Denny's Plans Big Refranchising Initiative to Boost Growth and Profitability
Over the next 18 months, Denny’s plans to ramp up its refranchising initiative, with the goal of moving from 90 percent to 95 or 97 percent franchised-owned. Denny’s chief executive officer John Miller said by refranchising, the brand and franchisees will benefit overall.
To achieve this goal, the company expects to sell between 90–125 company-operated restaurants. As of June 27, there were 180 corporate stores and 1,540 franchised or licensed locations. Denny’s franchisees closed 12 restaurants and opened six new restaurants during the third quarter to bring the total number of restaurants to 1,715.
“We look forward to providing an opportunity for development-focused franchisees to expand their businesses while also attracting and welcoming new, well-capitalized franchisees into the Denny's family,” Miller said during an October 30 conference call. “The consistency of our highly franchised business model, coupled with the momentum generated by our revitalization strategies, contributed to the relative strength of our results.” Denny's said it would continue to operate a portfolio of company restaurants in its highest-volume trade areas, such as the Las Vegas Strip.
The refranchising news comes after Denny’s reported successful growth and gains during the third quarter. System-wide same-store sales increased 1 percent during the quarter compared to this time last year. Chief financial officer Mark Wolfinger said the transition to a more asset-light business model would likely reduce annual capital cash expenditures associated with maintenance and remodel costs by between $7 million and $10 million. Denny's also antcipates generating pretax refranchising proceeds in excess of $100 million.
“We're very excited to use this refranchising strategy to stimulate additional growth for our franchised partners and to attract new franchisees to the Denny's brand,” Wolfinger said. “The good news is that our team that successfully led our transition from a 60 percent franchised business to a 90 percent franchised business is still in place and, accordingly, provides us with a high degree of confidence in our ability to execute this refranchising and development strategy as we move to a more asset-light model.”
The company also plans to sell up to 30 percent of 95 properties it owns and in the process, and is expected to earn about $30 million. Wolfinger said this money would go toward purchasing higher-quality properties in the future.
"We're very excited to use this refranchising strategy to stimulate additional growth for our franchised partners and to attract new franchisees to the Denny's brand. We will also upgrade the quality of our real estate portfolio through a series of like-kind exchanges," he said. "... The good news is that our team that successfully led our transition from a 60 percent franchised business to a 90 percent franchised business is still in place and, accordingly, provides us with a high degree of confidence in our ability to execute this refranchising and development strategy as we move to a more asset-light model."
Another factor contributing to Denny’s positive third quarter was the success on the off-premises side of business. Denny’s partnered with DoorDash over the summer to create “Denny’s on Demand.” Since the launch, Miller said, about 71 percent of Denny’s across the U.S. have worked with at least one delivery system.
“Off-premises sales to our Denny's on Demand platform represented approximately 10.5 percent of total sales at company restaurants during the third quarter and approximately 10 percent at franchised restaurants,” he said. “These to-go transactions continue to be highly incremental over indexed to late-night and dinner dayparts and skewed towards the younger 18- to 34-year-old demographic.”
Overall, as more locations expand into the delivery realm, the company sees continuous growth in off-premises.
This third quarter also delivered Denny’s positive guest traffic at restaurants. The company attributed this to an evolving menu that features high-quality products at reasonable prices.
“We continue to evolve our menu to meet guest expectations for higher-quality and more craveable products,” Miller said. “Our latest LTO menu features festive flavors, including a new Pumpkin Spice Pancake Breakfast, a new Holiday Turkey Melt and a Turkey & Dressing Dinner. We recently launched our latest core menu, which also includes several new craveable dinner entrées.”
Guests have also been receptive of remodeled units, giving the company positive feedback while dining at a “Heritage” remodeled location. About 78 percent of the brand features the new “Heritage” look after franchisees completed 53 remodels during the third quarter, including six company locations.
“With many brand-enhancing strategies remaining and our expectations that approximately 80 percent of the system will have the new image by the end of 2018, these remodels will continue to be a significant tailwind for our brand's revitalization over the next few years,” Miller said.