Dive Brief:

• IHOP is testing two virtual brands, Thrilled Cheese and Super Mega Dilla, at 50 restaurants, IHOP President Jay Johns said during parent company Dine Brands' Q4 2021 earnings call. The brands were originally at just nine locations in Q4. 
• This pilot comes as IHOP experiences strong off-premise sales. In Q4, off-premise business accounted for 24% of IHOP's sales and average weekly off-premise sales were approximately $9,300 versus $9,200 in Q4 2020. 
• IHOP joins a host of other casual dining brands, including Brinker International's Chili's, Ruby Tuesday and Bloomin' Brands, that are experimenting with virtual brands to generate incremental sales and optimize operations. Last year, IHOP's sister chain Applebee's launched its Cosmic Wings virtual brand, which is now available in about 1,000 restaurants.

Dive Insight:

IHOP has more markets planned for its virtual brands, Dine Brands CEO John Peyton said on the earnings call, and Johns said early results for the two brands are "encouraging." Thrilled Cheese and Super Mega Dilla won't compete with IHOP's breakfast daypart business, Johns said, and require minimal new SKUs. 

"We're enthusiastic about this flexible lower cost option to meet the convenience needs of our guests," Johns said. 

These virtual brands allow the company to re-prioritize its investments beyond assets. Peyton said those priorities include menu innovation, marketing and technology. Dine Brands has also supported its off-premise growth by investing in next-generation to-go packaging and updates to its website and mobile apps — moves that may benefit its virtual brands.

As it grows Thrilled Cheese and Super Mega Dilla, IHOP can draw lessons sister chain Applebee's experience with Cosmic Wings and its first virtual brand, Neighborhood Wings by Applebee's, which launched in 2020.

Applebee's has since shuttered Neighborhood Wings, but is pressing the gas on its Cosmic Wings concept by adding Grubhub to its suite of delivery providers in Q2 2022, in addition to existing deals with DoorDash and Uber Eats.

"At that point, we'll have a very clear view as to the full potential of Cosmic Wings in terms of average weekly sales and sustained incremental impact on business," Applebee's President John Cywinski said during the earnings call.

IHOP is likely to follow a similar path. 

"Our plans to grow sales extend beyond traditional brick-and-mortar locations, expanding our presence through virtual brands out of our existing domestic restaurants, [to] provide an opportunity to drive incremental sales with lower capital requirements," Johns said.

Dine Brands has updated its operations to support higher off-premise volumes, Peyton said, and has streamlined its menus "by more than a third" to ensure more efficient kitchens, which is critical as these virtual brands are folded into the back of the house. Adding a virtual brand to an existing restaurant could put pressure labor, however. IHOP is about 85% to 90% staffed nationally, according to Johns, who added staffing is "slowly getting better."