholesale beer distributor in Kansas City, where he served as chairman, president, and director. From there, he moved into foodservice as chairman of Juneau Holding Co., a Kansas City-based owner and operator of 18 Taco Bell Restaurants. Gustin wanted to expand his Taco Bell chain but was told that the company was not issuing any more territory rights. At that point he began considering the up-and-coming Applebee’s. Gustin flew to Atlanta, checked out the Applebee’s concept, liked what he saw, and worked out a deal to become the organization’s third franchisee. Gustin also took the advice of then-chairman John Hamra, and began selling off his Taco Bell holdings. He opened his first Applebee’s in 1986. The success of that store prompted him to open six more outlets during the next several months. Then, in January 1988, he teamed up with Hamra to buy Applebee’s from W.R. Grace.

Under new ownership, revenues at Applebee’s soared 500 percent to more than $24.21 million during 1988. Likewise, net losses for the year plunged from $877 million in 1987 to $47 million in 1988. The increase was largely the result of new restaurants; the Applebee’s chain grew to 88 units by the end of 1988 and then to 110 stores by mid-1990. To sustain that growth, Gustin and Hamra had taken Applebee’s public early in 1990. Cash from the initial public offering was used to reduce some of the $10 million in debt incurred while acquiring the Applebee’s chain from Grace. After the offering, Gustin announced that Applebee’s would soon be opening an additional 70 franchise units, news which boosted Applebee’s stock price. Unfortunately, the investment capital needed to open the outlets failed to materialize and only 39 of the restaurants were opened.

Expanding in the 1990s

Scrambling in 1990 to raise capital in a recessionary economy, Gustin was finally able to get a loan guarantee from Bell Atlantic, and the cash flow resumed. He recruited new franchisees to add to the company’s existing base of about 50, and the Applebee’s chain began to sprawl across the United States. In 1990, in fact, Applebee’s was selected by Barron’s as a small company with a five-year high-growth potential because of its management strategy and vision. Adding credence to that assessment was the fact that revenues, which were comprised primarily of franchise-related fees, surged to $38.2 million in 1989, $45.13 million in 1990, and then to $56.5 million in 1991. More importantly, net income rose to $5 million in 1992 from $1.8 million in 1990. Going into 1993, Applebee’s was operating about 200 outlets, roughly 85 percent of which were franchised and 15 percent of which were owned by Applebee’s International.

The reasons for Applebee’s success were several. The foundation of the company’s strategy was its neighborhood theme, which influenced all operating decisions in the organization. The Applebee’s menu depicted a doormat that read “Welcome to the Neighborhood,” on the cover, and the restaurants were designed to project a comfortable, neighborly environment. Franchisees were encouraged to get involved with local charities and neighborhood events, and to personalize their restaurants in some way to keep them from looking like a chain restaurant that could be found in any other city in the nation. The benefit of the neighborhood strategy was that it cultivated repeat business from the local population. In fact, the Applebee’s outlets targeted the crowd that would prefer to frequent a local mom-and-pop restaurant than the typical impersonal chain.

Company Perspectives:

Whether it’s for lunch, dinner, after work or late at night, we’ve got the neighborhood favorites you’ve grown to love.

As part of the effort to personalize the restaurants, Gustin empowered individual franchisees and restaurant managers to make decisions about how their restaurants operated and even what type of food they served. Two of the core required menu items were barbecued riblets cut from the tip of the tenderloin, and fajitas. The restaurants also typically offered chicken wings, burgers, lasagna, soup and salad, sirloin steak, apple honey cobbler, and cheesecake. In addition, each restaurant featured a full bar, where Applebee’s special apple margaritas were served. Aside from those staples, franchisees were allowed to experiment with their menus and emphasize foods popular in their particular market. Furthermore, Applebee’s wait staff was highly trained to respond to customer’s specific needs, and staffers were taught a special ten-step serving process. Importantly, the restaurants were set up to ensure that most people were served their meal within 15 minutes of ordering.

Applebee’s growth rate accelerated in 1993 and 1994. By exploiting the company’s proven management and operating formula, and by attracting new investment capital, Gustin was able to grow the chain at an average pace of more than 100 restaurants annually. During this time, Hamra retired, and Gustin became chairman, chief executive, and president. “My original vision was that there could be as many as 500 Applebee’s,” Gustin said in the September 20, 1993 Nation’s Restaurant News. “Now we’re targeting 1,200 to 1,500,” he added. To help him expand the company, Gustin hired such seasoned executives as Ken Hill, chief operating officer, and George Shadid, chief financial officer. They and other team members rallied going into the mid-1990s to expand the Applebee’s chain of eateries to more than 500 going into 1995.

As the number of franchised and company-owned stores rose, so did Applebee’s’ sales and profits. Indeed, revenues more than doubled in 1993 to $117 million before lurching to $208 million in 1994. For the same years, net income vaulted to $9.5 million before nearly hitting $17 million during 1994. Applebee’s continued to expand at a speedy clip in 1995, and by the middle of the year was boasting about 575 outlets in 43 states, one Canadian province, and the island of Curacao. Although the size of the organization had changed, the goals of the individual restaurants had not; “It helps for people to know they can bring the kids, have a drink if they like, and be served their food within 15 minutes of ordering,” Gustin said in the July 1995 Ingram’s. “People also want to walk out without feeling they’ve left their wallets behind them,” he observed.

The year 1995 also saw the acquisition of the 14-store Rio Bravo Cantina Mexican food chain when Applebee’s acquired its parent, Innovative Restaurant Concepts of Marietta, Georgia. Wall Street applauded the move, believing Rio Bravo to be a complement to the larger chain, and a concept which had great potential for growth. Rio Bravo offered Mexican food much as Applebee’s did American, utilizing a more sophisticated menu than fast-food restaurants and serving beer and wine. The company acquired all of the locations, and it began expansion slowly, deciding to fine-tune the concept before licensing additional outlets. Several franchisees, including Bill Palmer, had been behind the acquisition, and most wholeheartedly supported the move. However, Apple South took an antagonistic tack and bought its own Tex-Mex chain, Don Pablo’s. In addition to purchasing Rio Bravo, Applebee’s at this time was also developing a new, smaller store prototype for less populous markets.

Apple South Sells Out

A bombshell was dropped on the company at the end of 1997 when Apple South, now the owner of 274 units, decided to sell all of its Applebee’s restaurants. In addition to the differences over Rio Bravo, there had been other disagreements between the two partners over the years. The latest flare-up concerned Apple South’s Hops Restaurant Bar & Brewery concept, which Applebee’s thought too closely resembled its own. Apple South CEO Tom DuPree made the decision to develop the restaurant chains he owned outright rather than pay franchise fees to Applebee’s, later making the divorce complete by changing his company’s name to Avado Brands, Inc. The restaurants were sold off over the next year and a half to a total of 14 different buyers, with the parent company taking more than ten percent.

The summer of 1998 saw Applebee’s open its 1,000th unit. In September the company appointed former Taco Bell franchise and license vice-president Julia Stewart to run the company’s restaurant division. Stewart immediately took off on a two-month trip to meet all 58 of the company’s franchisees, and announced plans to focus on improving employee morale and brand identity. At the end of the year Abe Gustin stepped down from hands-on management, retaining only the role of board chairman.

In the spring of 1999, Applebee’s sold its Rio Bravo Cantina chain—acknowledging that it was not yielding the expected returns—to Chevys, Inc. for $58 million. The company had paid $68 million for the operation in 1995, and had ultimately expanded it to 66 locations. However, the sale did not dampen the mood much at Applebee’s, which was now seeing steadily increasing same-store sales.

Key Dates:

1980:: TJ. Applebee’s Edibles and Elixirs, the brainchild of Bill and TJ. Palmer, opens in Atlanta.
1983:: W.R. Grace & Co. purchases the restaurant concept from the Palmers.
1988:: Abe Gustin and John Hamra buy Applebee’s from Grace.
1989:: Applebee’s goes public.
1994:: 500th Applebee’s Neighborhood Grill & Bar opens.
1995:: Applebee’s buys Rio Bravo Cantina restaurant chain.
1997:: Franchisee Apple South announces plans to sell its Applebee’s holdings.
1998:: Abe Gustin leaves day-to-day management; 1,000th restaurant opens.
1999:: Rio Bravo operations are sold to Chevys, Inc.

The company was also ramping up its national advertising, and hired a new ad agency in the summer. The first campaign from Foote, Cone & Belding premiered the next January and featured the slogan, “As American as Applebee’s.” The ads targeted 21- to 49-year-olds, a narrower segment of the market-place than before. The budget for network television ads had zoomed from $6 million in 1998 to $16 million in 1999, and was slated to hit $37 million during 2000.

On the heels of its new momentum, Applebee’s increased its dividends to shareholders and also implemented a $100 million stock repurchase plan. In the spring of 2000, Abe Gustin stepped down as board chairman, though he continued to own a number of Applebee’s franchises. The company also opened its first restaurant in Manhattan, strategically located on 42nd Street near Times Square. Sales totals announced for fiscal 1999 showed an increase of 14 percent, with system-wide revenues a record $2.35 billion.

The company’s renewed focus on its core strengths was paying off, and it was continuing to grow steadily. Applebee’s had opened more than 100 restaurants annually for seven years running, and anticipated this number to hold steady for the near future. It had already recovered from both the loss of Apple South and the Rio Bravo misfire, proof positive that the company’s management was sound and that the American public was well satisfied with what it had to offer.

Principal Subsidiaries

A.I.I. Euro Services (Holland) B.V. (Netherlands); All Services- Europe, Limited; All Services, Inc.; Applebee’s Neighborhood Grill & Bar of Georgia, Inc.; Applebee’s Northeast, Inc.; Applebee’s of Michigan, Inc.; Applebee’s of Minnesota, Inc.; Applebee’s of Nevada, Inc.; Applebee’s of New Mexico, Inc.; Applebee’s of New York, Inc.; Applebee’s of Pennsylvania, Inc.; Applebee’s of Texas, Inc.; Applebee’s of Virginia, Inc.; Gourmet Systems, Inc.; Gourmet Systems of Arizona, Inc.; Gourmet Systems of California, Inc.; Gourmet Systems of Georgia, Inc.; Gourmet Systems of Kansas, Inc.; Gourmet Systems of Minnesota, Inc.; Gourmet Systems of Nevada, Inc.; Gourmet Systems of Tennessee, Inc.; Rio Bravo International, Inc.

Principal Competitors

Advantica Restaurant Group, Inc.; Brinker International, Inc.; Carlson Restaurants Worldwide, Inc.; CBRL Group, Inc.; Darden Restaurants, Inc.; Lone Star Steakhouse & Saloon, Inc.; Metromedia Company; Outback Steakhouse, Inc.; Ruby Tuesday, Inc.