IHOP, expanding both menu and outlets, shifts its office from the dowdy to Class A.

IHOP, expanding both menu and outlets, shifts its office from the dowdy to Class A

IHOP Corp., parent of the International House of Pancakes restaurant chain and a mainstay on the American fast food landscape, will in February move its headquarters from the somewhat-dowdy North Hollywood building it has inhabited since being founded in 1958.

Its new home will be the top two floors of a three-story office building under construction on the up-and-coming Brand Boulevard in Glendale.

The move to "Class A" office space in downtown Glendale is a far cry from the industrial area where IHOP's home has stood, surrounded by car repair shops, for the past 32 years. It's also move that proves that few things sell as well as pancakes.

And it's also the latest, and among the most dramatic, symbols that a management-led buyout group that took over in 1987 is cooking -- despite a cool economy and a heavy debt load.

Since 1987, the new owners, led by IHOP Chairman and President Richard "Kim" Herzer, have added some 50 new restaurants to the chain and have improved the chain's per-store sales by more than 20 percent. (See accompanying chart.)

IHOP is now the nation's sixth-largest chain of "family coffee shop" restaurants, on the basis of both U.S. sales and number of outlets, according to the New York-based Nation's Restaurant News, a trade publication.

The chain remains outdistanced only by Denny's ($1.45 billion in annual sales and 1,334 outlets), Bob's Big Boy ($1.10 billion in sales and 1,132 outlets), Shoney's ($927 million in sales and 734 outlets), and Friendly's Restaurants ($581 million in sales and 830 outlets).

Perkins Family Restaurants still has IHOP barely beaten in annual sales, and Waffle House has it slightly outnumbered in U.S. locations.

But the competition is losing ground, as IHOP pours it on.

Since the 1987 management buyout, sales have risen 43 percent, to nearly $400 million in 1990, according to projections by Nation's Restaurant News. That makes it one of L.A. County's largest private companies.

But more importantly, IHOP's growth in sales is being matched by a corresponding growth in profits.

Its net income was $5.1 million last year, up 50 percent from 1985, when it launched a major marketing campaign to broaden its appeal beyond breakfast items.

"We tried several times in the past to expand our appeal," explained Steve Pettise, IHOP's vice president of marketing. "But with pancakes as your middle name, it was tough."

That difficulty appears to be easing now, however, as aging baby boomers turn away from fast food in favor of more service-oriented establishments, such as IHOP.

The company's introduction last April of a line of "home-style" dinners hasn't hurt, either, Pettise said.

Indeed, breakfast items now account for only about 55 percent of IHOP's total sales, whereas breakfast fare accounted for fully 75 percent of total sales 10 years ago, Herzer pointed out.

The company has also been beefing up sales by adding menu items that appeal to the growing number of health-conscious consumers in recent years -- including soups, salads, and even "Harvest Grain & Nut" pancakes.

Skinless chicken salads are on their way next year, promised Pettise.

And just as IHOP's menu is expanding, so is its number of locations.

The IHOP chain is expected to exceed 500 outlets by the end of this year. That's up 4 percent from 1989 and up 14 percent from the 1987 buyout. Most of that expansion came in the form of new franchises. Its number of company-owned stores, on the other hand, has been nearly cut in half since 1985. (See accompanying chart.)

"We'd rather expand through franchising," Herzer explained, "because that puts an entrepreneurial spirit into the operation. Owner involvement is very, very important in this business."

Herzer reported last week that he plans to add at least 25 new restaurants to the chain each year.

IHOP will continue to concentrate its expansionary efforts in five metropolitan markets: Los Angeles, New York, Chicago, Dallas, and Atlanta.

Herzer insisted, however, that quality, not mere quantity, is the company's primary goal.

The comment was apparently a reference to earlier ill-fated expansion attempts by IHOP founder AL Lapin Jr. and his successor, Austrian restaurateur Friedrich Jahn.

Lapin, after founding the first International House of Pancakes in Toluca Lake in 1958, began franchising his pancake concept to eager buyers.

As the 1960s franchising frenzy took off, Lapin tried to cash in by acquiring more than two dozen other companies. All his acquisitions were financed with debt.

Before long, Lapin's pancake company was franchising everything from ice cream to dresses, advertising, home improvement services, secretarial training, and more.

He took the company public in 1965, when it began trading on the New York Stock Exchange. But most of the far-flung franchising ventures proved far less profitable than pancakes.

IHOP Corp., then called International Industries, teetered on the brink of bankruptcy by the early 1970s.

Jahn then bought the company and tried to scale it back.

He introduced the Swiss-style dirndl outfits still worn by IHOP waitresses today, as well as several Germanic dishes that he personally liked. But IHOP's bratwurst, schnitzel, sauerkraut and German potato salad flopped with U.S. customers. And Jahn was eventually forced to cede control of the company in March 1983 to Svido-Abwicklungsgesellschaft, a Swiss holding company consisting of Jahn's creditor banks.

IHOP stagnated somewhat under Svido, but the Swiss banks held on until early 1987, when they finally agreed to sell to the management-led buyout group.

The deal was financed by by Kelso Inc., the Newport Beach-based investment banking firm of ESOP pioneer Louis Kelso, who currently holds a 56 percent equity stake in IHOP.

Some 17 members of IHOP's management team, including Herzer and Pettise, own about 30 percent of the company. A 14 percent stake is held by New York Life Insurance Co., IHOP's subordinated debt-holder.

The buyout has saddled IHOP with plenty of debt, which has somewhat constrained its expansion.

But operational improvements installed by the new owners appear to be more than compensating for the added expense.