Number 1

The Big Applebee’s

The restaurant at the top of the casual-dining heap.

Slathering your neighborhood

The most accurate way to describe the food at Applebee’s Neighborhood Bar & Grill is “well-slathered.” Nearly every dish comes drenched in sauce, usually either a deep-red ketchup derivative or a ranch dressing variant. Applebee’s trademark Riblets, for example, are bathed in enough tangy BBQ sauce to make a diner forget that he’s chowing on extraneous pig parts.

Applebee’s cuisine is considered so-so even by chain-restaurant standards. In the latest customer survey by the trade magazine Restaurants and Institutions, Applebee’s food scored below that of Chili’s, O’Charley’s, and the Cheesecake Factory, though it did top the deep-fried grub at T.G.I. Friday’s, Bennigan’s, and Hooters. But despite its middling food, Applebee’s is by far the largest casual-dining chain in the United States, with annual sales of around $3.6 billion—over $1 billion more than Chili’s, its closest competitor. Applebee’s also has high profit margins, typically over 10 percent; Brinker’s International, the parent company of Chili’s, is managing just 3.12 percent, while Darden Restaurants, which owns Red Lobster and Olive Garden, is stuck below 5 percent. How did Applebee’s and its heavily sauced pork chunks make it to the top of the casual-dining heap?

By treating sit-down dining establishments like fast-food outlets. The casual-dining industry began with T.G.I. Friday’s, which started as a singles-friendly Manhattan bar in 1965 and steadily opened locations nationwide throughout the 1970s. The conventional wisdom that guided the expansion of T.G.I. Friday’s and other pioneers was that casual-dining outlets, unlike Burger Kings, were too complicated to franchise en masse. Malcolm M. Knapp, whose eponymous consultancy publishes the Knapp-Track casual-dining newsletter, points out that a McDonald’s cook can be trained to use the fryer in about two hours. But training an Applebee’s chef to prepare the menu’s 80-odd items, including Fajitas Con Sizzle and the Southwest Steak Skillet, is significantly more difficult. Then there’s the challenge of finding and hiring reliable servers; a customer might put up with a dimwitted, brutally hungover teenager behind the counter at Arby’s, but patience can wear thin when said teenager is expected to shuttle ceramic dishes and checks to an actual table. Factor in the dishwashers, the prep cooks, and the more complex supply chain, and it’s easy to understand why casual-dining chains were once reluctant to entrust their brand reputations to independent operators. One case of E. coli in Montana could mean millions in lost sales nationwide.

Like its competitors, Applebee’s largely eschewed the franchise model for the first eight years of its existence. (The restaurant got its start in 1980, when two Atlanta brothers created a local chain called T.J. Applebee’s Rx for Edibles & Elixirs.) In 1988, however, the Applebee’s brand was purchased by a pair of Kansas City businessmen, John Hamra and Abe Gustin, who owned dozens of Wendy’s. As successful restaurant franchisees themselves, they saw no reason that independent operators couldn’t run tight ships. They also did the math on the casual-dining market and figured that by establishing new Applebee’s in underserved areas—primarily exurban and rural strip malls—they could attract enough potential customers to support 800 restaurants nationwide.

The aggressive expansion strategy worked in part because Hamra and Gustin were correct—operating a casual-dining restaurant is tough work, but it’s not exactly the Manhattan Project. But it also worked because Applebee’s recognized that some franchisees are aces at the startup phase but have no stomach for dealing with the day-to-day headaches of management—the grease fires, the drunken customers, the Riblet supply woes. So, Applebee’s agreed to buy back and operate franchises that had reached maturity, thereby allowing startup specialists to move on to the next 3,000-square-foot vacant space on the outskirts of Eau Claire, Wisc., or Fort Smith, Ark.

America’s appetite for cheap, filling sit-down meals surprised even Applebee’s. Franchises have opened at a rate of more than 100 per year, and the company has continually revised its estimates on the maximum number of restaurants that the nation can support. The latest projection is for Applebee’s to top out at 3,000 restaurants, about 1,300 more than it has today. Chili’s, by contrast, has around 1,000 restaurants right now, but expansion plans are slowed by the fact that only about a quarter of the chain’s outlets are franchised; over 75 percent of Applebee’s are independently owned and operated. (Other casual-dining establishments, such as Darden’s Olive Garden and Red Lobster, still avoid franchising altogether.)

More franchises also mean more advertising dollars, since each franchisee is contractually obligated to kick in 2.75 percent of his gross sales to the chain’s national ad budget. And advertising makes a huge difference in the casual-dining industry, since there is very little that differentiates the Applebee’s dining experience from the Chili’s or T.G.I. Friday’s dining experience—all three offer the same fatty burgers and the same kitsch-laden walls.

Applebee’s has gained the edge, then, by using its huge ad budget—$160 million this year—to put forth three distinct branding messages rather than one. There are, of course, the familiar “Eatin’ Good in the Neighborhood” television spots, which present Applebee’s as meeting spots suitable for cozy tête-à-têtes. But there are also simultaneous promos for the chain’s take-out Carside to Go service, which now accounts for nearly 10 percent of the chain’s business, as well as the branded Weight Watchers menu, which contributes another 5 percent to 7 percent to the bottom line.

Still, the real genius of Applebee’s is Hamra and Gustin’s steadfast faith that America’s franchisees can, in fact, train low-wage workers to adequately sauce a platter of Bleu Cheese Sirloin. Call them the grand optimists of American small business, if you like. But if you’re not a fan, here’s a spot of grim news: The chain’s bean counters now calculate that an Applebee’s can succeed wherever there is a nearby population of more than 20,000 people. So, if you don’t already have the option of eating good in the neighborhood, you soon will. T.G.I. Friday’s and Chili’s are scrambling to catch up—both are relying increasingly on franchisees—but it may be too late. The dining landscape is already well-slathered with Applebee’s.