International House of Pancake (IHOP)
International House of Pancakes, LLC (IHOP) is a franchisor. IHOP restaurants sell pancakes in addition to a broad menu of breakfast, lunch, and dinner products. IHOP was incorporated in 1958 and has been in the Franchising business from 1960. The company is headquartered in Glendale, California. IHOP provides franchise programs for developing, sale, and operating International House of Pancakes and IHOP restaurants in both non-traditional and traditional locations (IHOP, 2016). IHOP offers more than breakfast, it is one of the most popular brands in the family restaurant industry in the United States today, and for this reason, many businesses are eager to become an IHOP franchisee in order to benefit from the exciting and unique experience that IHOP offers (U.S. Securities and Exchange Commission, 2005). From 2008, the business has dominated talks in the family restaurant industry in the United States and the Nation’s Restaurant News’ annual Top 100 issue ranked IHOP as number one in Family Dining from 2008. The company`s vision is to develop an insurmountable lead by directing its focus on three main strategies: energizing its brand, achieving operational excellence, and optimizing franchisee development(IHOP, 2016). This project seeks to examine IHOP`s franchise model from the point of view of a potential franchisee. Specifically, the paper evaluates IHOP`s franchise opportunities and offers appropriate recommendations.
IHOP Franchise Opportunities
To evaluate the Franchise opportunities that IHOP offers, five most important areas will be examined. They include how the company demonstrates cooperative strategies, how IHOP`s recent history of operational and legal issues support the success of the franchisee, IHOP`s track record on relationship building between the franchisor-franchisee, and marketing strategies support successful operations for a franchisee, how the company’s strength of global distribution compare to industry competitors, and How IHOP`s sales and marketing strategies support successful operations for a franchisee.
How IHOP Demonstrates its Cooperative Strategies
The IHOP`s business model is characterized by a close collaborative relationship between IHOP (franchisor) and its franchisees. This is based on the understanding that the failure of IHOP will automatically lead to the failure of its franchisees. Additionally, if IHOP`s franchisee network is weak, IHOP cannot succeed in the long-term. There are a number of ways through which IHOP demonstrates its cooperative strategies as discussed below.
Cooperating with franchisees in meeting the quality standards. One of the main goals of IHOP is to ensure customers have a satisfactory dining experience at each IHOP franchise. To achieve this goal, managers of IHOP-operated restaurants collaborate with the franchisees in ensuring that guests` expectations are exceeded. IHOP believes that a satisfied guest will be a loyal guest who in turn will inform others about the franchise. Through this collaboration, all IHOP restaurants are managed using similar specifications and operating standards in relation to preparation and quality of menu items, the selection of items in the menu, premises cleanliness, and maintenance, and how the employees conduct themselves. The IHOP operations department works with every franchisee to see to it that the high standards are achieved at all times. The standards are published on the company`s Manual of Standard Operating Procedures and all franchisees are graded (On a scale A to F) based on how they perform in meeting these standards. Furthermore, IHOP`s operations department works in close collaboration with the Franchisees to enhance their grades and scores (Getfilings, 2005).
Cooperation in the areas of sales, financing, and human resources.All franchisees are assigned an operational assessment specialist and a business consultant from the headquarters. The business consultant makes regular visits to the assigned restaurants and collaborates with them in achieving budgeted sales, consults with them in relation to their finances, marketing, operational, and human resource objectives. Through these engagements, tactics and strategies for every franchise restaurant are developed. On the other hand, the operational assessment specialist visits each franchise twice per year and together with the restaurants` management, they undertake operational audits, provide consultation reports, and assess the quality of products, facilities, equipment, and techniques used by management. Furthermore, all IHOP franchises receive training on a continuous basis. A potential franchisee must receive extensive training from the IHOP before a franchise is sold to him or her. The training involves both hands hands-on operational and classroom training allowing the franchisee to learn things such as cooking, serving as a host, waiting on tables, and even washing dishes (Wikinvest, 2007).
Advertising and marketing. IHOP and its franchisees collaborate in advertising and marketing. Because IHOP`s success is interlinked to the success of its franchise restaurants, both IHOP-operated restaurants and IHOP franchises contribute 2% of the sales revenues toward local advertising cooperatives. IHOP has created the local advertising cooperatives so that the franchises and the company-operated restaurants share the cost of promotion. This also ensures that uniform marketing messages are delivered to the audience. The advertising cooperatives are charged with the responsibility of the funds contributed to buy radio and television advertising time at a national level and placing ads in direct mail or print media.
Consultancy. IHOP is a consultant to its various franchises.It assists its franchisees in a broad range of purposeful interventions that involve problem solving,decision-making, and organizational development. As a consultant, IHOP places more emphasis on assisting its franchisees to help themselves by facilitating interventions to achieve the set goals as well as enhance the franchises ability to forecast and solve similar challenges in the future (Stump & Longman, 2000). In this regard, IHOP performs the role of the partner-manager, where by it helps the franchises in running their businesses and offers continuous advice and administrative support, including assistance in site selection, restaurant design and marketing consultancy (IHOP, 2016a).
How IHOP`s Recent History of Operational and Legal Issues Support the Success of the Franchisee
Global expansion and increased sales revenues. Following years of slow restricting, in the 1990s, OHIP started reinvesting its profits to further grow and improve its business. Its stock price was continuously rising and financial analysts referred to OHIP as an overnight phenomenon with a significant potential. Throughout the 1990s, the company`s revenues were increasing on monthly basis and analysts were predicting that its stock price would rise by as much as 60%. These positive developments created a positive value image for the business and guests were comfortable with IHOP. By 1995, IHOP had successfully opening more than 50 new restaurants annually both in the domestic market as well as in its foreign markets in Japan and Canada. Nearly 90% of IHOP`s restaurants were franchised, and the majority of them were in Florida, California, Texas, and Japan. Overall sales for the business continued to increase positioning IHOP among the top industry leaders in the family dining business (Lori, 2003). By 1998, the company`s sales had hit the $1 billion mark. The predictions of the early 1990s came true when IHOP`s stock price increased by about 60% over a period of one year. Additionally, Forbes ranked IHOP among the top 200 small companies (Fundinguniverse, 2016). These developments significantly contributed to the success of IHOP`s franchises.
Adoption of the traditional franchise business model.Before 2003, IHOP was using a company-financed model of growth (turnkey development) to finance the expansion of small franchise businesses. Under this model, which was unique to IHOP, the company developed and set up many of its new restaurants before handing them over to franchisees at a fee of $250,000. Because of cost implications, the company was in so much debt. However, in 2003, this changed when IHOP adopted a traditional model of franchising, under which franchisees were expected to finance their own expansion by using resources from either third-party investors or borrowings. Because of the change in business model, IHOP`s current franchises are much bigger and experienced franchisees. These has also improved the company`s balance sheet significantly because of reduced debt and increased revenues in the form of franchise fees, advertising fees, royalty revenues, and sale of proprietary products. The new business model has increased profits and stimulated franchise growth. Additionally, under the new model, same store sales for its franchisees have increased passing those of competitors such as Denny`s and Waffle (SEC, 2003).
Opportunities for multi-store development by a franchisee. As part of its business model, IHOP enters into multi-store development agreements with its franchisees both in the domestic and international markets. Under these agreements, the franchises are granted an exclusive right to create IHOP restaurants in particular geographical areas for a specific period. Through this agreement, IHOP franchises have increased significantly in both the domestic and international markets reaching an all-time of 1,675 units (Franchise Direct, 2016).
Purchase of raw materials. IHOP has entered into long-term contractual relationship with suppliers of pancake mixes. In addition, IHOP has signed pricing agreements for many of the products sold by its franchises. This has contributed to the success of the franchises because they are guaranteed of supply of quality products throughout the year, and they get their raw materials at competitive prices. Furthermore, through agreements with companies that distribute food, IHOP has managed to reduce markups levied on restaurant supplies that the individual IHOP franchises purchase. In some occasions, IHOP purchases raw materials on behalf of all its franchisees allowing for economies of scale. All these benefit the franchise in terms of reduced operational costs and ensure availability of key menu products in the franchisees (IHOP CORP, 2005).
IHOP`s Track Record on Relationship Building Between the Franchisor-Franchisee
IHOP franchise leadership council: IHOP significantly values its franchisee/franchisor relations and always strives to maintain good working relationship with its franchisees. Some of the initiatives the company has taken to build on this relationship include sponsoring the IHOP Franchise Leadership Council. This is an appointed and elected council made up of IHOP franchisees. The council assists and advices the company`s management on a broad range of issues regarding the operations of IHOP restaurants. The council convenes meetings with IHOP management at least thrice per year. Their deliberations focus on operational matters, marketing issues, construction and development matters, and information technology in the restaurants. This information is very important in the company`s management decision making. All decisions made at IHOP take into account the views of the franchisees as articulated by the council.
Increased contribution by restaurants to the IHOP advertising fund: One of the best examples of IHOP`s relationship building between Franchisor-Franchisee is the voluntary agreement the company had with its franchisees under which the franchises agreed to make incremental contributions to the IHOP advertising fund until 2017. The increased contributions has benefited both the Franchisor and the Franchisee by increasing human traffic to the IHOP restaurants nationally and enabling IHOP to broaden its follower and fan base to more than 4 million followers in nine social media platforms (Birkner, 2016).
Conducive terms for the franchisees: Under IHOP`s business model, franchisees are required to pay different types of fees including development fees, franchise fee, franchise royalties, and franchise advertising fees. Because of the need to continue building a good Franchisor-Franchisee relationship, IHOP occasionally agrees to accept reduced royalties or lease payments from its franchisees. Additionally, if need be, the company offers various types of accommodations to its franchisees for a specific period in order to help them either establish or reinvigorate their businesses (Sager & Solish, 2007).
Supply chain: The company`s track record on relationship building Between the franchisor-franchisee is also evident in its supply chain. In 2009 February, the franchisor and its franchisees created the Centralized Supply Chain Services, LLC (CSCS). This is an independent entity, which has the responsibility of purchasing equipment, goods, and distributing the same to IHOP restaurants across the United States. Approximately 99% of IHOP`s franchisees are members of the CSCS (Dine Equity, 2015). This has ensured that all its franchisees benefit from continuous supply of goods and state of the art equipment. They also receive raw materials at the lowest possible price.
Service marks and trademarks: This is another area where IHOP demonstrates its record of accomplishment on relationship building between the franchisor-franchisee. IHOP and its franchisees own numerous service marks and trademarks, which they use in the IHOP restaurants. These include logos and trademarks like International House of Pancakes® and IHOP®. Allowing all its franchisees to use the same trademarks and service marks is important because it has helped in the identification of the company and its restaurants and they are significant in doing the business (Dine Equity, 2015).
How the Company’s Strength of Global Distribution Compare to Industry Competitors
IHOP operates in the family dining industry. Its main competitors include Denny’s, Bob Evans, Waffle House, and Cracker Barrel, Bob Evans, Cracker Barre, Denny’s, Friendly’s, Perkins Restaurants, Shoney’s, and Village Inn (FSR Magazine, 2013). Compared to these competitors, IHOP`s strength in global distribution is much stronger. Most of these competitors are primarily focused on the U.S. domestic market.On the other hand, IHOP global distribution is spread in many countries including Canada, Saudi Arabia, Bahrain, Kuwait, Qatar,
Internationally, IHOP has locations in Bahrain, Canada, Dubai (UAE), Guam, Guatemala, Saudi Arabia, Mexico, The Philippines, and Kuwait (International House of Pancakes, 2014). This is in addition to its presence in 50 U.S. states, the District of Columbia and Puerto Rico. In both the domestic and international markets, IHOP has positioned itself as a location where people gather for breakfast, lunch, and dinner and before and after major sporting events (Dineequity, 2015). All the IHOP restaurants in international markets are franchises. IHOP`s success in global distribution is attributed to its unique expertise in brand revitalization and its knowledge in franchising.
One of the main factors that have enabled IHOP to strengthen its global distribution network is the Franchisees` understanding of the respective markets and their skill in developing new restaurant locations (Hotelier, 2014). Many of the franchisees have been with the company for decades and as a result, they have developed a skill for finding the best locations for new IHOP restaurants. The Franchisees in-depth understanding of the IHOP concept allows them to think out of the box in foreign markets and develop new ways to be innovative but within the IHOP concept and remain true to the ideals of IHOP. Furthermore, the IHOP Franchise Leadership Council has helped the franchisees both in the domestic and foreign markets in developing new menu items and updates to the IHOP concept (Alshaya, 2013).
How IHOP`s Sales and Marketing Strategies Support Successful Operations for a Franchisee
Numerous sales and marketing strategies have been undertaken by IHOP, which have significantly boosted the success of its franchisees.
Integrated marketing: In an effort to create brand loyalty and increase traffic in its franchisees in slow weekdays, IHOP employed a strategy of integrated marketing involving direct mail, SMS marketing, and outreach. Through these mediums, consumers were encourages to opt in for a coupon through SMS. Using these coupons, consumers could redeem them for a free short stack of pancakes on particular days of the week. This strategy relied on numerous marketing channels. To begin with, Money Mailer forwarded direct mail pieces informing potential customers to text ‘IHOPFREE’ to a particular number in order to qualify for the free short stack of pancakes. Same messages were broadcasted through print and radio ads. Using this strategy, IHOP managed to achieve coupon redemption of 10%, traffic to various IHOP franchises increased translating into higher revenues. The franchisees also benefited by building an SMS text list database, which they can use for future marketing purposes. They also benefited from significant upselling. For instance, guests who redeemed a coupon for a free short stack later came to the IHOP restaurants and bought breakfast for their entire families. Furthermore, traffic on the otherwise slow mid-week days went up significantly. One IHOP franchise owner observed that this was the most cost effective method of reaching a broad target population (Allen, 2013).
Using its Guests as brand ambassadors: IHOP treats its breakfast as a social occasion and has capitalized on its guests` presence in social media to drive traffic to its franchises. It has transformed its IHOP.com website into the company`s digital hub. Through this website, IHOP fans are able to connect with the brand via social media platforms directly from the site. The IHOP brand has attracted more than 262,000 followers on Twitter, 304,000 followers on Instagram, and more than 3 million fans on Facebook (Phanta Media, 2016). The results have been significantly impressive for its franchise business. For example, in 2012, #IHOP became the number one ranked term in Twitter GLOBAL Trends for that year in the food category. This has substantially boosted the brand`s popularity. Moreover, because of the successful SEO strategy, the company and its franchises have become the top competitor in both traditional and organic search competitors. My IHOP community has consistently grown from 2012 without the company incurring any costs in paid promotions. The platform continues to drive global conversations about the IHOP brand, advocacy, guest engagement, and most importantly restaurant traffic for its franchisees leading to higher revenues for its restaurants (MRM, 2014).
Supporting the breakfastarian Community: As part of its sales and marketing strategy, IHOP has positioned itself as a restaurant that offers “Everything You Love about Breakfast” for nearly 58 years. As part of promoting this legacy, the company supports breakfastarians in the U.S. market through advocating for passion in enjoying traditional breakfast products anytime of the day, particularly for dinner. Breakfastarians have taken social media by storm encouraging their friends and acquaintances to spread the message and take breakfast at night. IHOP and its franchises have significantly benefited from this culture of serving breakfast all day long. At present, IHOP franchises are popular across the globe as experts in breakfast products that customers love. This has translated into increased traffic and sales revenues for the franchises (PRNewswire, 2015).
IHOP is a significantly strong brand name with franchises across the U.S. and 19 international markets. The strategies employed by IHOP are beneficial to both IHOP and its franchisees. Based on the analysis, there are still significant opportunities that new franchisees can exploit. Firstly, there are still significant opportunities for opening up new restaurant locations particularly in foreign markets. With a good internationalization strategy focusing on the major global cities, particularly in Asia, Franchisees can capitalize on the good corporate image and IHOP brand to drive traffic and create revenues. Secondly, the IHOP brand appears to have a global recognition because of the effective sales and marketing strategies employed by the company. Both existing and potential franchisees can make use of this competitive advantage to attract more guests to their restaurants.Thirdly, many of the direct competitors have not yet penetrated the international markets. This gives IHOP and its franchisees a first-mover advantage in these markets. Franchisees should use this opportunity to create a loyal fan base in these markets and significantly expand their locations to boost revenues.
Other benefits such as IHOP franchise leadership council and a common advertising fund can further help new franchises to gain useful knowledge onhow to run the restaurants effectively and profitably and benefit from nationwide advertising using the funds contributed. Furthermore, thetraining, practice standards, and close collaboration that IHOP offers its franchisees is a key asset that can assist the franchises to learnthe business and uphold the high quality standards and customer service levels that IHOP is known for. This obviously translates into loyal customers and higher revenues. IHOP has undergone significant transformation since its creation nearly six decades ago. The breakfast restaurant has successfully conquered the U.S. market with a presence in 50 U.S. states, the District of Columbia and Puerto Rico. The company has gone international and its global expansion efforts continue. With its focus on guest satisfaction and an internationally known brand, IHOP presents significant opportunities for potential franchisees. Middle East and Asia offer significant growth opportunities for IHOP business going forward, and with the right strategies IHOP franchises are poised to succeed in these markets
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