The brand is thinking long-term despite pandemic challenges.
Denny’s has had to grapple with the trials and tribulations facing full-service restaurants during a pandemic, of which there were many. Therefore, it might seem an unusual time to invest in a kitchen modernization project of scale.
But Denny’s executives are confident this is the right step forward. The majority of company restaurants, alongside a group of franchised stores, tested a new equipment package this year. Based on positive guest feedback, Denny’s will now expand the project to the entire domestic system beginning in early 2022, with plans to complete it by the end of that year, CEO John Miller said Tuesday.
“The new equipment package will reduce complexity in the kitchen, both improving efficiency and reducing waste,” Miller said. “This simplifies execution for our cooks and results in more consistency for our guests.”
The new equipment also improves current core menu items, added Miller, who said it will impact more than 4.5 million plates every week. Breakfast proteins will have better quality and consistency. Bacon will be crispier and sausage more evenly ground.
Under the initiative, Denny’s will enhance offerings across all dayparts but especially the dinner occasion with new entrees, sides, and baked desserts.
Still, Miller said, the menu can only be so big. Improving food quality and strengthening the ability to manage current shifts was the focus, ultimately saving waste and redeploying labor to help the business smoother.
The total domestic franchise system cost for Denny’s kitchen equipment package as well as its new cloud-based tech platform will be about $65 million. Denny’s said it will allocate roughly $10 million toward installation costs.
“This is not something that we just tested in 2021,” Miller said. “This has gone on for some time. We've been on this long journey of revitalization of Denny's as America's diner and we focused for many years on the breakfast and lunch component.”
For franchisees, timing concerns appear temporary, Miller said.
“I'd say that there was very little discussion around the timing or that there's high wage inflation or high commodity inflation or tough time staffing coming out of the pandemic,” Miller said. “Most franchisees are looking past that to the longer term, which has been a really nice place to be for us.”
Miller noted 25 percent of franchisees shared, given their financial positions, they will pay for the kitchen revamp in cash. To date, 75 percent of company units already have the new equipment.
“When you're able to bulk cook in a high tech new oven, then you free up space on the grill,” Miller said. “And when you free up space on the grill, the cook is not sort of waiting or running up and down the line to be as efficient, so you improve some ticket times and you also improve some waste.”
On average, products will taste better, and fewer foods will have to be thrown away at the end of a shift.
In terms of the new technology platform Denny’s plans to launch, with so much business suddenly going to virtual brands and Denny’s on Demand app, a more frictionless ordering experience was a must.
To date, Denny’s revamped its website and created the app to incorporate upsell and cross-sell capabilities, personalized profiles, and digital wallets for rewards. Since relaunch, there’s been about 40,000 net new app downloads and 100,000 net new rewards members.
The next step in Denny’s technology transformation is a cloud-based launch next year. The platform is expected to be fully rolled out by the end of 2023 and will include waitlist and table management capabilities and lay the groundwork for the next generation of customer experiences, Miller said.
“In spite of all the things that are challenging in the environment, our franchisees have some pretty enthusiastic body language about the investments we're making in the brand and the outlook for the future,” Miller said.
Throughout the past quarter, Denny’s made strides on its previous mission to get more stores adequately staffed and open 24 hours. Since July, Denny’s transitioned 90 more units to full-day service. Miller said there’s been improvements in staffing although he expects it to still play out over a few more quarters. “This is going to take a little while, but there is momentum,” Miller said. “It is improving.”
Even though Denny’s saw a decrease in same-store sales by 0.1 percent domestically compared to 2019 in Q3, comps were up 0.8 percent in October. That was with only 45 percent or so of Denny’s domestic system operating 24/7.
Currently, about 70 percent of Denny’s domestic system is operating, on average, at least 18 hours per day, a 15 percentage point increase from July. Eight percent of restaurants are running full tilt hours during the weekend.
Of those stores open 24 hours, same-store sales grew 11 percent versus 2019 in Q3. Those with limited hours declined 9 percent.
To get restaurants back on track and operating at their prior 24/7 capabilities, Denny’s launched its second national hiring tour, using its relationships with Historically Black College and Universities, the National Urban League, and the National Society of Hispanic MBAs.
Across the industry, as supply chain issues pulse, restaurants have been forced to hike up menu prices. Denny’s is no exception. But the exact pricing varies based on labor inflation across states.
“With staffing challenges, as you can imagine, filling the dining rooms, it's paramount that we fill with full priced guests,” Miller said. “The focus on value sort of disappeared across the industry, in general, not just full service, but just pretty much across the entire industry. So, that's given some buoyancy to check.”
The normal process of restaurants stimulating traffic through value is missing industry-wide, Miller said. Having experienced 10 percent commodity inflation during Q3, Denny’s expects this current trend to continue into 2022 and taper down sometime that year.
Off-premises business has held at 20 percent of sales compared to its pre-pandemic 12 percent mix. And Denny’s two new virtual brands, The Meltdown and Burger Den, delivered about 3 percent in incremental sales for the overall system.
“These brands provide opportunities not only at dinner and late night to leverage underutilized labor, but we continue to see a meaningful number of transactions during the week versus the weekend,” Miller said. “Our teams have accomplished this while navigating persistent industry wide staffing challenges that have impacted our ability to execute at our highest potential.”
Overall, the third quarter started out strong for Denny’s as consumer confidence rose and families enjoyed summer vacations. But growing Delta variant COVID cases shut down the progress in dine-in traffic in August and September.
And then, just as swiftly, the lower number of cases in October led to a return in dine-in transactions, the company said. So much so Denny’s reached its highest level since the pandemic began, with same-store sales surpassing 2019 figures. Half of the domestic system brought in positive comps in October versus 2019.
Even though commodities, wage inflation, and consumer confidence continue to take Denny’s, and full service more broadly, on a roller coaster, Miller said October looked more promising as the Delta variant started to subside.
But while Miller said both the company and franchisees have excitement for the future, there is one restaurant dilemma that continues to inflict the most pain to Denny’s bottom line.
“They [franchisees] will say that the staffing challenge is their No. 1 challenge,” Miller said. “Commodity and wage inflation runs right behind that, and the rest of these challenges, they're a lot less concerned about.”
“Whether it's a pandemic recurrence or lockdowns or vaccine mandates or political environment or all the kinds of things that sort of show up on the radar over the last year to year-and-a-half, they're way lower and it's really more about staffing,” Miller added.
The current staffing shortage makes it too early for Denny’s to predict what the next year will look like, but franchisees remain dedicated to development, Miller said.
In the beginning, California was Denny’s most concerning market, but their sales are coming back quicker, even outperforming all the other states in the country. Now, some of the Midwest and Pacific Northwest markets are lagging.
“They want to meet their development commitments,” Miller said. “And at the same time, I'd say because of staffing, they're a bit more wary about the pace at which those things kick back in. As staffing challenges abate, confidence returns.”
During Q3, Denny’s opened seven franchise restaurants, including four international locations in Canada. The company has around 75 remaining commitments from its refranchising strategy.
Also throughout Q3, company restaurant sales grew 45.9 percent to $46.5 million. Franchise and license revenue increased 30.9 percent to $57.3 million.
