Leading a turnaround in troubled times

Six years ago, IHOP restaurants were struggling. Julia Stewart was hired to shake things up, which she did. Now, the CEO of DineEquity Inc. has an additional challenge: the troubled Applebee's chain.

EXECUTIVE SNAPSHOT

Who: DineEquity CEO and Chairwoman Julia Stewart

What you may not know: Stewart got her start in the restaurant industry at 15 as a waitress for IHOP.


Kai Ryssdal: Julia Stewart, good to have you with us.

Julia Stewart: Thank you very much.

Ryssdal: How's business these days?

Stewart: Business is good. If you think about it, on the IHOP side we have had 22 consecutive quarters of same store sales and life continues to go well. The guests love our limited time offers, and the day to day business of coming to IHOP for breakfast, lunch, dinner and late-night . . . it's all good. And on the Appleby's side; it's work in progress on the turn-around, but we're meeting all of our objectives in terms of the actual turn-around.

Ryssdal: We'll get to the Appleby's and the turn-around thing in a second, but I have to ask you about discretionary income; because going out to eat is not a thing that people have to do and at a time when the economy is in a little bit of a tough spot, isn't that a place where people cut back?

Stewart: Absolutely it's a place where people cut back. Therefore, in the restaurant business and times especially like this, one has to be known for great service, great price value, great food and a concept that's differentiated from every body else in the category. I think that becomes more important than anything. It is always important but in times like this, I think it's even more important.

Ryssdal: Is price value casual dining, which is what Appleby's does, a synonym for cheap food?

Stewart: No. Great question, but no. Price value is really all about walking into a restaurant, whether it is family dining or casual dining or even fine dining, and saying, "I got all of that for only . . . " Because it's about the food, it's about the service, it's about the ambiance, it's about this emotional connection you and I had there. That's what it's about. And if people walk away, regardless of the category and say, "Wow! That was great for only . . . " Look at the tab, then you know you've got price value. It really is more than just about price. I think people . . . when you hear the words price value people think . . . oh that's all about the price. But it isn't, it's all about what I get. And I think people expect more in today's environment. One, because they're smarter and brighter and they know a lot more about the food; but I think more importantly, they want all that goes with it. I always like to say they want a $20.00 experience at IHOP for $8.00; they want a $25.00 experience for $10.00 at Appleby's . . . I mean it's the same thing.

Ryssdal: You've been at IHOP since 2001, everything is fine. You turn around a year ago and say, "I think we need to go buy something." Why did you feel that way and why Appleby's?

Stewart: So we had actually announced in 2006 that we would look at strategic alternatives, including an acquisition, but strategic alternatives were also international, brand extension, licensing . . . it was the gamut of things because we realized we had a limited sort of space in IHOP. We said at the very beginning of the 2003 when we changed the business model, we said we thought we could build another . . . franchisees would build another five, seven hundred restaurants in the domestic U.S. And with all of the signed and pending agreements, we're sort of close to being there. Now it will take five, ten years to grow that out but we knew we had to look at other things. So that's how we started and we began to set upon that journey. And in early 2006 when we said that . . . we said that it was like looking for a needle in a haystack. Because it had to be big enough to matter, it had to be at the right price, it had to meet our core competencies, it needed to be turned around, it needed to be franchised or re-franchised, it had to meet our core competencies and it had to be something that wasn't competing with our existing franchisees. So it couldn't be in the family dining category, it had to be something else. So when we first set out to say that, everybody said, "well what are the odds of you being able to do that?" And all of 2006, we kept saying, "found nothing." And we would continue to look for other options. And in early 2007, Appleby's announced its intentions to possibly sell itself and we began to look at it. And the more we looked at it, the more it began to be this sort of perfect storm, if you will. It needed to be re-energized. Clearly there was an opportunity to sell the existing company stores. Clearly it had sort of . . . the halo had worn and it was not fresh and new and it literally needed exactly the kind of thing that we had done with IHOP so we felt it really needed our core competencies. And when all was said and done, we got it at a really good price so all of that came to bear on us making the acquisition.

Ryssdal: So the deal closes, everything is fine . . . signed, sealed and delivered and you sit down with the Board of Directors and they say, "O.K. hotshot, now what are you going to do? How do you take a company like Appleby's, which was in some trouble, and make it into what you want it to be?"

Stewart: Well the good news is that we had those conversations long before we ever made the acquisition so the good news is the board was not only supportive and aware, but very much in line with the fact it's not going to be something you fix in 30 days. It was going to take some time. They were very supportive of that, not only that time frame and that plan, but very specifically and methodically, what was it going to take to make those needed turns. And because they had gone through it at IHOP, they were very cognizant and supportive of what was going to be involved.

Ryssdal: Step one is...

Stewart: Make certain that you had clearly the right people in place at Appleby's; so had the right team set up. Set out to be very clear about the strategy and then make certain there is incredible buy-in from the franchisees; the 42 franchisees at Appleby's. Good news . . . those were the same 42 franchisees that I was very much aware of and worked with when I was there before, so that was great news. Make sure that you have the right team. But most importantly, make sure that everybody's bought in. So all the employees, everybody running those company restaurants . . . because remember, you're literally telling 500 restaurant managers, "look, I love you but we are not keeping you." So that's a fine line you're walking there so make sure they are comfortable and in the right place. Make sure the franchisees are very supportive of the strategy. Make sure all the employees are very supportive and then set out to make certain everybody's clear about what their piece has to be in the turnaround.

Ryssdal: When you do this, are you at this level thinking more strategically or are you walking into a couple Appleby's around the country and saying, "you know what? Let's put the grill over here and put this on the menu and do this differently."

Stewart: In the beginning, it's me doing a lot of that, all of it. It's the strategic piece, but it's also the day to day piece because I am in the process in the very beginning, of looking for a president to help me with that day to day. So in retrospect I think in the very beginning people said, "Wow! You're going to run both IHOP and Appleby's." And in the end, I would go look back on that and say, "one of the better, smarter things that I did." Because when you do that, you are able to put your arms around it and you see the good, the bad, and the ugly; but you know it from the ground up. And I will go back in history saying that was very smart and very strategic. Now I am thrilled with the person that I have brought on in both cases, but that knowing in the beginning and listening from the ground up what food servers were saying, what cooks were saying, what franchisees were saying, what people in the restaurants were saying..." Here's what is working and here's what is not." That became invaluable to link up with the strategy.

Ryssdal: You've got a history of being very involved with the menu selections, both at Appleby's and at IHOP. How come? I mean, you are not a food person. You're a business person, although I suppose you are in the food business, right?

Stewart: Yeah, I would say I am both. Somebody asked me the other day what differentiates? I say it's the passion. It's the passion for this restaurant business. This is all I've ever done, all I've ever really wanted to do. And I think to really be in the restaurant business, it's just not a people business . . . it is about the food. It is about differentiating yourself. And so over the years I would call myself, maybe not an expert, maybe not a superior chef . . . I'm not culinary trained . . . but this passion for food; and I would go so far as to say a bit of a gut feeling about what the every day person wants and I think there is something very valuable about knowing what you like and sort of a sensibility. I think my sensibilities are very much for the every day person and maybe sometimes pushing the envelope a little bit but, you know not with wasabi mashed potatoes but maybe a great French fry, or a beer-battered onion ring . . . I mean thinking through what sort of makes sense. And I think that has been invaluable at both Brands to sort of lead and challenge the culinary folks who are the experts into what that looks like.

Ryssdal: Do you ever get sick and tired of restaurant food? Come on now . . .

Stewart: I don't now if I get sick and tired of restaurant food. I think that I love to cook and so that passion for me, loving to entertain and cook, so I'll do that at home because I love the notion of entertaining and making you feel welcome at my home. But I'm always, always out looking for new, innovative, creative ideas wherever I am. I could be at Gramercy Tavern, I could be at a diner at 5th and . . . you know I mean for me, it's looking for ideas.

Ryssdal: Do you know it when you see it?

Stewart: Pretty much. Sometimes I'll see it and know it has to be changed to fit within the restaurant but even while we were celebrating our 50th anniversary for IHOP last week, I found myself . . . you know, I'm a terrible date . . . I found myself turning the china over and loving a piece of china and saying, "O.K. where did you get this?" . . . and saying to a food server, "can you find out who makes that bacon?" You know, it's always looking for a new, unique, innovative, creative . . . and I may drive the culinary team crazy but on the other hand, they love that constant challenge of there's a better idea . . . here's something you may want to look at.

Ryssdal: One of the things you've done at both brands is unload some of the company run and owned stores and start franchising to an almost complete degree. Why is franchising better than owning and operating your own institutions and being able to maintain control?

Stewart: I think it depends on the brand. I think it depends on the business situation and the business model. In the case of IHOP, it was always largely a franchise system. Those company restaurants, by and large were restaurants that we either got back because somebody had failed at them or we were in the process of re-franchising them. But the business model at IHOP was always basically a franchise model. And when I got here, those restaurants had sort of compiled and we had one in Atlanta and two in New York and one in Seattle. It's virtually impossible to run those kinds of restaurants spread apart. And so we made the strategic decision . . . let's sell all those and develop one company market that we can keep for ourselves. But that really made sense in that business model, so for that business model, it made sense. Now when you look at Appleby's and we saw what had happened with building out over 500 company operated units. You would think . . . oh my gosh you'd have this great opportunity to test and you'd have all these sort of pipeline of ideas . . . none of which had transpired. So when I got there and said, "look, we have all these company restaurants, we have lost a tremendous amount of profitability over the last several years, what makes the best sense?" Made the strategic decision that what made the best sense, not just to pay down the debt, but what made the best business model sense is to really refocus our attention on franchising which we had not done at Appleby's. What had happened over the last several years was this sort of focus on the company restaurants. Really not focusing on the things as a franchisee you want; which is you want focus on training, operations, culinary, innovation, marketing expertise . . . all of the things that are going to help you drive your business. Right? And that really had not been the focus. So making the strategic decision to say, "I am going to get out of that business and get everybody focused on franchising."
I believe is the right thing to do in this particular business model scenario. I just think in large measure, those restaurants are probably in better hands by franchisees who are on the ground, who live and work and own them. Certainly there will be individual situations where that doesn't make sense but certainly in the two business cases we are speaking of, I think it absolutely makes sense to let franchisees own and operate them.

Ryssdal: Sort of sounds like your management style and decision making matrix has a lot to do with your gut.

Stewart: Mm-hm. I do think there is . . . because I have been doing this for so long. Certainly I am trained in the school of what's the right thing, and balance the business issues and be fair and think about the different sides. You know, surround yourself with bright, smart people who make you, help make you make those bright, smart decisions. But I do think that after all these years that some of that is truly the gut.

Ryssdal: I was in an Appleby's not too long ago, and there's not really much difference between say Bennigans and T.G.I. Friday's and Chili's. I mean they all sort of blur together and it's not possible that I am the only consumer that feels that way.

Stewart: No you are absolutely right and that's one of the things that we were quite aware of when we first undertook the acquisition. And consumer research said this, I mean it's not like you just made it up. We know for a fact that we had this vanilla, same-same image as a lot of other folks.

Ryssdal: How do you fix that?

Stewart: Well, in the case of Appleby's, you start with what are the things that differentiate the brand and we know what some of those are and we want to really create that emotional connection.

Ryssdal: What are they?

Stewart: The single biggest thing, if you do consumer research, people will say this thing about the Neighborhood. And that no one has that panache or that sort of specialness that Appleby's has. And I know this because when I worked there before, we really tried to exploit that whole sense of neighborhood. We need to get back in that scenario for Appleby's as a brand and really differentiate ourselves, not just on neighborhood which I'm so excited about the ability to do, but on the food and the service . . . there is lots we can be doing to differentiate. But the sense of neighborhood is very unique and special and it will require us doing that. And it isn't just bar and grill food and that sense of neighborhood which, you know . . . CHEERS.

Ryssdal: Do you mean neighborhood as in the neighborhood place that you go to?

Stewart: Yes. And I also mean... neighborhood is about what we do for our neighbors. So just this sense that we have begun to explore a philanthropy and the notion that neighbors take care of neighbors. We intend to become the absolute best in our category if not the industry in people taking care of people. And so we have begun to explore what it means for the neighborhood from a philanthropy perspective. There is this huge opportunity in the 12-17 year old, young people growing up now and wanting to make a difference. Whether it's sustainability . . . there are a lot of aspects of neighborhood that we can not only own, but differentiate ourselves. That's sort of the global view. The more micro view is what kinds of foods can we have that nobody else can have? What flavor profiles did we have that are unique to Appleby's? All of that we have begun to work on and bringing that together through the advertising and the marketing about being unique that you can only have at an Appleby's. It will take time. It doesn't happen overnight; it didn't happen overnight at IHOP. But over time, you will begin to say . . . you know, somebody asked me the other day, "what does greatness look like?" It's like, when you walk in that restaurant and you call me up and you say, "I get it. Everything about that was a different experience, from the service, to the food, to the ambiance to that whole neighborhood thing I got into. Wow Julia, it really is different."

Ryssdal: When you walk into a restaurant . . . one of yours or somebody elses, what are the first couple of things you look for?

Stewart: Well, I look at how I am greeted. And if you remember my name, if I had been there before; and it doesn't even have to be exactly remembering my name, if you wink at me and say, "Glad to have you back." You know, welcome back. There is something rather special about that. And when you find me my seat, you make me feel special. And maybe it's a little nuance that you add, or maybe you tell me what's going on in the neighborhood, but you make this special connection with me and you stay with me. You make that special connection. And I remember when I open that menu, do I like "Ahh . . . I'm craving the mmm,mmm!" I can't have that anywhere else but I can sure have it here. Those are the kinds of things that make it special. And when I'm leaving, I look down and say, "Wow! All of that for only . . . " Right? But it would be the nuances; it would be the little special things that I remembered about that restaurant.

Ryssdal: When you go into an Appleby's or an IHOP for that matter, do they know you when you walk in the door?

Stewart: Well, unfortunately yes, a lot of them do. But if I go at odd times or I wear my sunglasses, or I come with a . . . then no. And I am really interested in trying to get just the every day, every persons experience. And when I do, more than not I am gratified. And you know, then I am writing a note about I caught you doing all these things right and here was this special occasion. I also have thousands of what I call Mystery Shops. Like I got three of them yesterday on the plane; food servers who I will give a coupon to, a flight attendant who will get a coupon and go out and visit, and they become vigilantes for me. They can't wait to tell me all about . . . largely it's usually pretty good. And if it isn't, then I thank them and I let somebody know, and we make it better. So I want the feedback, right? I'm craving the feedback because it's the only way you are going to get better.

Ryssdal: This is a little bit like asking which of your children is your favorite but with all of this attention that you are obviously paying to Appleby's, do you worry that IHOP might suffer a tad?

Stewart: I know it must feel for some of the folks at IHOP that I'm spending so much time and attention on Appleby's. And maybe that was good last week in Hawaii to remind them that I have a special place in my heart . . . for IHOP.

Ryssdal: At this 50th birthday celebration . . .

Stewart: Yes. We did the 50th celebration of IHOP last week, but really letting people know that there's a special place in my heart. But if you really were to follow me around day in and day out, you would say it's pretty balanced; the time and attention on IHOP and the time and attention on Appleby's. Now that we have two presidents, I have hired a president for IHOP and a president for Appleby's, I am able to start to move up and create that amount of strategy and direction work I really want to do and should be doing for both brands. I am able to do that because I am able to give that time and attention to both brands and more even it up; but I think that it's never 50/50 on any given day. But I am giving a lot to both brands, and I think it's interesting . . . the other day I caught myself learning something at IHOP that I could apply to Appleby's and I found myself saying, "Wow, O.K. that's as good as it gets when you can say to somebody, you now, we experienced that and here's a lesson learned."

Ryssdal: How much correlation is there really though between casual dining on the Appleby's model and, what is it family dining on the IHOP model? Is there that much cross connection?

Stewart: There isn't so much in terms of the segments. The segments are very different. A lot of the target consumers are very different. But some of the day to day business problems; it's amazing to me the similarity. So when we got to IHOP and we were trying to re-invigorate the brand and re-energize it; and we had to work on the advertising, and the marketing, and the plateware, and the glassware, and the silverware, and the uniform and the food. It's amazing! We are doing the exact same things. And one of the things I found myself saying the other day is, "you know guys let's be careful of the timing and the sequencing. Let's get a couple of wins before we tackle the next set, and the next set and the next set." Because it's the same at IHOP as it was at Appleby's; you have to be bringing along the franchisees and all of these folks that are working in the restaurants. It's like over a quarter of a million people that are working in these restaurants that you want to bring them along and you are doing it third-hand. So you are making certain that you time and sequence the initiatives that you are doing, that you get the traction, never forgetting that along the way you have to be over-communicating with these folks. So whatever we are creating, whether it's a training tool or communication tool, it literally is not me or the president standing up and saying to 42 guys, "O.K. here's what we have to do." It's certainly having that communication and then creating tools and systems so they can share it with their food servers, their cooks, their back-of-the-house folks, their front-of-the-house folks, their general managers, their assistant managers. The tools are literally as important as the work that you do or the strategy that you come up with. Said differently, it's great but if nobody buys it or listens to it, you're a failure.

Ryssdal: Let me get back to this franchise question for just a second. What is the market like for an Appleby's restaurant now as you go out and seek franchisees for these company owned and operated units?

Stewart: It's very interesting because Appleby's business model, and this is what I was saying earlier, it's very different in some ways than IHOP and similar in others though the similarity is clearly its' franchise. The difference is IHOP has almost 400 franchisees, half of whom own one restaurant, right? And that's 1300 and some restaurants basically owned by 400 franchisees. At Appleby's it is 42 franchisees owning 1500, soon to be 2000 Appleby's. So large franchisees who own marketplaces, entire markets, they typically don't share, right? They own the whole thing. So it makes for a very different dichotomy and when you go looking for someone to perhaps franchise to, you're looking for a well-healed franchisee with infrastructure, capability, access to capital, a very different kind of franchisee by and large. Now certainly we have some of those at IHOP but we also have many who have started out as a cook and eventually were able to buy the restaurant.

Ryssdal: Are you having any trouble finding those franchisees?

Stewart: No, it's not trouble. Certainly in this environment with the credit market being what it is, it makes for a more difficult scenario in trying to find the franchisee. But no, there's a lot of interest in people wanting to have an entire market. Both our existing franchisees at Appleby's and new franchisees, and even a few of the IHOP franchisees are expressing interest.

Ryssdal: I read a number the other day that the food that your companies serve every day is eaten by two million people. Are you aware of that number?.....No?

Stewart: Sounds like a really great number!

Ryssdal: (laughter) . . . good. More.

Stewart: Seriously? Two million people . . . every day.

Ryssdal: Yes. We'll show you the numbers.

Stewart: Why yes! That's a great number!

Ryssdal: I like to go out to eat as much as the next guy and occasionally find myself in an Appleby's or an IHOP. The catch is though that none of that food is going to make you skinny.

Stewart: So . . . one of the things, and this is again partly me and partly the business . . . I'm a big believer in freedom of choice and people finding what makes them happy. But also recognizing that if you look at either menu, so IHOP it's "The IHOP for ME" which teaches you about finding those low-cal, low-carb, low-fat items. And it's as simple as . . . short stack of pancakes with Promise instead of real butter and non-sugar syrup. So there go your far less calorie oriented pancake. It can be egg whites or EggBeaters. I mean there is a million ways to order your food at an IHOP so that it meets your needs. Or you order your fresh fruit instead of the hash browns. In other words, it's all about freedom of choice. On the Appleby's menu, it's the Weight Watchers items, but it's also the same thing. Ordering the chicken without the sauce, the broccoli without the hollandaise, the potato . . . in other words it's this freedom of choice and I've always said and been a big believer in it's got to be freedom of choice. We certainly teach people, and we give them that section of the menu that helps educate them on what they can look for, but it's also all about what is right for you in terms of what you order and how you make it work for your needs.

Ryssdal: Who is your competition in this casual dining space, in the Appleby's space?

Stewart: In the Appleby's space, it's largely regional chains which is interestingly enough the same thing it is for IHOP. It sort of depends on where you are in the country. If you are in the southwest, it's a big Chili's market or T.G.I.F's market. If you are in the west, it's a lot of the independents. If you are in the east, it could be some of the higher ends, you know the Olive Gardens, the Ruby Tuesday's. It sort of depends on where you are but in general it's largely the chains that are regional and it's also the Independents. In both family dining and in casual dining your biggest single competitor, like to the tune of 70% of the market share, is Independents. So it's your local Independent mm,mmm restaurant that we're competing with day in and day out, that neighborhood restaurant.

Ryssdal: Before I let you go I have to ask you this, and maybe this is one for the branding game somewhere here . . . Dine Equity? Where did that come from?

Stewart: I love that name! I love it when you say it! It's the notion of bringing together two brands; Appleby's and IHOP and giving a name that creates this sense of comfort but also this sense of expertise. Equity . . . Think of the equity in the brands, the loyalty, the dining sense of it.

Ryssdal: But when you go to food conventions and you say, "Hi. I'm Julia Stewart." And obviously they know you. But if you find somebody who doesn't know you and you say, "Hi. I'm Julia Stewart. I'm the CEO of Dine Equity." Don't they go, "Huh?" And then you say, "Appleby's and IHOP." And they go, "Oh, of course!"

Stewart: You've said it perfectly.

Ryssdal: That's O.K. with you.

Stewart: But it is O.K. because I think in the end . . .

Ryssdal: But it's all about brand though, right?

Stewart: Right. And for me, we are always going to be known as Appleby's restaurants and as IHOP restaurants. Dine Equity is much more for the investment community. But if you think about the day in/day out, the franchisees will refer to themselves as the Appleby's franchisees or the IHOP franchisees. Employees will say I am an IHOP employee or an Appleby's employee. There certainly is a small group of us that are in Dine Equity for shared services and to support both brands but I'm not troubled by the notion that ten years from now people may not know Dine Equity. What I care about is that they have a passion and an affiliation for the IHOP brand and the Appleby's brand, they are going often and frequently. Whether they know whether they are both owned by Dine Equity, it really matters not to me. What matters is that people have this affiliation to both those brands, this loyalty to them, this emotional . . . real emotional connection. When you get on a plane and I tell people what I do, they literally cannot let me go until they tell me a story about IHOP and a story about Appleby's; and invariably they're heart-wrenching about . . . I took my father there every Sunday . . . every Monday morning I took my son there. It's amazing to me the stories that people will tell and they make these emotional connections and they typically will talk about their IHOP and their Appleby's. And they typically know the managers name and they've been going there or they've traveled the country and they've sent me pictures. You'd be amazed. The stories are just . . . the number of people who got engaged in an IHOP or an Appleby's or people who celebrated their birth of their son or the graduation of their daughter. These are life's experiences that people are letting us share. It's 40 minutes of respite but that's the part that's gratifying, this emotional connection people will talk about with you over and over again.

Ryssdal: Your emotional connection with this company obviously is well established. You were an IHOP waitress at the age of 16. Here you are some number of years later working at the company again. What's next for you? What are you going to do?

Stewart: I am so excited for the next couple of years of doing nothing but helping to turn around Appleby's and make it the brand that it absolutely should and can be . . . re-energize it. Work to continue to take IHOP to a whole other level which I'm so excited about. Some of which I can't talk about because it's testing work, but think of us as taking the IHOP brand and letting you choose. In other words, as a consumer you are going to have access to the IHOP brand like you've never had before. And for Appleby's it's being able to re-energize it so that you'll want to go there more and more and more often. So when I think about that work on both brands, that's a lot for the next couple of years. I mean, that's a lot of work . . . a lot of fun but a lot of work.

Ryssdal: What's the one thing you took with you from your days serving food, of waiting tables to the corner office?

Stewart: That's easy. It's an honor and a privilege. It's an honor and a privilege to serve, it's an honor and a privilege to lead. I don't take it for granted. It's very blessed that I'm able to lead this great brand. Even in a serving capacity. Even the other day I was back in a restaurant and I was helping out a food server. It's an honor and a privilege to serve and with it comes responsibility. I may have to turn your bad mood into a good mood. I may need to make certain that I've given you the right dietary instructions if you are not certain how to read the menu, or made your son or child or daughter feel at ease, or made certain that I helped your mother that extra step up. Those are all privileges, the ability to serve and if you're not in the restaurant business, which is what I've always wanted to do, it's hard to explain to somebody but there is an honor and a privilege with the ability to serve and make a difference in that 35-40 minutes in peoples lives. I mean it really is all I've really ever wanted to do and this is always what we are going to be doing in the restaurant business: making a difference in peoples' lives.

Ryssdal: Julia Stewart is the CEO of Dine Equity. Thanks a lot for your time.

Stewart: Thank you.

About the author

Kai Ryssdal is the host and senior editor of Marketplace, public radio’s program on business and the economy.

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