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Franchising Insight Applebee's Makes It Big In Small-Town America

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While competitors battle for space in the parking lots of suburban shopping malls, the Applebee's restaurant chain is entering rural markets that never before boasted an upscale restaurant. Its strategy is simple: Be all things to all people.

The Friday night crowd at the Applebee's in Hays, Kan., is so robust that nearly a dozen parties are waiting outside for tables. There are families, old folks, and young singles like Anne Speier and Rhonda Eckler, who're downing cocktails at a table near the window. "We just got paid and wanted to splurge a little bit," says the 25-year-old Ms. Speier.

Choosing Applebee's is easy in a place where there's little other choice. There is no Chili's. No Houlihan's. Not even a Bennigan's. In this community of roughly 21,000, Applebee's is the only brand-name casual dining restaurant.

The scene in Hays helps explain why Applebee's International Inc. is the star of the $440 billion restaurant industry. While competitors battle for space in the parking lots of suburban shopping malls, the Overland Park, Kan., chain is entering rural markets that never before boasted an upscale restaurant--or at least one that passes for upscale hereabouts.

The rural-market strategy is part of Applebee's larger effort to be America's restaurant. Its roughly 1,600 units, the majority owned by franchisees, already make it the undisputed king of the industry's fastest-growing segment, casual dining. But Applebee's wants more. It wants its red-apple logo to be as recognized as the golden arches of McDonald's Corp. It wants to be the nation's most profitable restaurant chain.

Today it is the nation's ninth-largest restaurant chain and its strategy is simple: Be all things to all people. While competitors launch ethnic chains in pursuit of niches, the Applebee's menu offers it all: Asian, Italian, Mexican, American and more. For the time-pressed, Applebee's has sharply reduced how long it takes to receive and deliver orders. For the weight-conscious, it is the first restaurant ever to introduce meals approved by Weight Watchers meals, replete with caloric information.

Yet its most audacious move may be its invasion of towns such as Hays, which sits about 300 miles from Denver and 300 miles from Kansas City in a region known as the middle of nowhere. Ranches, farms, feedlots and slaughterhouses dominate the local economy. It's not exactly the kind of market one would expect to support a restaurant that offers salmon steaks and merlot. And Applebee's is taking a risk by opening its restaurant here, right next to a Wal-Mart along a big highway that cuts across the state.

But it's working, and the crowd in Hays offers insight into how rural diners have reacted. The biggest misperception about rural customers in general is that they're not interested in anything that can't be bought at Wal-Mart or its restaurant equivalent. Sitting in the Applebee's here one recent Friday evening, 21-year-old Brandon Weigel talked about the importance of full service, fancy meals and alcohol. "If you want to take someone out on a date," says Mr. Weigel, "you're not going to take them to the Golden Corral," an order-at-the-counter beef joint next door. That's quite an admission, considering that Mr. Weigel is a management trainee at the Golden Corral.

Rural diners have embraced Applebee's so affectionately that the company has opened 138 units in counties of 50,000 households or fewer. And 25% of its new restaurants are expected to open in such counties. The potential for this strategy is enormous. The U.S. Census Bureau estimates that 2,209 of the nation's 3,141 counties have estimated populations of 50,000 or less.

There are disadvantages to these markets. The rural units tend to rake in sales about 10% below the $2.3 million that suburban and urban restaurants bring in. And service mistakes all but make headlines in these places. "We have to execute well, because if you don't take care of people word gets around fast," says Steve Lumpkin, the company's chief financial officer.

But lower real-estate costs make for attractive margins at these outposts. And winning zoning approval is also much easier in towns that are desperate for new businesses. Indeed, the Kansas town of Derby, population 17,000, vigorously courted Applebee's for nearly a decade, and will celebrate the opening of one in September. Says Mayor Dion Avello, "We're a small town, and it's just fitting into our growth pattern of what we want--a high-class restaurant, with a reliable name."

But the strategy's greatest virtue may be that small markets can't support two such restaurants. So there's no danger of Chili's setting up shop across the street.

Which isn't to say that Chili's, a unit of Brinker International Inc., isn't a concern. A pioneer of the bar & grill concept--and the ruler of it until Applebee's raced past it--Chili's boasts only slightly more than half as many restaurants as Applebee's these days. But it is growing still--and in particular aping the Applebee's small-market strategy. Chili's recently entered Hot Springs, Ark.; Jacksonville, Texas; Lady Lake, Fla.; and Brownwood, Texas. Its plan is to continue finding strong, small markets that don't have an Applebee's. "When you get to markets with 25,000 or less, it's going to be the first person there gets it," says Todd Diener, chief operating officer at Brinker.

Its small-town invasions clearly haven't hurt the image of Applebee's in the big city, where it continues growing and thriving. But these moves are putting the hurt on family-dining chains that traditionally dominated small markets--players such as Shoney's, Denny's and Cracker Barrel.

Meanwhile, Applebee's is becoming something in small towns that it never did in large suburbs: a vital cog in the community. Applebee's managers are viewed as leaders in many small towns, often welcomed with a picture on the local newspaper's front page. The restaurants become places where high school seniors take post-prom dates. Garden clubs meet there, too. "Applebee's becomes a cultural piece of the community, and so this has been a wonderful strategy," says Mr. Lumpkin.

Copyright © 2005 Dow Jones & Company, Inc. All Rights Reserved

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