The IHOP : Chain Goes Flat Out to Prove That It Serves More Than Just Pancakes
“Man Does Not Live by Pancakes Alone.”
Indeed, neither does North Hollywood-based IHOP Corp., the parent of the 464-restaurant International House of Pancakes chain, which uses the slogan in its latest promotional campaign.
IHOP has struggled for years to expand its lunch and dinner trade while maintaining its breakfast niche. As fast-food hamburger restaurants try to gain ground in the breakfast market, IHOP is going the opposite route.
“People take the time for leisurely breakfasts during the weekends, and our traffic is fine then,” said Richard K. Herzer, the company’s chairman and president. “During the week, too many don’t think of us and go to McDonald’s.”
‘Nobody’s Ever Noticed’
Neal Kaplan, an analyst for Interstate Securities of Charlotte, N.C., said, “IHOP’s always served stuff other than pancakes. The company’s trouble is nobody’s ever noticed.”
Even so, non-breakfast items at IHOP now account for 40% of sales, up from 20% in 1982. IHOP says the increase stems in part from a more creative lineup of sandwiches and salads, including the “Parmesan-Grilled Beef ‘N’ Cheddar” introduced this year.
But company officials say IHOP’s mission is complicated by the heavy debt incurred during the rapid expansion attempted by its founder, Al Lapin Jr., and his successor, Austrian restaurateur Friedrich Jahn, which left the company teetering on the verge of bankruptcy. Neither Lapin nor Jahn could be reached for comment.
The firm still is 100% owned by a Swiss holding company consisting of Jahn’s creditor bankers, but it has been profitable since 1983. IHOP says it earned $3.4 million in 1985 on sales that climbed 14% from two years before to $242 million.
Luckily for the company, pancakes are enjoying a resurgence among “baby boomers.” The supposedly health-conscious generation views pancakes as a treat the same way it does yuppie brands of cookies and ice cream, said Stephen T. Pettise, marketing vice president. According to New York-based Restaurant Business magazine, pancake sales surpassed $1 billion last year, up 27% since 1980.
To exploit that trend, the company added two new pancake flavors this year: “The Super-Amazin’ Cinnamon Raisin Pancake,” which it has promoted heavily on television, and banana nut, one of the original 48 flapjack varieties eliminated in the 1970s, when the chain pared its choices down to 16.
New lunch and dinner offerings include the “Super Stack,” which is ham, turkey and Swiss cheese on a French roll; the “Big Cheese,” a sandwich with Cheddar, jack and Swiss cheese and tomato and bacon on cracked wheat, and taco and seafood salads.
5 Big Cities
Although franchises are in 35 states, IHOPs are concentrated in five metropolitan areas: New York, Atlanta, Chicago, Dallas and Los Angeles. The company owns 89 restaurants, and the other outlets are franchises.
Nearly 16,000 people work at the restaurants in both categories, and 180 work in IHOP’s sparse, two-story headquarters, encircled by auto repair shops on Lankershim Boulevard.
The number of franchises has remained fairly flat in recent years, but Herzer says he hopes to have 2,000 within the next 10 to 15 years. Herzer, 55, who keeps on his desk an IHOP cup and a coffee pot resembling those in the restaurants, maintains that, despite corporate problems, IHOP restaurants always have been profitable.
Competition in IHOP’s market comes from La Mirada-based Denny’s Inc., which has more than 1,200 Denny’s restaurants as well as about 850 Winchell’s Donut Houses in the United States and abroad.
Other competitors range from neighborhood diners to regional chains such as Marriott Corp.'s Bob’s Big Boy in Western states and Holiday Corp.'s Perkins Restaurants, mostly in the Midwest.
Much has remained the same at International House of Pancakes restaurants since Lapin built the first one in Toluca Lake in 1958. Lapin’s idea was to create a family restaurant in the spirit of the successful hamburger, doughnut and ice cream establishments of the era.
Its trademark, of course, was pancakes, and every table in the chalet-style restaurants had syrups that customers weren’t likely to have in their own kitchens, with flavors such as boysenberry, blueberry and strawberry, and a “never empty” pot of coffee.
The “international blue” roof, Lapin thought, was bright and distinctive, as much an IHOP symbol as Howard Johnson’s orange roofs, which he was emulating. First introduced in 1960 at the Woodland Hills restaurant on Ventura Boulevard, the A-frame roof seemed homey to him.
The idea worked, and the concepts have stayed basically the same, although many franchises are redecorating with light-colored wallpaper and brass lamps. New restaurants are no longer being built with A-frame roofs, either. Dining rooms under mansard roofs fit more people, and are easier to convert to other uses if a franchise fails.
In the early 1960s, with three restaurants successfully in operation, Lapin found people with money knocking on his door and expressing an interest in opening IHOPs, so he began franchising.
Through a long series of acquisitions, the pancake company eventually had two dozen subsidiaries, including Michael’s Artist & Engineering Supplies, Craft Showcase, Securities Supervisors, House of Nine, Shirt Gallery and others that sold ice cream, dresses, advertising, marketing and home improvement services and secretarial training.
But rapid expansion brought problems. Laden with debt, the company announced substantial layoffs in October, 1970, when several European lenders called in $5 million, half of its outstanding loans to the banks.
“Needless to say, things were a little rough then,” said Herzer, who joined Lapin in 1967, when the company for which he was chief financial officer, United Rent-All, was acquired by the restaurant chain’s parent.
The parent company, then known as International Industries, also was hit by a class-action suit filed by franchisees who charged they were forced to pay inflated prices for supplies and equipment. In 1973, a federal judge in Kansas City ordered the company to pay back the franchisees by reducing their royalties.
Lapin left the company that year, selling his interest for $50,000, twice what he paid for the original Toluca Lake restaurant. Turnaround expert Frank Grisanti then took over as chairman and began to sell off the company’s subsidiaries.
In 1976, the company was reorganized by its creditors, 21 banks and an insurance company, and renamed IHOP Corp. Three years later, IHOP was sold to Wienerwald Holding AG of Switzerland, which was owned by restaurateur Jahn. Herzer was named president, and Jahn became chairman.
Under Jahn, the chain expanded its non-breakfast menu from what Herzer now calls “relatively uninspired” items like hamburgers and french fries to Germanic specialties including bratwurst, schnitzel, sauerkraut and German potato salad.
“Friedrich thought everybody liked the food he liked,” Herzer said. “But those items didn’t work.”
Jahn left his mark in other ways. Herzer said Jahn introduced the Swiss-style dirndl outfits still worn by IHOP waitresses. Jahn also was known for his whirlwind tours of all of his restaurants, meticulously examining kitchens and bathrooms for cleanliness.
In 1981, he took the company private--it had been traded on the New York Stock Exchange since 1965.
New Dinner Items
Herzer takes credit for helping to revitalize the chain in 1982 by introducing 17 new dinner items, including steak, roast chicken and shrimp. He said testing was done in the kitchen without Jahn’s knowledge, because the chairman would have objected.
Jahn, meanwhile, was struggling with personal business problems that led to his losing the ownership of the pancake chain in March, 1983, to a Zurich holding company, Svido-Abwicklungsgesellschaft. The directors of Svido, the owner now, include representatives of Credit Suisse, the Swiss Bank Corp., Barclay’s and Bayerische Landesbank.
“We talk with them every six months or so, but, so long as we keep making money, we don’t hear from them,” said Herzer.
Larry A. Kay, senior vice president, said Svido has always intended to sell IHOP sometime and divide the proceeds. “But it’s not going to be a fire sale. Unlike U.S. banks, the Europeans can hold on to us indefinitely, until they feel they can get the right price.”
Kay also wouldn’t rule out the possibility of an eventual leveraged buy-out, but said such a plan was unlikely because the firm is carrying a heavy debt, the amount of which he declined to disclose.