DineEquity's IHOP Launches Cafe-Style Spin-Off

IHOP has quietly debuted its first coffeehouse-style spinoff, which offers a stripped down menu in a more modern setting and could signal the chain's move to target a younger, more urban demographic.

IHOP Cafe opened late last year in San Antonio, where customers can order from a menu that includes silver dollar pancakes, wraps and sandwich melts, plus coffee, smoothies and milkshakes - a slimmer selection than found at full-service IHOP restaurants, a brand owned by DineEquity Inc. (DIN). The location is open from 6 a.m. until 10 p.m. during the week, and serves customers until midnight on the weekends.

IHOP had the idea for a smaller-format store in the works for several years, said Patrick Lenow, a DineEquity spokesman, and the lone current location is operated under a licensing agreement. He would not reveal any additional information on long-term plans for the project.

"It's a limited test at this time as part of our process of looking to get better," Lenow said.

Family dining chains have been experimenting with offshoots in recent years to try to draw in more time-strapped users. Denny's Corp. (DENN), one of IHOP's main competitors, has been testing Denny's Fresh Express within some of its traditional restaurants in Texas, where customers can pick up smaller items like breakfast sandwiches on the go.

"It follows a growing consumer desire to have more control over how much time you spend at the restaurant," said Dennis Lombardi, a restaurant consultant with WD Partners.

The smaller stores can also squeeze into smaller footprints that have lower costs to build than full-service restaurants, and need fewer workers, which can either make the unit more profitable or allow them to keep prices down, Lombardi said. Franchisees who own the rights to a particular market could also pepper such smaller locations within the area, attracting more frequent diners.

Such spinoffs are borrowing ideas from the so-called fast-casual segment of the dining industry where chains like Panera Bread Co. (PNRA) and Chipotle Mexican Grill Inc. (CMG) have been growing fast in recent years as they benefit from their positioning as being lower-priced than traditional full-service restaurants while being a step above fast-food chains.

Fast-casual formats also have appeal to a younger crowd, a demographic family-dining chains are increasingly trying to target because their main users are older.

"It looks like IHOP is trying to go for the urban-minded, 18- to 25-year-old customer," says Chris Wolf, director of innovation at the foodservice consultant Turover Straus Group Inc. and who spotted the IHOP Cafe on a recent trip to Texas.

IHOP Cafe could also potentially make a run at customers of Starbucks Corp. (SBUX), which has been struggling amid the downturn and shuttering locations. The fast-food giant McDonald's Corp. (MCD) is also stepping up its presence in the coffee arena by rolling out McCafe to all of its U.S. stores, which many analysts see an attempt to target Starbucks customers.

IHOP's sales have held up well throughout the recession, as it has kept up a steady stream of limited-time offers to draw traffic and has been renovating its existing locations to give it a modern touch. In its most recent quarter, IHOP posted a same-store sales decline of 1%, which has been ahead of its peers, and DineEquity expects IHOP's system-wide same-store sales to be up 1% to down 1% in 2009.

DineEquity also owns the Applebee's Neighborhood Grill & Bar, which it bought in a $2.1 billion deal in 2007. In addition to stabilizing sales at both of the chains, DineEquity is focused on paying down its debt load taken on in the merger by selling most of its corporately owned Applebee's stores to franchisees.

DineEquity shares have lost nearly 80% of their value in the past year, and in recent trading, were down $1.33, or 12.09%, at $9.67.

-By Paul Ziobro, Dow Jones Newswires; 201-938-2046; [e-mail]