Ms. Stewart: IHOP was founded in 1958 in Toluca Lake, California, so our 50th anniversary will be in July of 2008. We grew modestly through the 1950s and 1960s, and began franchising IHOP restaurants by the end of 1960s. Restaurant franchising slowly increased over the course of the 1970s, 1980s and 1990s. In the 1990s, we built about 500 restaurants. Throughout that tenure, the company utilized its 'old' business model, where IHOP bought the land, built the building and then franchised the restaurant. Then, in 2003, we changed our development strategy, and moved to a traditional franchising model where the franchisees do their own development.
TWST: What were the reasons for the change?
Ms. Stewart: The change was largely due to the fact that we were using
significant amounts of capital to buy the land and build the building.
At our size ' more than 1,000 units ' we thought there were better uses
of our cash to improve our return on invested capital, while our
franchisees were willing and able, and would prefer to do the
development themselves. We were charging a premium to our franchisees
for that development, and many of our franchisees preferred to go to
local banks and do it themselves. There was certainly leveragability in
franchisees financing and developing restaurants themselves. So, when
you think about it, it truly did make sense to switch to a more
traditional franchise model. And IHOP could then return cash to
shareholders in the form of a dividend and a share repurchase.
Tickers included in this excerpt: IHP
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