Stacked odds: IHOP tries to break out of breakfast niche

Late one recent weekday morning at an IHOP in Arcadia, Calif., a waitress placed a brightly colored new menu in front of Eric Brito. He barely gave it a glance, already knowing exactly what he wanted: country fried steak and eggs -- the usual.

"If I wanted a salad, I wouldn't have come here," said Brito, 28, a budding car mechanic who eats at the chain at least once a week.

Lately, the preferences of loyal customers such as Brito have been the subject of intense scrutiny by the higher-ups at IHOP.

The Glendale, Calif.-based company, formerly known as the International House of Pancakes, has relied on down-home breakfasts for 47 years as its main source of profit. But IHOP executives, hungry for a bigger share of the more lucrative lunch and dinner market, are rolling out the first major menu overhaul in almost a decade with hopes that new items such as shrimp Caesar salad, brie sandwich and grilled cod will shift their customers' perceptions from the IHOP of yore.

Chief executive Julia Stewart's management team spent six months surveying the dining desires of 20,000 IHOP customers. The result, she said, guided them toward more contemporary dishes, as well as enhancing the flavor of the chain's classics.

"We are not going to be cutting edge," said Stewart, emphasizing that IHOP would still be what she called an "everyday indulgence" for diners who love its pancakes. "But when you see these items you will say, 'Wow, I have never quite seen this before."'

IHOP won't say how sales, which totaled $359 million last year, have fared since the new menu was introduced last month.

Stewart's menu strategy, which is being launched in tandem with a chainwide remodeling program and an ambitious national TV advertising campaign, is being closely watched on Wall Street.

Since Stewart took over as CEO in December 2001, the onetime IHOP waitress has received much of the credit for the steady rise in the company's stock price, which more than doubled between January 2003 and early April. But on April 14, IHOP surprised Wall Street by reporting that first-quarter sales at its restaurants open more than a year rose less than 1 percent -- sparking an 8 percent sell-off in its stock. Two weeks later, when the company's first-quarter profit came in below analysts' forecasts, the stock fell an additional 6 percent.

And earlier this month, analyst Bryan Elliott at Raymond James & Associates downgraded the stock from strong buy to outperform, citing in part the company's focus on expanding away from its core breakfast business.

In 1998, IHOP tried a similar shift, but "the impact was not as great as we had hoped," spokesman Patrick Lenow said.

"Clearly IHOP has tried for many years to build a more significant lunch and dinner business," said Michael W. Gallo, restaurant analyst at C.L. King & Associates, "but it's a competitive business, and the jury is still out on whether they will be able to do that or not."

The company hopes to improve its chances with the restaurant remodeling scheme, which minimizes the current red and blue color theme in favor of more muted tones, and an advertising budget that's more than double the amount spent on the earlier campaign.

And it will need patience.

"This time around, we're allowing more time," Lenow said. "You don't have 'pancakes' in your name for 47 years and change overnight."

IHOP is pursuing the new strategy at a time when the restaurant industry is struggling to cope with the effect of sharply rising gasoline prices, which analysts including Elliott fear could sap the spending power of low- and middle-income people, pushing them to fast-food chains.

Family dining chains such as IHOP, which are typified by wide menu offerings and little or no reliance on alcohol sales, have been "squeezed from the lower end by fast-food chains" and by casual dining chains such as Olive Garden and TGI Friday's on the upper end, said Bob Sandleman, a restaurant consultant in Villa Park, Calif. He said IHOP's effort to attract larger lunch and dinner crowds with its new menu offerings reflected one strategy for staving off growing competition.

Meanwhile, IHOP's leading rival, Denny's, is opting for a less experimental approach at its nearly 1,600 restaurants. Margaret Jenkins, a senior marketing executive for the chain, said that with the exception of a few new items this year such as grilled tilapia and hickory chicken, the company was sticking to what its customers had always expected.

"We are not in a position to educate our customers' palates," Jenkins said. "The thing about Denny's is that there is a comfort to knowing what Denny's is."

Indeed, experts note that IHOP's decision to tamper with its image by dabbling in the almost-gourmet could prove risky. "I think it will require a long-term effort to begin to create the awareness out there among consumers that IHOP is truly in the lunch and dinner business," said Elliott of Raymond James.

At the Arcadia IHOP, cook Juan Diaz said the new menu items were doing well -- mostly.

"A lot of regulars like the tutti-frutti and the stuffed French toast," he said. A new fish offering, served with a rich hollandaise sauce, is popular with the dinnertime senior clientele, he said. But veggie burgers have remained untouched in the freezer.

Florida-based franchisee Bob Leonard, who heads an advisory board for IHOP franchise owners, said his customers had tried the new brie sandwiches, but the more familiar roast beef was proving to be more popular.

Still, Leonard added, "If we keep doing what we did good 50 years ago, we would be out of business."