Roof Not Yet on Pancake House Firm

Fast-food chains are gobbling up more of the $309-billion U.S. food service market, but the midscale IHOP Corp. chain is betting Americans haven’t had their fill of pancakes.

“This year, we’re going to build between 40 and 50 units,” that is, restaurants. “We can’t fill all the demand,” IHOP Chief Executive Richard Herzer said in an interview. The Glendale-based chain now has 685 restaurants.

“If we cross over 5,000 units in the U.S. one day, we might be close to the saturation point.”

Herzer said IHOP’s consistent focus on pancakes has helped it outperform other, struggling midscale restaurants.

He said the Glendale based company will keep expanding at an annual rate of 60 to 70 outlets through acquisitions and new construction.

Herzer said he is interested in buying a 102-unit IHOP franchise in Florida from a family that has owned it since 1960.

Analysts said the licensee, FMS Franchise Management, has exclusive rights to develop restaurants in much of Florida.

This acquisition would help IHOP by expanding its ability to build in Florida and would give it an opportunity to bolster the franchise’s earnings. “I talked with them about a month ago and I said, ‘If you’re interested, I’d be willing to talk with you,’ ” Herzer said of FMS.

“Obviously, they feel that I’d be the likely buyer, but they’re not interested in selling right now,” he said, adding that annual revenue for the Florida chain totals $80 million.

Only 50 of the 685 International House of Pancake restaurants are owned and operated by IHOP, which derives the bulk of its revenue and profit from franchising activities. It develops restaurants into profitable businesses before selling them to a franchisee for development fee of $250,000 plus rentals and royalties.

Analysts say the midscale sector, composed of chains such as International House of Pancakes, Denny’s, Shoney’s and Sizzler International Inc., is losing ground to upscale dining at one end and fast-food chains on the other. It is the slowest-growing sector in the food service market, according to industry tracker Technomic Inc.

However, analysts say IHOP’s franchise policy has kept its sales trends above those of more highly leveraged midscale competitors. Herzer said Sizzler, which recently filed for Chapter 11 bankruptcy protection, and other midscale chains are losing customers with too-frequent shifts in focus.

“I’m a pancake flipper. That’s what I do for a living. If you don’t have a focus, you can’t be in this business,” Herzer said.

He said midscale chains have lost ground to fast-food giants because they’re too busy competing with each other.

“What has happened is that we [midscale restaurants] have been fighting ourselves and haven’t been paying attention to other sectors,” he said.

“Our segment’s not as media-driven as the fast-food sector and we don’t spend the kind of money [on advertising] they do.”

He said IHOP’s marketing is now being refocused to lure the fast-food customer, through an emphasis on IHOP’s low prices and its bigger, more varied menu.

“The quick-service sector will continue to overtake midscale because McDonald’s has the media power, but we’re being responsive,” he said.

Herzer said IHOP’s $18-million annual advertising budget is dwarfed by the $300-million one of McDonald’s and trails that of Denny’s, which spends $30 million a year.