Dual-Branded Franchise Strategy with Dine Brands’ Scott Gladstone | The Business Growth Show

Well first, Ford, thank you for having me. It's a privilege and an honor to be here, and thank you for that introduction—it was fantastic. I am even more energized than I was before about dual brands. So the dual brands are our most recent innovation here at Dine. I'll get into what it is, but give a little bit of context: we've opened about 20 of these units internationally. We opened our first dual-branded location in Seagoville, Texas last week, the 14th of February. So what is it? We have Applebee's and IHOP, two iconic legacy brands, category leaders here in the US, and we've put them under one roof. As a guest, you walk in and there are distinct dining areas—what I call the hallmark equities of the brands within the front of house. For example, you'll see the Applebee's bar and bar area, and you'll see an IHOP dining area. But in the back of house, you've got a shared kitchen, cross-trained staff, effectively working everything on one line. From a consumer perspective, you get the best of both worlds, which is proven to be very interesting to the consumer. For the operator, you get a lot of efficiency: efficiency of all your fixed costs. You have an existing building with rent, electricity, and other fixed costs, and you're able to leverage that with a higher sales base. You get leverage out of your labor, especially variable labor. It's a compelling proposition for potential franchisees, and we're really excited about it.

That's right. For the consumer, you get the best of both worlds. We've adjusted the menu so it's very efficient, featuring the highest velocity items of both. In a standalone Applebee's or standalone IHOP, you have between 100 and 120 menu items. In this dual-branded unit, you also have 110 menu items, so it's not double the size. You get a lot of efficiency and can service it with your existing staff. The concept is not too different at the highest level—many other concepts have attempted this, and you're seeing a lot of it in our category today, especially in an environment of rising rents and rising costs. What makes us uniquely Dine is that we have these two category leaders that are so distinct in their day parts. A lot of other concepts that have tried to put two brands together generally have volumes at the same time—lunch and dinner concepts. Here, we've got a breakfast leader where most of the volume for IHOP comes before noon and then tapers off, though we do have a strong late-night business. Then you're able to supplement that with Applebee's. From a volume perspective, it actually smooths everything out, giving us three full day parts.

We think it's a very attractive proposition for the franchisee. It solves—again, we're very early in this journey—some potential issues in this environment of rising costs and rising real estate costs. We're trying to add top-line and flow-through for our franchisees. This gives a very clear option to do that. On our side, we're trying to be flexible, and I think we've done a good job of saying there are no sacred cows as it relates to our brands and the way we do things. We're going to think of doing it a little bit differently. For example, the SOPs in the back of house or front of house are different for Applebee's and IHOP, so we had to realign what the standard greeting is for a table. It's not the way we do it in IHOP; you have to leave some of that behind. There are different ways you prepare the food—it gets to the very minuscule things like serving sizes. We've had to redo it. We never said it has to be this way or that way; we came up with a new way of doing it. We think it's going to work, and we're excited.

It's a little bit of both. That's where it solves a couple of different problems or opportunities. For greenfield development or new markets, it's very clear. We can potentially take this into a more rural market where you might not have forecasted the sales for a single brand to justify the investment, or into a high-density urban market where rents are incredibly high. It can solve either of those opportunities for new store growth. On existing stores, it's not a silver bullet but a nice opportunity to leverage your existing fixed cost base. The first restaurant we opened in Seagoville, Texas, was an existing IHOP that we converted to add Applebee's. Early on, it's proving to be a very compelling proposition both for the franchisee and for a community that was probably looking for more dining options. It can be deployed in multiple ways. We're now in the execution phase, having put the first one out there. We're encouraged by the early results and have a lot of interest from our franchisees because they've had an opportunity to see it live. We're going to work through the complexities of the development process to see how much we can get done. The hypothetical in development is so execution-focused. There's the strategy and the concepts, but then it's about whether you can actually make this come to life in the existing box. We have a variety of footprints, capacities, square footage, plumbing, and everything set up in a certain way. Can you actually implement this? That's where our architecture, design, and field construction teams come in to work hand-in-hand with franchisees to make this concept come to life.

Nothing is linear. You experience different things and end up where you are. My first career was in financial services. I started at a company called Bear Stearns in New York, and I was there during the financial crisis. That was my early exposure and experience in the corporate world—very formative, to say the least. After that, I went back to business school, then came out and did management consulting for about five years with Boston Consulting Group. I had the opportunity to work across a bunch of different industries and functions, learned a ton, and built the general management toolkit. Then I joined Dine Brands in 2016, so it's been about nine years—coming up on my nine-year anniversary. At Dine, I've had the opportunity to be in a bunch of different roles. I spent about four years in the Applebee's business unit in more of a line leadership role at the franchise level. I led our off-premise business, development, and consumer insights for a time. The past four years, I've been at the Dine enterprise level. I've been President of International for the last two years, and Chief Development Officer for the last year. The CDO role was new, so we're still building this team. We saw that opportunity because we had development within each of the three business units at Dine, and we decided to consolidate that under one function and one leader. We've been building the team out, and I think the dual brand is the first output of this new team. It's really exciting to see what you can do when you put people together who historically focused on one brand and now they're focused on the enterprise.

I'll give you some rough numbers. Approximately globally, 3,700 units across the three business units. Approximately 3,500 of those units are domestic. IHOP is approximately a 1,700-unit brand. Applebee's is approximately a 1,600-unit brand globally. Fuzzy's is 130 to 140. So that's the size we're talking about, with very different profiles. Fuzzy's just came under the family in 2022 or 2023—I believe at the end of 2023 we acquired Fuzzy's. We had talked for years in the public markets. Applebee's and IHOP came together in 2007 in an acquisition, bringing together two category-leading brands. The challenge with being category-leading brands is that growth is harder because you have a much larger base of stores. Every restaurant you add on a percentage basis doesn't move the needle as much. In the public markets, you're looking for growth, and growth is highly valued. We knew we had built a strong capability at the Dine level in terms of our shared service platform with legal, finance, supply chain, and now our development function. The theory was to plug in another brand to scale our shared service capabilities. That's what we did with Fuzzy's. We identified that the fast-casual Mexican segment is growing incredibly quickly, especially in Texas. There are a number of concepts that have successfully merged the full-service bar experience with fast-casual food, and Fuzzy's is one of those brands. We think it has the opportunity to scale beyond its historical roots, already in a couple of core markets including Colorado and Oklahoma City, and we expect that to continue. The thesis was to use the platform, acquire a faster-growing concept on a percentage basis, and use that as a platform for growth going forward.

What you're describing is the service model. At IHOP or Applebee's, you get full service: you're greeted by a host, served by a server, and that's the experience you'd expect. In fast casual or fast casual plus, where we live with Fuzzy's, you order at the counter, pick up your food, and sit down. The service model is different. You do a little more work as a consumer, but it's a faster experience. The order is taken right away, the food is fired sooner, so it's a shorter dining experience. But with the full bar, we have a lot of people who like to hang out. That's the allure of Fuzzy's: you get your food quickly but then hang around for a couple of drinks.

How long's the list? Luckily, the consumer response has been very strong, so a lot of what we're focused on now is the ops execution and the asset itself—the actual facility. We had to build this from scratch. We had to think about the existing footprint in Seagoville, Texas, which was an existing IHOP. We had the four-wall perimeter and some existing equities in the space, but we had to figure out how to represent both brands within that space and execute on the line. You can put everything into a floor plan and construction documents, and it looks okay on paper, but when you actually build it, it doesn't always look so good. We're talking about very tactical things: the sight lines of the TVs. I can't tell you how many times we moved the TVs around. They weren't supposed to be in certain places, but we kept moving them because if they were there, you couldn't see them from here. We changed most of the bar TV layout within two weeks before the opening. There was a lot of that type of work and rework. A lot of the wall decor changed. There are a few things we missed in the plans that a consumer won't notice, but from a design perspective, we'll adjust and incorporate into the next learning. I was trying to emphasize to my team that speed was of the essence. We're trying to get this to market. It doesn't do us a ton of good to sit around talking to ourselves, planning for perfection, and not getting anywhere. I was trying to encourage the team that it's okay to take risks and make mistakes. No matter how long we sit here planning, there will be things we discover when it launches that we didn't intend. Might as well get there faster and get to that point as soon as possible. Our punch list is long, but nothing that's damaging to the experience. There's always room for improvement, and we're in phase one of this long journey.

It starts with the unit economics. It's been a challenging macro environment in the US and most countries over the last two or three years with inflation. Inflation goes to interest rates, which have increased borrowing costs, so it's more expensive than ever to get into this type of business. You have to be really careful and thoughtful about the unit economics you're stepping into. That's where you're seeing a lot of concepts try to innovate—either on the size of the box, the operating model, or putting multiple brands together—to come up with a product that can achieve the returns an investor or franchise investor is looking for. As a franchisee, understanding what those box economics look like or are projected to look like is probably the most important thing in almost any business: how to make money from it. Secondarily, understanding who you're going to be working with. The franchisee-franchisor relationship is incredibly important. Not trying to sell my own stuff, but we think highly of the support system we've put in place at Dine. Speaking specifically to the Dine development function, we have a fully integrated sales team, real estate team, construction team, architecture and design, and pre-opening training. All those pieces together are meant to support franchisees throughout the lifecycle. If I'm assessing an investment opportunity, I understand what it's going to get me, whether I'm going to get a return, and whether I have a partner that's going to support me throughout and give me the best chance for success. Those are the main areas, and they've become even more important over the last 24 months in an increasingly competitive and challenging operating environment.

I think it's getting comfortable with letting go of everything. You can't be in every phone call, every presentation, or make every little decision, nor should you. It's learning to trust yourself and your people to make the right decisions. You've got to give the right direction and set the right accountabilities and responsibilities. That comes with experience and learning by doing over time. Also, time and tenure with the people you're working with—you trust them more after working with them for a while. That's probably the biggest part where I've had to let go. I love being in the details. I love building and tinkering. That's kind of my nature—to really understand all the executional details. That probably comes from building a lot of Legos as a kid. I really like the step-by-step, building every little thing. But at some point, you have to let go and let somebody else build it. Then you can take a look at the end and say, 'Oh, I think maybe you missed a step,' or 'That looks fantastic, great job.' So the biggest piece is learning to let go and trust your people to execute.

Absolutely. If you're not learning, you're stagnant. You have to learn and adapt. It's critical.

Thank you. It was a pleasure.