Applebee's, IHOP CEO sounds the alarm on customer behavior

Delivering value and getting customers to perceive value are two very different things.

At various points in its history, Chiptotle has been been seen as a good value by consumers, despite it costing more than most rival fast food. That's because a burrito or bowl from the Mexican chain seems like a lot of food compared to, say, a McDonald's value meal.

But as we learned recently, Chipotle walked a pretty slippery slope. As the company worked to make sure team members served proper portions, customers accused them of cutting back.

That took something that was once a great value in people's minds and made it less so. That could drive customers to Taco Bell or other lower-cost rivals.

Few people would argue that Taco Bell is better than Chipotle, but it's definitely cheaper and could be perceived as a better value.

💵💰Don't miss the move: Subscribe to TheStreet's free daily newsletter💰💵

It's a scenario most restaurant brands are facing: What's the line between perceived value and just being cheap?

And Dine Brands CEO John Peyton has struggled with it across his major brands — Applebee's, IHOP, and Fuzzy's Tacos.

Applebee's has tried to stake out its place as a value brand.

Image source: Dine Brands

Applebee's has staked out low cost

You could argue that Applebee's, when it comes to perception of quality, trails behind rivals like Chili's, TGI Fridays, Miller's Ale House, and a few others. It's sort of the bottom rung of the casual sit-down restaurant — vaguely, but not exactly, in the sports bar category.

The company has somewhat courted that reputation with its $1 drink and all-you can-eat riblets promotions. A $1 drink mixed in a trash can doesn't seem high-end, and nobody fully knows what a riblet is.

That doesn't mean there aren't Applebee's loyalists. It occupies a narrow space where it offers a lot off food that's good enough, along with cheap drinks.

The problem is that rivals like Chili's have also staked out value as well as the perception of higher value. Two people getting a solid hamburger, decent fries, and a beer for $20 might strike some people as a better deal than a bottom-shelf margarita and the left-over parts of the pork rib.

Bankruptcy stories:

It's a very fine line, and a remark made by Peyton does not bode well for any company that can't fully lean into value.

“Guests remain cautious with their spending, particularly the lower-income guests, and we continue to see check management and trade down to lower priced items,” he said.

Applebee's — and IHOP, to an extent — offer lower-priced items with higher perceived value.

Consumers are being really careful

While some chains are not well positioned for a value-based model, IHOP and Applebee's are set up to allow regular customers to trade down.

“Across Applebee's and IHOP, the value mix increased versus Q4. At Applebee's, the value mix increased from 28% to 34%. And at IHOP, that mix increased from 16% to 19% due to the rollout, more broadly, of House Faves. Despite this challenging backdrop, sales, traffic, and our development pipeline each improved in March, and that positive momentum continued into April,” he said.

That's good news for Dine Brands (DIN) , but a warning shot for the broader restaurant business. Consumers want to eat out, but only if they can see and feel the value.

Dine Brands also has a secret weapon — dual-branded IHOP and Applebee's locations. These given the chain the ability to present not only perceived value, but a lot of choice.

“We're pleased with the performance of our dual-brand concept, and we remain on target for our 14 domestic dual-brand openings this year. Our first domestic dual brand in Seguin, Texas, continues to perform above expectations, doing approximately three times the sales compared to when it was a standalone IHOP,” the CEO shared.

Customers seem to appreciate and understand the concept while also enjoying the broader selection.

“Guest feedback is very positive, especially around the fully combined menu of brand favorites. In fact, our franchisee in San Antonio just signed up to open eight more dual brands in the market over the next two years,” Peyton added.