The breakfast chain is now hoping to financially motivate operators to get back to pre-COVID hours of operation.
Three months after Kelli Valade became Denny's CEO, she took center stage in September at the chain's annual franchise association convention.
The executive came away from the event with three major initiatives, including a swifter return to 24/7 operations—a battle Denny's has faced for most of the pandemic.
As of November 1, almost 870 of the company's 1,459 U.S. restaurants, or about 60 percent, are operating at 24/7. Same-store sales at these units consistently outperform limited-hour stores by mid-teen percentage points when comparing against 2019. They also bested the BBI family dining index in Q3 by more than 400 basis points versus three years ago. Valade made note that Denny's current issue is similar to what the industry is facing overall. She pointed to Dataessential information that shows roughly 30 to 40 percent of full-service concepts that were open for late night before COVID have not returned to pre-pandemic operating hours. Another Dataessential study found casual-dining restaurants are open almost seven hours less compared to pre-COVID.
"We know guests want to return to normal behavior and have options for dining out late-night, and that's good news for us," Valade told investors during the company's Q3 earnings call.
Denny's launched a modest financial incentive to encourage more franchisees to increase hours to 24/7. The program is tiered, meaning the sooner a store gets to 24/7, the more benefits realized by the operator. This offer will end in early 2023. After that, the brand will enforce its franchise agreement, which states 24/7 operations is mandatory. However, there are some exceptions, like safety, local ordinances, or other cases in which it doesn't make sense to be 24/7. Roughly 5 percent of Denny's U.S. system wasn't 24/7 prior to the pandemic, so the company agreed to review late-night profitability on a case-by-case basis to determine whether more stores shouldn't return to full operating hours. When this review process is finished, Valade estimated another 5 percent will not return to 24/7. In some cases, the chain has offered alternatives, like 24/3 or 24/4.
"Obviously the evidence is there, and the mounting evidence, it continues to be there in terms of the demand," CFO Robert Verostek said. "We've highlighted that over and over again, but the conversation truly has shifted, given the evidence that we've done it at company restaurants, some best practices we've already shared with our virtual hiring events, and our recent campaigns. So the more we've demonstrated that, the more the conversations have shifted to, 'OK, how do we get there?'"
This isn't the first time Denny's has tried financially motivating operators. It did so in Q4 2020, but admittedly, the timing wasn't right, Verostek said.
"If you recall, what was happening back then is states weren't even open," the CFO said. "California didn't even get open fully to on-prem business until really April of 2021. So the timing of that, while it was not ill-concepted, the timing wasn't ideal to really get there. The reality is you fast forward two years and you get to the point that everybody's open. Thankfully, in a way, COVID has really left the common everyday vernacular in large part. It really transitioned to this hyper inflation. So all of the limitations that we were experiencing two years ago really are not in place right now."
Another priority, which directly relates to returning to 24/7, is improving staffing levels. Valade said labor at company stores is now comparable to pre-pandemic levels. Recent hires are showing strong results, and turnover figures are reducing. The brand has driven further participation by establishing a platform for virtual hiring events.
The third area of focus is driving profitability and sales through increasing value. In early September, the company rolled out All Day Diner Deals, a menu featuring 10 meals starting at $5.99 and ending at $10.59. Some examples include the Country Fried Steak Dinner, Fried Cheese Melt Sandwich, Two-Egg Moons Over My Hammy Omelette, and Plate Lickin' Chicken Fried Chicken Dinner.
Denny's U.S. same-store sales increased 1.5 percent in Q3 versus 2021 and grew 1.7 percent compared to 2019. Softer traffic felt at the end of Q2 extended into July, with inflationary pressures weighing on lower-end consumers. But through a combination of consumer confidence increasing in August and the new value menu in September, traffic has taken a positive turn. Denny's average weekly sales per restaurant were $35,100 in Q3, which equates to $1.83 million in annualized AUV. That's an improvement from $33,600 in Q3 2019.
"We are hearing some evidence of trade down from other higher-price brands into categories such as ours," said John Miller, Denny's former CEO. "Likely in the eventuality that this [economy] turns and it becomes more impactful to the economy, then there is some evidence that they'll trade down. We were really, really excited therefore to launch that All Day Diner menu. And it is resonating."
Off-premises sales remained strong in Q3 at roughly 20 percent, still up from the 12 percent seen before COVID. The Burger Den and The Metldown, Denny's two virtual brands, are at a 3 percent mix. The Burger Den is active in more than 1,100 domestic locations, while The Meltdown is in more than 900 U.S. stores.
Denny's opened eight franchised restaurants in Q3, including one international outlet and one for Keke's Breakfast Cafe, which the company acquired for $82.5 million in July. The brunch concept has 53 stores, 45 of which are franchises. All locations are in Florida.