Can DineEquity Catch Fire By Bringing Fire?

| About: DineEquity, Inc. (DIN)


DineEquity is renovating Applebee's chain.

Company investing millions in wood fire grills.

Company seeks to differentiate its brand from competition.

We all love to eat out. We all love to get a good meal for a good price. We all love a menu that gives us something special. Over the past few years, many consumers seem to have found that all of the chain restaurants are essentially the same. One will have a hickory smoked glaze on the product while another pushes a steak rub. The bottom line is that a steak is pretty much a steak. One will have potato wedges, while another has fries. The bottom line is that fries are fries.

DineEquity (NYSE:DIN) has announced a major change that it hopes will cure flat to slumping sales. The ideas seem full of potential, but in my opinion, these changes may not be enough to move the needle. The changes announced include essentially an overhaul of how Applebee's prepares food and the menu offerings. The sales pitch sound great, but will it really move the needle?

"Applebee's Neighborhood Grill & Bar® today moved decisively to take back America's neighborhoods - the roots of its rise as the country's largest casual dining restaurant chain - by unveiling new American-made, wood-fired grills as the centerpiece of nearly 2,000 of its U.S. restaurants and introducing certified USDA Choice steaks hand-cut in-house as the signature item of a revamped and streamlined menu that elevates quality, flavor and freshness." - DineEquity Press Release

The Sales Pitch

  • Inviting guests to follow the enticing aroma of American oak smoke into their neighborhood Applebee's.
  • The first menu items to hit the grills are certified USDA Choice Top Sirloin Steaks and Bone-In Pork Chops. Both items are hand-cut in Applebee's restaurants by trained meat cutters before they hit the grill with sizzle and smoke.
  • Guests will immediately recognize something is new at their local Applebee's as wood corrals stacked with split American oak logs greet them at the entrance along with the mouth-watering aroma of oak wood grilling.

How They Deliver The Sales Pitch

  • Applebee's expects to achieve historic levels of mindshare through penetration of traditional broadcast and cable TV channels
  • Exposure through prominent online platforms
  • Exposure through movie theaters
  • All ads will drive home the concept of "Hand-Cut, Wood-Fired"

Will It Work?

This is the million dollar question, or perhaps the $75 million question. The company will spend $75 million in this bold move. That is a lot of coin. Can sales increase enough to make such an investment worthwhile? Is this hype going to change the narrative from quarters where sales decline 3.7% to quarters where sales improve by 5% or 10%?

In my opinion, the concepts seem sound and even make it tempting to visit an Applebee's that has seen this renovation take place. I do not think that the wood fired in and of itself is a game changer. Certainly, if the company can get the idea of "wood-fired" and "Hand-Cut" on the tips of consumers tongues it can help, but is that enough?

In my mind, the success or failure of this campaign will not be how the food is prepared, but rather the service delivered. Part of the problem with the chain restaurants these days is that the service delivered is simply average. Restaurants that deliver exceptional service are able to do so because they build in the cost of providing that service into the menu price. In contrast, chain restaurants are homogenized to a point where even the service boils down to average. I am not indicting the servers at chain restaurants. It is what it is.

In my opinion, the secret to a re-invention of a brand is in ensuring that it is an across-the-board event. The public is used to the shift from a rub to a branded sauce, to two-for-twenty type pricing shift. What would take the public by storm is getting drink refills when the current drink is half empty, seeing a server make eye contact and assess the tables needs more than twice per meal, and seeing the meal process seem more like an event than a numbers game of flipping tables as fast as possible. Indeed, I think many consumers would actually pay a bit of a premium to see the service aspect of the meal upgraded.

In my opinion, management has a winning food concept on its hands, and while expensive to implement, is easily controlled. The more difficult challenge rests with tying this re-invention to a new approach to service. Along with "wood fired" and "hand-cut," should be "personalized service." Giving a person a decent meal is expected. What is no longer expected is great personalized service. If Applebee's can deliver this, the quarter-over-quarter numbers can improve to levels that allow for equity appreciation.

DineEquity has a 52-week high of $106 and a 52-week low of $77. It is currently trading at about $82 per share. This means that there is potential to see a greater upside than downside. From the sounds of the DineEquity press release, the company has a mission in mind. If it hits a single with this plan, the stock should still be okay. If it hits a home run, the stock price could begin to challenge prices above $100 per share. American consumers are eating out more than ever. It is a balance of time, value, and experience. Applebee's, even with the current cooking method and menu does okay on time and value. Make the experience all-encompassing by ensuring topnotch service, and the "neighborhood story" that Applebee's wants to represent could take on a new meaning. Stay Tuned!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.