Inside the Revitalization of Denny's, an American Icon | Food Newsfeed
Continue to Site
Denny's
Denny's revitalization is really only just kicking into gear.

Inside the Revitalization of Denny's, an American Icon

Underline Image
Refranchising, remodels, and digital are driving the classic brand forward.
By Danny Klein January 2019 Chain Restaurants

It seems ages ago, but it was really only eight years back when Denny’s became “America’s Diner.” The gist of the new campaign wasn’t to pivot or reposition one of the country’s largest sit-down chains. Rather, Denny’s wanted to make sure it promoted and stressed what it stood for already: A brand firmly rooted in family dining, but built around the following mantra: “We Love Feeding People.” This came from a newspaper article written way back that quoted Denny’s founder Harold Butler explaining why he started the brand.

But one of the pitfalls of casual dining—especially family dining—is that, all too often, it rests on its laurels. These brands were so ingrained in American culture that they tossed aside the marketing roadmap. You could find your way to Denny’s, or IHOP, Waffle House, Huddle House, and so forth, without every tapping Yelp or picking up a local guide. Yet what happens when you become too rooted in purpose and history? You become wallpaper for a generation that isn’t even sure that decorating style ever existed.

As iconic and legacy-driven as Denny’s is, though, you could argue it’s also one of the most active shifters in the restaurant game. And they’re not alone. IHOP (look no further than IHOb), Huddle House, and others have adapted in an effort to reach younger consumers and inspire loyalty that doesn’t require memories as kindling.

In many instances, this goes beyond marketing and social (Denny’s is pretty … eccentric digitally). It comes down to the assets, models, and growth strategies involved.

For this article, we’re going to focus on Denny’s, which released preliminary fourth quarter and fiscal year 2018 results on Monday. The brand saw its same-store sales lift 1.4 percent domestically in Q4, including 2.1 percent at company-run restaurants and 1.2 percent at franchised. For the year, comps upped 0.8 percent (1.8 percent at corporate and 0.6 percent at franchised). On a two-year stack, Denny’s domestic systemwide same-store sales increased 1.9 percent. Denny’s has achieved eight consecutive years of systemwide same-store sales growth. Total system sales have grown by about $500 million since 2011 (from $2.4 to $2.9 in billions) and adjusted EBITDA upped 26 percent over the last six years ($81.7 to $103.3 in millions). While that’s all good news, naturally, what’s the breakdown? And how does it project moving forward?

Denny’s opened 30 restaurants this past year, including nine international units. But it closed 56 to reach a total of 1,709 locations. Denny’s also completed 203 remodels during fiscal 2018. And as part of its new refranchising strategy, unveiled in Q3, Denny’s sold eight company restaurants—the first transaction since the announcement.

Let’s start with the top line:

Same-store sales

  • 2011: 0.7 percent
  • 2012: 1.3 percent
  • 2013: 0.5 percent
  • 2014: 2.8 percent
  • 2015: 5.8 percent
  • 2016: 0.9 percent
  • 2017: 1.1 percent
  • 2018: 0.8 percent

Perhaps more interesting for Denny’s, however, is how the restaurant is shifting. It managed to move the system from a 60 percent to 90 percent franchised model earlier in its history. That’s about to ramp up once again.

Denny's
Denny's family-friendly food hasn't changed.

A changing system

The refranchising strategy is going to define Denny’s performance and shareholder return in the coming months. Impressively, the chain has opened nearly 350 new restaurants since 2014, or 20 percent of its overall system. That includes 60 international locations since 2011 in five new countries.

Denny’s said in November that it wanted to refranchise to the level where it would get to 95 or 97 percent franchised owned from today’s 90 percent. And do so over the next 18 months. That would equate to 90–125 company-operated restaurants sold. As of June 27, there were 190 corporate stores and 1,540 franchised or licensed locations. So shift the scale by eight franchised stores.

Why is Denny’s doing this? There are always arguments to both sides of the chain model. But in this specific case, Denny’s said, “transitioning to a lower risk business model” would have accretive impacts on adjusted earnings per share and adjusted free cash flow, and also allow development-focused franchisees the chance to expand without starting from the ground-up. New operators are also able to come into the fold this way. It’s a growth stimulator, in other terms. CFO Mark Wolfinger said the transition to a more asset-light business model could reduce annual capital cash expenditures associated with maintenance and remodel costs by between $7 million and $10 million. Denny’s could also generate pretax refranchising proceeds (in excess of $100 million in this case) and earn about $30 million from selling between 25 and 30 percent of the 95 properties currently owned. With that, Denny’s could purchase higher-quality properties in the future, it said. Denny’s said it expects to upgrade the quality of its real estate through a series of “like-kind” exchanges. Cash proceeds from the sale or property are not captured in cash capital expenditures while purchases of property are included.

A like-kind exchange, also known as a 1031 exchange, is a transaction or series of transactions that allows for the disposable of an asset and the acquisition of another replacement asset without generating a current tax liability from the sale of the first asset. This can get pretty technical but essentially Denny’s can garner better real estate by selling lower-volume stores and redeploying those proceeds in favor of better spots. It’s an optimization path.

Denny's

Denny’s said 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. As a company, AUVs were $1.8 million in 2011. They were $2.3 million in 2017. On the franchised side that number went from $1.4 million to $1.6 million in the same span. Also, franchise operating margins expanded by 670 basis points to 71.7 percent ($99.5 million) from 65 percent ($82.6 million).

In savings from refranchising, Denny’s said $10 million to $12 million will be broken down as follows: 25 percent to franchise support cost sharing; 50 percent to corporate support; and 25 percent to field support.

Denny’s has been here before. Much of the current team led the past transition to a 90 percent franchised operation.

In Denny’s current system, 35 franchisees have more than 10 restaurants, each collectively comprising over 60 percent of the franchise system.

How this looks:

  • There are 84 single-unit Denny’s franchisees (5 percent).
  • 2–5 restaurants: 92 franchisees for 255 locations (17 percent).
  • 6–10: 35 franchisees for 258 locations (17 percent).
  • 11–15: 12 franchisees for 149 locations (10 percent).
  • 16–30: 13 franchisees for 277 locations (18 percent).
  • 30-plus: 10 franchisees for 503 locations (33 percent).

Currently, 21 states have company restaurants. After refranchising, only eight will. There are 48 designated market areas with corporate stores. After: There will be 14.

Denny's
Denny's On Demand platform continues to grow, and is especially big during the holidays.

Let’s look more into that growth

Denny’s has changed a lot since 2011, from a unit count perspective. It’s likely the chain will slow down a bit moving forward.

Breakdown of openings (2018 was the lowest amount of openings in the past seven years)”

2011

  • Domestic: 56
  • International: 5
  • Total: 61

2012

  • Domestic: 34
  • International: 6
  • Total: 40

2013

  • Domestic: 41
  • International: 5
  • Total: 46

2014

  • Domestic: 32
  • International: 6
  • Total: 38

2015

  • Domestic: 37
  • International: 8
  • Total: 45

2016

  • Domestic: 36
  • International: 14
  • Total: 50

2017

  • Domestic: 32
  • International: 7
  • Total: 39

2018

  • Domestic: 21
  • International: 9
  • Total: 30

The Top 10 U.S. markets (Wes Coast, Southwest, Texas, and Florida lead the way)

  • Los Angeles: 179 locations
  • Phoenix: 66
  • Houston: 61
  • Dallas/Forth Worth: 53
  • Sacramento/Stockton: 51
  • San Francisco/Oakland: 44
  • Orlando/Daytona: 41
  • San Diego: 40
  • Chicago: 38
  • Miami/Fort Lauderdale: 35

Globally:

  • U.S. 1,578 locations
  • Canada: 74
  • Puerto Rico: 14
  • Mexico: 11
  • New Zealand: 7
  • Philippines: 7
  • Honduras: 6
  • Costa Rica: 3
  • UAE: 3
  • Guam: 2
  • U.K.: 2
  • El Salvador and Guatemala: Each with 1

The revitalization of Denny’s

Much went into that 2011 campaign and everything that followed. One thing that hasn’t been widely publicized: Nearly 80 percent of Denny’s core menu entrees have changed or improved since. Denny’s said this has led to “significant improvement in taste and quality scores and sales growth.”

“It even makes the food taste better,” CMO John Dillon on Denny's remodels.

In surveys, Denny’s found that one in five guests said they visit Denny’s 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. What this says is Denny’s realized everyday value was the key to unlocking repeat guests. Perhaps more so even than the deep discounts and promotions so often pulsed in casual dining.

Denny’s said it has used local and national media to target popular products, like the $4 Everyday Value Slam (again, everyday value. Not limited).

Over the summer, Denny’s conducted a “course correction” in the face of increased value activity from its competitors, launching a $5.99 Super Slam. It then introduced a beefed-up burger lineup that started at just $6.99. CEO John Miller, in Q3, credited the pressure to a “highly competitive value-focused environment” and mentioned 2 for $20 deals (likely a nod to Applebee’s) as well as what quick-serve stalwarts McDonald’s and Wendy’s were up to. At the same time, Denny’s didn’t have any food on air during April and May and saw its sales drag. After the Super Slam, comps turned slightly positive as it generated an incident rate of over 10 percent. Sales were also softer in the dinner daypart, which was another side effect of the value wars. “That said, we’ve been building—this will be our eighth year of positive comp growth with nothing but breakfast and lunch initiative. And we’ve been saying for some time, we were in the middle innings of our revitalization strategy,” Miller said.

Meanwhile, Denny’s has pushed fiercely into digital with its Denny’s On Demand platform. Off-premises sales represented about 10.5 percent of total sales at company stores in Q3 and 10 percent at franchised. Denny’s partnered with DoorDash over the summer and has expanded to the point where close to 71 percent of Denny’s nationwide have worked with at least one delivery system. Inclusive of the delivery fee, the total margin rate on third-party delivery transactions has ranged from the low teens to the upper 20 percent for Denny’s.

Denny's

Here’s how it’s all breaking down:

Sales by channel

Company stores

  • Delivery: 4 percent
  • Pick-up: 7 percent
  • Dine-In: 89 percent

Franchised

  • Delivery: 3 percent
  • Pick-up: 8 percent
  • Dine-In: 89 percent

Share of transactions by daypart

Breakfast

  • Off-premises: 30 percent
  • Dine-in: 27 percent

Lunch

  • Off-premises: 25 percent
  • Dine-in: 38 percent

Dinner

  • Off-premises: 23 percent
  • Dine-in: 21 percent

Late night

  • Off-premises: 22 percent
  • Dine-in: 14 percent

Quick note on this: It’s rather interesting that every segment other than lunch is taking transaction share on the off-premises side. That’s especially intriguing for the breakfast business and speaks to Miller’s comment on value from before.

Delivery status

  • Company: 86 percent are eligible; 82 percent are active
  • Domestic franchise: 76 percent are eligible; 70 percent are active
  • Total domestic: 77 percent are eligible; 71 percent are active

Online transactions by age

  • 18–24: 12 percent
  • 25–34: 43 percent
  • 35–44: 25 percent
  • 45–54: 12 percent
  • 55-plus: 8 percent
Denny's
Denny's burger platform plays into a sweet value spot.

What does this all mean?

Here’s one way to look at it. When Denny’s decided it wanted to become “America’s Diner” instead of just a family restaurant, it needed to hone in on a certain category of consumer. Denny’s calls this, “the modern American family.”

Who are they: Guests who largely identify as part of the millennial generation; have a family-first focus and are increasingly becoming multi-generation (especially among Hispanics); mobile centric and constantly have access to multiple screens.

From TV to digital video to curated content, digital and social, data and tech, and being sure to appear in the right search fields, Denny’s is appealing to this group with a multi-channel approach.

Makes sense then why Denny’s posts stuff like this on tumblr.

Denny's
Denny's refreshed image is driving the turnaround.

Remodeling forward

At the end of Q4, Denny’s remodeled 81 percent of the system (100 percent company-run). Also, worth remembering that these remodeled corporate locations could soon be franchised. By the end of fiscal 2019, Denny’s expects to have 90 percent of the system complete. Denny’s has said in the past that the “Heritage” design generated a mid-single-digit sales lift over legacy stores. “It even makes the food taste better,” CMO John Dillon once told FSR. “That’s the beauty of it. The scores we get across the board, from experience ratings to food ratings, have really helped improve the guest experience across all dayparts.” These updates give outlets a more old-fashioned-diner feel, and create a warmer, more welcoming atmosphere. It has helped open up the dinner daypart as well. “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.

The investments you can’t see

Denny’s said it has invested in training talent, tools, and strategies that are driving improvements in service scores. It has a “Denny’s Pride Review Program” used to evaluate and share best practices. “We have made important investments in field training and coaching initiatives that only serve our franchise system as a model franchisor that not only serve our franchise system as a model franchisor but also to better able our operations teams to achieve their goal of delivering higher-quality products with a more consistent service experience,” Miller said. “We have made progressive improvements toward realizing our full potential, but we believe opportunities remain. Accordingly, we continue to invest in our talent and systems to further elevate the guest experience.”