Why Refranchising is the Key to Denny's Success
A combination of refranchising, remodeling, and promising off-premises sales resulted in a positive fourth quarter and end-of-the-year finish for Denny’s.
For the eighth consecutive year in a row, Denny’s reported positive same-store sales growth. Domestic same-store sales increased 1.4 percent compared to the fourth quarter of 2018. Compared to 2017, Denny’s ended 2018 with a 2.1 percent growth in same-store sales, Denny’s executive vice president and chief financial officer noted on a February 12 earnings call.
This amount of growth will be sustainable for the company over the next year, said chief administrative officer and chief financial officer Mark Wolfinger said on the call. “We expect same-store sales growth at company restaurants between 0 percent and 2 percent. Similarly, for domestic franchised restaurants, we expect same-store sales growth between 0 percent and 2 percent,” he said.
In an effort to move toward a lower-risk business model, the brand is undergoing a transition to become a majority franchised company by 2020.
“Over the next 12 to 15 months, we intend to sell between 90 and 125 total company-operated restaurants with future development commitments as we migrate toward a business model that is between 95 percent and 97 percent franchised,” Wolfinger said.
Denny’s refranchising initiative started during the last quarter. Wolfinger told analysts during the call that eight stores were sold in Q4 of 2018 and an additional two more corporate stores sold so far during the first quarter of 2019. Each store sold for around $2 million. The company predicts corporate growth will stay flat in 2019 with only 35 to 45 restaurants opening.
The sale will also help the company trim locations that performed slightly lower than the average unit volume, which was around $2.3 million in 2018. The stores that Denny’s is planning to keep have an AUV around the $2.8–$2.9 million range. Wolfinger said the company anticipates generating approximately $30 million from the sale of 25–30 percent of the 95 properties it currently owns.
“Our efforts to continually optimize the value of our real estate portfolio have yielded an opportunity to sell property under some lower-volume stores in order to acquire higher-quality real estate through a series of like-kind exchanges,” Wolfinger said.
The refranchising strategy also coincides with the brand’s effort to refresh the restaurant design to the new Heritage model. Remodeled locations are performing well, “receiving favorable guest feedback and generating mid-single-digit ranges of sales lift,” Denny’s chief executive officer John Miller said during the phone call.
In 2018 Denny’s completed 203 remodels (about 81 percent of the entire system) with 41 of those during the fourth quarter. By the end of 2019, 90 percent of locations will feature the updated image.
While reimagining the restaurant design, the company focused on creating systems that could improve the experience for both the dine-in and off-premises crowd. Denny’s on Demand launched in 2017 and has become a key pillar in the company’s off-premises strategy. Miller said off-premises sales accounted for approximately 11 percent of total sales at both company and franchised restaurants, which is up from 7 percent when the program launched.
“Delivery continues to drive the expansion in our off-premises business, and we have observed a steady progression of company and franchised restaurants, adding delivery channels over the last few quarters,” Miller said.
Around 71 percent of Denny’s domestic customers are actively engaged with delivery options. “We have an opportunity to further grow our off-premises business as more restaurants expand their delivery channels,” Miller said, adding that at present about 77 percent of the system has off-premises capability.
The company is in the early stages of transition toward a more asset-light model. By outlining key strategies toward company-wide revitalization, Denny’s leadership believes the company is setting up long-term success.
“We will remain committed to our revitalization initiatives while continuing to drive same-store sales growth and profitable returns for our shareholders,” Miller said. “Our brand-enhancing strategies like Denny's on Demand and Heritage remodel program, our menu evolution and Everyday Value focus, and our refranchising and development strategy are expected to yield incremental shareholder value for years to come.”