IHOP, Applebee's Plan Purchasing

Check out this article from the Wall Street Journal.

IHOP, Applebee's Plan Purchasing Co-Op By Year's End
DOW JONES NEWSWIRES
September 3, 2008 2:32 p.m.
http://online.wsj.com/article/BT-CO-20080903-711726.html?mod=dist_smartbrief

Wall Street Journal
By Paul Ziobro
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Applebee's and IHOP operators could soon be flexing a combined $1.7 billion in purchasing muscle, giving the brands greater bargaining power to counter rising food costs.

DineEquity Inc. (DIN), owner of the brands, is working with franchisees to create the centralized purchasing cooperative that will negotiate prices of food ingredients and soft goods like napkins and straws for participating restaurants across the 3,300-unit casual-dining company.

"When you combine what Applebee's is buying with what IHOP is buying, we are a very big customer," DineEquity spokesman Patrick Lenow told Dow Jones Newswires.

It will also help streamline negotiations, as Applebee's and IHOP already share about 75% of their vendors but negotiate their rates separately, Lenow said.

Plans for the co-op, which will be owned by franchisees, are still in the works. IHOP franchisees met last week at their national conference to discuss the measure, while Applebee's franchisees plan to parse the matter further at their annual meeting later this month, Lenow said.

But the general outline sees restaurant owners opting into the co-op, with members getting the chance to earn a rebate if sales of certain ingredients and products reach a specified target, Lenow said. The co-op would employ purchasing professionals that secure contracts based on specifications from the two brands.

The co-op will help reign in food costs, which have risen in recent years as feed and fuel costs have made producing and transporting ingredients more expensive. It would also give Applebee's and IHOP store more leverage in securing long-term purchasing contracts, which many food suppliers have been reluctant to enter into due to volatility in commodity costs.

"We believe a co-op makes sense and could bring below-average market inflation rates in 2009, as well as longer-term contracts," J.P. Morgan restaurant analyst Steven Rees said in a note.

Franchisees are showing the same sentiment. "I can't see where it does any harm to lump our purchasing with their purchasing," said Zane Tankel, chief executive of Apple-Metro Inc., owner of 25 Applebee's restaurants in the New York-metropolitan area.

DineEquity declined to disclose projected savings that would result from the co-op, although it would likely eliminate less than 100 purchasing-related jobs at the parent company, which has more than 30,000 employees, including restaurant workers, Lenow said. Those workers let go may be retained by the co-op.

Co-ops have been used for years by fast-food restaurant franchisees, but are new to sit-down dining, where most locations are owned by the parent company, according to Dennis Lombardi, a restaurant consultant with WD Partners.

"There hasn't been enough critical mass of any one brand in casual dining to make that much of a difference," Lombardi said.

DineEquity is in the midst of converting to an entirely franchised restaurant company over the next several years, which makes the co-op model preferable, Lenow said..

DineEquity Chief Executive Julia Stewart laid out the refranchising strategy last November when IHOP bought Applebee's for $2.1 billion. It plans to sell off nearly all the 500 Applebee's restaurants it owns. The remaining 1,500 Applebee's and most of the 1,350-plus IHOP stores are already owned by franchisees.

DineEquity's refranchising plan has underperformed thus far. The company has only sold 26 stores this year, leaving it a long way from its target of 100 sales. Proceeds from sales have also come in below targets, as prices for the units have declined due to the credit crunch and declining performance of Applebee's stores.

As a result, DineEquity stock has lost close to 65% over the last 12 months and is down 39% on the year.

Shares were down four cents, or 0.2%, to $22.08 in recent trading.

-By Paul Ziobro, Dow Jones Newswires; 201-938-2046; paul.ziobro@dowjones.com