The diner chain is gearing up to revive a ‘key brand differentiator.’
Intense competition on value across the industry is keeping price and affordability front and center for Denny’s. In the first half of the year, the company extended its value-oriented Slams platform and reintroduced its All-Day Diner Menu.

“We aren’t done innovating yet,” CEO Kelli Valade said during the company’s Q2 earnings call this week. “We’re about to go even deeper into value, bringing back a key brand differentiator in a big way.”

Denny’s is resurrecting its $2-$4-$6-$8 menu and adding a $10 category to appeal to cost-conscious guests. First introduced over a decade ago, the tiered platform allows customers to select options within their budget. Valade believes it will drive traffic amid a softer consumer environment that weighed on Q2 results.

Inflation Takes Toll on Denny’s Unit Count

Denny’s Goes Virtual to Tackle Traffic Declines

Same-store sales fell 2.6 percent at domestic company-owned units and 0.4 percent at domestic franchised units. Total operating revenue decreased to $115.9 million from $116.9 million in Q2 of 2023. Operating income was $9.1 million, down nearly 40 percent from $14.9 million a year ago, with margins at corporate locations shrinking from 15.5 percent to 13.2 percent.

Valade attributed the declines to restaurant prices rising faster than grocery prices, leading more people to cook at home. And while Denny’s value mix has held steady throughout the year, hovering at just under 20 percent in Q1 and Q2, there are signs that customers are cutting back on their spending at the diner chain. Beverage incidences, for example, are down quarter-to-date and year-to-date.

“There’s no doubt it’s kind of a value war out there with everybody racing to get to the next offering that might really ignite some new customer trial,” Valade said, pointing to the $2-$4-$6-$8 menu as a unique, consumer-friendly equity that only Denny’s can offer. “We do think this could be the platform that signifies the strength we have always had in value.”

The revived menu is expected to drive incremental traffic and generate new customer trial. It also has been engineered to protect profitability. It mixed in the mid-teens during trial runs earlier this year, and the company didn’t see margin erosion in test stores. Valade said results were especially strong in California, where much of the testing occurred, and where consumers are feeling the pinch from restaurants raising prices to offset the FAST Act.

The Golden State also served as a key testing ground for Banda Burrito, Denny’s third virtual concept alongside Burger Den and The Meltdown. The company has concentrated on expanding this delivery-only concept to hundreds of stores in California, aiming to offer competitive quick-service fare while avoiding the $20 minimum wage costs. Now, it wants to get the concept up and running systemwide.

Other updates are making their way across the system and will continue accelerating in the back half of the year. This spring, Denny’s began reigniting its local marketing co-ops by reestablishing those that had disbanded during the pandemic. The local advertising investment represents $12 million annually, approximately half of which is incremental.

“An immense amount of work has been done with our agency partners as we learn more about our specific Denny’s guests,” Valade said. “Our data suggests we can speak more effectively to our target guests through a larger focus on local media.”

Q2 was a transitional quarter with many co-ops restarting in mid-April and more rolling in throughout the quarter and into early July, she added. With the time it takes to receive the funds and then deploy them against media, she believes the full weight of co-op advertising will be realized in Q3 and beyond.

Denny’s also recently completed the rollout of its new cloud-based POS system in all company restaurants and is continuing to expand it in franchise stores.

“We now have approximately 130 restaurants on the new platform, and it is opening the door to provide future labor savings, smart upsell opportunities, server handhelds, and payment at the table,” Valade said. “Additionally, our new cloud-based POS is an even bigger benefit for our franchise restaurants as the new equipment package comes with an upgraded kitchen visualization system, which provides meaningful waste-saving opportunities.”

While the POS upgrades, incremental advertising benefits, Banda Burrito rollout, and new value menu are giving the company some optimism heading into the back half of fiscal 2024, Denny’s still updated its full-year outlook to reflect ongoing headwinds. It now forecasts domestic same-store sales between –1 percent and 1 percent and adjusted EBITA between $83 million to $87 million, down from its previous guidance of 0 percent to 3 percent and $87 million to $91 million.

“The reality is that we are in a very volatile macroeconomic environment, which we don’t control,” CFO Robert Verostek said. “So, we will execute against the things that are within our control.”

Denny’s shuttered 15 restaurants in Q2, most of which were franchised locations with expiring leases, and expects as many as 15 more will close by the end of the year. It opened three new stores and ended the quarter with 1,541 domestic units, all but 64 of which are franchised. One company-owned Keke’s restaurant opened in the quarter, bringing the breakfast chain’s footprint to 62 units, including 51 franchised locations and 11 corporate locations.

The company now expects 30 to 40 consolidated restaurant openings this year, including 12 to 16 new Keke’s locations, down from its previous guidance of 40 to 50. It is forecasting a consolidated net decline of 20 to 30 units, versus the previous guidance of 10 to 20.

Some of those upcoming Keke’s locations will be in Texas and California, where the brand plans to expand through a combination of franchising and corporate development. Valade said franchisees have been waiting to see how two stores in Tennessee—the first units outside of the brand’s home state of Florida—would fare. One opened in Q1 and is on pace to deliver approximately $2 million in annualized sales volume. That’s “significantly higher” than the systemwide average. The second opened in Q2 and is expected to deliver even stronger results.

Comps were down 4.6 percent at Keke’s in the second quarter. Executives blamed the decline on a “tough environment” in Florida, where family dining has been negative for the past four quarters. The brand is pulling a few levers to counteract the trend. It updated its menu with new options like grits, gluten-free toast, and revamped kids meals. Those changes have been accretive to check average and are helping improve guest satisfaction scores. Keke’s also expanded the rollout of alcoholic beverages to over 40 percent of its system with an eye toward providing more check-building opportunities.

Additionally, the brand recently completed the first remodel test at its largest-volume corporate cafe in Orlando. While it’s still early, Verostek said the company is “extremely encouraged” by the trend shift at that location. It will focus on optimizing costs and evaluating the potential impact on sales and traffic before bringing the updates to other stores in the Sunshine State.

“This is a brand that just turned 18 years old and made it to adulthood finally,” Verostek said. “It has not had a remodel program up until this point, so whatever we do should be a significant improvement. We do need more testing. There’s no doubt about it. But we are really, really pleased with how we got out of the ground with this.”

Source https://www.fsrmagazine.com/feature/dennys-wants-to-reclaim-its-value-edge/