IHOP, Denny's, and the Changing Face of Family Dining
In the past couple of years, perhaps longer, you could make the argument that family dining was the full-service segment most pressed by a changing consumer. According to insights platform TDn2K, it was the only category to show declining revenue in 2018. While slight at negative .03 percent, it served as a stark contrast to industry-wide gains that covered both quick-serve and sit-down chains.
Also, per TDn2K, average check at family dining venues stagnated last year and showed the least increase of any segment. This emphasizes the underlying issue: Due to increased competition, including regional upstarts and microchains, like Metro Diner, First Watch, and Black Bear Diner, among others, family-dining stalwarts have been reluctant to raise prices for fear of ceding share in a tightening segment.
Higher checks, however, continue to soften a harsh reality for restaurants—less traffic, but a consumer more willing to spend. But how those guests fork up disposable income is where the transaction battle is waging, and it's been especially challenging for family-dining brands. It’s one reason legacy chains like Denny’s and IHOP diverted such rich resources to creative marketing and refreshed store designs in recent quarters.
Denny’s latest campaign, “See You at Denny’s,” pushes the company’s diversity efforts while also inviting customers into its revitalization efforts. The brand’s Heritage design, for example, is now in 83 percent of locations after franchisees completed 44 remodels in the first quarter.
IHOP has emerged over the last two quarters not just as the largest player in the segment, but as the biggest full-service brand in the U.S. The chain ended Q1 with 1,697 locations, just ahead of Dine Brands sister concept Applebee’s at 1,689. There were 1,525 domestic Denny’s in the U.S. last year (that doesn’t include units open less than a full year, of which there were 36).
Denny’s and IHOP have shared one key growth lever in common during these transformative months: Off-premises. It's where brands are offseting negative dine-in traffic. And there are a few reasons the opportunity is so alluring for both. Perhaps the biggest is simply awareness. Family chains at this apex collect brand equity by the decade-full. They’re not trendy concepts that flash and vanish. It’s also fair to say there’s some element of bouncing off the bottom when it comes to digital and underserved sales channels. But breakfast does travel well for the most part, and Denny’s and IHOP already shine in one category that typically over-indexes for delivery—late night.
Focusing on IHOP, the brand turned in same-store sales growth of 1.2 percent in Q1, marking five straight quarters of gains. That outpaced the family-dining category, based on comp sales, by more than 150 basis points, according to Black Box data.
IHOP’s off-premises comp sales jumped 54 percent in Q1 and traffic outside the four walls boomed roughly 40 percent. That’s a dramatic change from a year ago when those figures were 31 and 22 percent, respectively.
IHOP courted this customer with a new, fully integrated online ordering system through its improved website and mobile app. The goal being to create an omnichannel experience with additional touchpoints. This type of target is held by nearly all full-service chains today, but especially family- and casual-dining brands with scale. As the earlier check and revenue figures prove, classic sit-down brands simply can’t rely on guest counts anymore. There are too many concepts at similar price points serving the same occasions. But many of those smaller brands couldn’t bring anywhere close to 1,200 restaurants onto the DoorDash platform, as IHOP has.
Why is this all so important? For starters, average check for online orders is 31 percent higher than call-ins at IHOP. In 2018, online orders came in at $21.20. Call-in orders were $16.22.
Adding more guest-facing technology into the system, IHOP president Darren Rebelez said during the chain’s Q1 conference call, also enabled the brand to grow its off-premises business to 9 percent of total sales. That’s nearly double (5 percent) what it was this time in 2018.
“We believe to-go can increase to the low teens as a percentage of total sales over the next few years,” he said.
And now it becomes clearer why IHOP flipped the “P” to promote burgers last year in one of the most-talked about promotions of the calendar. The deal didn’t just quadruple burger sales in the short-term and generate 36 billion earned media impressions—it gave IHOP a dinner daypart it could build on. The majority of to-go and delivery orders, for most sit-downs, arrive post-lunch during the weekdays. People rush during lunch and grab-and-go breakfast on their way to work, giving counter-service chains and routine-drivers, like Starbucks, the advantage.
This past quarter, IHOP rebranded and relaunched its Pancake Revolution program as “MyHop.” The primary objective, Rebelez said, was to increase membership and entice guests to come back for more visits. In Q1, the company boosted its overall membership by about 9 percent.
MyHop will serve as a foundation for IHOP’s CRM efforts moving forward. Eventually, it will help the chain one-to-one market in a more direct, effective, and budget-friendly way.
Changing gears to Denny’s, 79 percent of the brand’s domestic locations were engaged with at least one delivery partner last quarter. Close to 90 percent—up from 77 percent—were eligible for the service by Q1’s end.
What that suggests is Denny’s still has room to grow its off-premises slice as more restaurants sign up (the same is true of IHOP). CEO John Miller said the transactions deliver total margin rates from the low teens to upper 20 percent range, inclusive of the fee. And sales have been incremental.
He said off-premises allows Denny’s to reach younger customers. That’s a critical element, because family dining wasn’t exactly aging well. Casual dining as a whole relied too long on generational affinity. The breakfast giants were no different. They were becoming wallpaper to an evolving generation. Hence, IHOb, Denny’s eccentric social media personality, and the infusion of offbeat and reenergized advertising campaigns.
Miller said off-premises sales represented about 12 percent of total sales at Denny’s last quarter, up from 7 percent at the launch of Denny’s On Demand in mid-2017.
Here’s how Denny’s online transactions, by age, break down:
Online transactions by age
- 18–24: 12 percent
- 25–34: 43 percent
- 35–44: 25 percent
- 45–54: 12 percent
- 55-plus: 8 percent
IHOP’s guest dynamics, overall (not just online), look as follows:
- 23 percent: 55-plus
- 26 percent: 35–54 years old
- 32 percent: 18–34 years old
- 19 percent: Under 18
So, much to the surprise perhaps of some pundits, more than half of IHOP’s current traffic is coming from guests aged 34 and below.
Customer experience, not to be forgotten
IHOP franchisees completed 35 remodels to the “Rise N’ Shine” program in Q1. The company expects to finish roughly 220 this year. Rebelez said an annual run date in the range of 220–250 makes sense until the program completes. When combined with new restaurant openings since the program’s inception, more than 1,100 units, or about 65 percent of the domestic fleet, have been updated.
But this process evolved as well. The latest iteration, Rise ‘N Shine 2.0, nods to the digital changes and opportunities. They’re equipped with new technology, such as a no-wait tool that provides guests with more accurate times. There’s also server tablets to improve speed and accuracy and wireless credit card devices that are brought to the table.
The latter device removes friction, Rebelez said, by allowing customers to conveniently pay without having to hand their credit card over.
He said IHOP achieved all-time guest satisfaction scores in Q1—a record it hit and then broke again during the period. “Operations excellence plays a pivotal role in not only ensuring guests of an enhanced dining experience in our restaurants, but also in exceeding their expectations on every visit,” he said. IHOP has also explored development opportunities in some non-traditional locations lately, moving into dense urban areas as well as travel centers, universities, and airports.
“Our goal,” Rebelez added, “is to entice guests to return for that valuable incremental visit.”
Denny’s previously noted its Heritage remodel program generates mid-single digit range sales lifts. The chain is also in the throes of a refranchising strategy. It closed three sales in Q1 and has refranchised 14 stores since last October. The hope, for Denny’s, is to migrate franchised units from 90 percent to 95–97 percent over the next year and a half—a process that will include shifting 90–125 company locations.
The process, Denny’s said, allows growth-minded operators to expand without starting from the ground up. Not to mention generate $30 million Denny’s can use to acquire higher-quality locations. Denny’s said it expects to upgrade the quality of its footprint through a series of “like-kind” exchanges. The restaurants being sold are producing average-unit volumes between $1.9 million to $2.1 million. The one’s Denny’s plans to keep: $2.7 million to $2.9 million.
Food and value
Even with the burger push, IHOP never lost sight of its breakfast core. Rebelez said its leverage remains abundant value. In response, IHOP brought back all-you-can-eat pancakes last quarter and coupled it with any classic breakfast combo. Customers could also just pick the pancakes for $4.99. It followed the launch with an all-you-can-eat pancakes with any omelet promotion.
“Our culinary pipeline remains very strong, with a compelling combination of unique breakfast creations and a very strong value proposition,” he added.
Denny’s menu was quietly overhauled over recent years. Nearly 80 percent of its core entrees have changed or improved since 2011. One big push has been value.
In surveys, Denny’s found that one in five guests said they visit the chain because of its $2468 Value Menu. There was a 19 percent average incident rate of the offering since its national launch in April 2010, ranging from about 15–23 percent. Miller said it was right around 14 percent this year. You could credit the decline to the rising prominence of the $5.99 Value Slam.
Denny’s traffic sagged a bit this past summer thanks, it said, to rising value activity in the space. So it launched the offer and brought a $6.99 beefed-up burger lineup to market. The Super Slam turned same-store sales around and generated an incident rate of over 10 percent.
Denny’s added a Meat Lovers Slam this past quarter, as well as an LTO menu with new crepes, a Southwest Chroizo Burger, and Strawberry Pancake Puppies.