Applebee’s International Inc.
Applebee’s International Inc.
Sales: $208.53 million
Stock Exchanges: NASDAQ
SICs: 5812 Eating Places; 5813 Drinking Places; 6794 Patent
Owners and Lessors
Applebee’s International Inc. franchises and operates a national chain of restaurants under the Applebee’s Neighborhood Grill & Bar name. The eateries proffer moderately priced, high-quality fare for all ages in a friendly, informal atmosphere. After expanding rapidly during the late 1980s and early 1990s, Applebee’s was operating more than 560 restaurants in 43 states, one Canadian province, and the island of Curacao in July 1995.
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 was kept on board 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’s 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.
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. And, despite the success of individual stores, Applebee’s lost money every 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. As intimated above, 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 food service 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 wasn’t issuing any more territory rights. That’s when 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.
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.
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 margarita 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 a big $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.
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Cauley, Lauree, “Applebee’s Capitalizing on Pittsburgh’s Neighborhoods,” Pittsburgh Business Times & Journal, June 11, 1990, Sec. 2, p. 15.
Ezell, Hank, “Apple South a Casual Success,” Atlanta Constitution, July 5, 1994, p. Dl.
Kaberlin, Brian, “New Special on Applebee’s Table: Buy Big Franchisee,” Kansas City Business Journal, November 15, 1991, p. 1.
Kaberlin, Brian, and Adam Feuerstein, “Palmer May Rejoin Applebee’s International,” Atlanta Business Chronicle, December 2, 1991, p. 3A.
Keegan, Peter O., “Abe J. Gustin Jr.: ‘Risk-Taking’ Type of Guy,” Nation’s Restaurant News, September 20, 1993, p. 122.
Plyler, Tami, “Applebee’s Recipe for Expansion,” Union Leader, May 3, 1993, Business Sec.
Saponar, R.C., “Applebee’s to Go Public Wednesday,” Nashville Business Journal, September 18, 1989, p. 3.
Smith, Margaret, “Corporate Report 100: Serving Success,” Ingram’s, July 1995, p. 45.
Walkup, Carolyn, “Applebee’s Nabs Lucrative Slice of Small-Town American Pie,” Nation’s Restaurant News, October 30, 1989, p. 3.