Denny's Claws Back to Pre-COVID Sales with More 24/7 Operations

About 40 percent of Denny’s U.S. restaurants are open 24 hours a day.

August 5, 2021 Suzanne Blake

Historically, Denny’s situated itself as the 24/7 hour American diner. To reach its full potential again post-COVID, the brand must return to those roots.

The brand’s 2021 Q2 results proved that. Same-store sales at domestic units operating 24/7 increased 12 percent compared to 2019, while limited-hour locations saw comps fall 10 percent. Systemwide, domestic same-store sales declined just 1.2 percent compared to 2019. Put another way, Denny’s achieved roughly 99 percent of 2019 sales in Q2.

About 40 percent of Denny’s domestic restaurants are open 24 hours a day. Denny’s witnessed a 5 percent increase in effective operating hours since the beginning of 2021 to its current level of 19 hours per day, but this is still a far cry from its core 24/7 positioning. If more Denny’s locations return to 24/7 service, the brand will likely see a boost from Gen Z consumers, who over-index to the later dinner and late-night dayparts, Denny’s CEO John Miller said Tuesday during Denny’s earnings call.

And staffing remains the prime obstacle to get there. Denny’s is just one of many companies affected by the labor shortage. Eating and drinking places were 1.3 million jobs short of where they were in February 2020, according to the Bureau of Labor Statistics.

But Denny’s refused to sit idle waiting for hiring challenges to clear up. Instead, the brand revamped its career website and led a national hiring tour, bringing in 13,000 applications for 20,000 open positions.

“Spirits are lifting up with the staffing challenges that we can close the gap on that,” Miller said. “It did not materially change so far in terms of the number of 24-hour locations, but we are on our way, and we expect that as we work throughout August, that continues to improve.”

By September and October, Denny’s expects to fully close the labor and 24/7-diner gap. This requires continuous action by the company to ensure corporate stores and franchises alike are doing what they can to attract employees.

“It's important that we continue,” Miller said. “Any good company and the good companies we compete with are going to continue to be vigilant about holding and building and developing their staff and the career opportunities within their organization.”

In the past, Denny’s refrained from telling franchisees exactly what their employee support programs should look like. But the past few months of the labor crisis proved brutal, so Denny’s blurred the lines a bit. Now, the company works to support franchisees in hiring efforts with new technology while sharing recruiting best practices concerning starting wages and benefits.

Miller acknowledged the hiring battle Denny’s and other restaurants face today goes beyond expanded unemployment benefits. Lingering nerves about virus spread are still a vital part.

“As it is today, a number of people came through the pandemic, cut their expenses, and found different ways to make it through that environment. And so they're maybe not quite as ready to go back to work just yet. So, again, I think all these things abate in time,” Miller said. “The answer is, time will tell. We're confident it normalizes, but it doesn't happen like snapping your fingers.”

Denny's

By September and October, Denny’s expects to fully close the labor and 24/7-diner gap.

For the restaurants open 24/7, Miller said consumers are being reintroduced to the brand, especially during the late-night daypart. Quick-service category sales held steady throughout pandemic, thanks in large part to the drive-thru and delivery/takeout acceptance among consumers. But coming out of the past year and a half, guests are ready to indulge in more full-service experience again.

“With that comes a little bit more of a cabin fever or an interest to try some full-service meals that are maybe different than a handheld drive-thru type of meal,” Miller said. “So with that, I think we have some stickiness that remains post-pandemic that's driving this transaction.”

The off-premises sales Denny’s acquired throughout the pandemic may very well stick: takeout went from 12 percent to more than 20 percent from 2019 to 2021, although the Q2 season brought the metric down a bit.

“We expect that a considerable amount of that continues to persist as part of the new normal of how people trade their meals from takeout, delivery, and dine out away from home,” Miller said. “We expected some of this as people dine in a little bit more, but we do expect it to be really sticky.”

Same-store sales still vary regionally, but California is no longer a burden to the overall comparative performance of the brand like it was in early days of the pandemic. For the past weeks, California was the No. 1 state in performance, with Nevada, Colorado, Texas, Florida, and Hawaii leading the pack as well.

This year, Denny’s joined the extensive list of restaurants entering the virtual brand market. For Denny’s, this meant the launch of The Burger Den and The Meltdown, which together brought an incremental 3 percent boost of average weekly sales. Burger Den is Denny’s first try at a virtual brand. Live in more than 1,100 locations, The Burger Den uses ingredients already available in Denny’s pantries. Launched in April to half of domestic stores, The Meltdown is a DoorDash exclusive sandwich melt brand in about 700 locations.

The Meltdown generates roughly $1,200 in average weekly sales per restaurant, while The Burger Den brings in around $600 weekly per restaurant.

“We're highly confident these are brands that will endure a while, and they're not just a flash to sell some burgers and melts for a short period of time,” Miller said. “They're quite popular, and we get high marks from our third-party delivery vendors saying, this is the kind of product line they're looking for.”

Denny’s virtual brands leverage underutilized labor to maximize kitchen efficiency, Miller said. Denny’s sees a sales increase from the brands particularly during the week and in dinner and late-night dayparts.

About 70 percent of transactions from The Burger Den and 60 percent of transactions from The Meltdown occurred during these dayparts compared to 35 percent of transactions from Denny’s base brand. The virtual concepts also saw around 75 percent of transactions during the weekdays compared to about 65 percent for Denny’s.

Denny's

The Meltdown generates roughly $1,200 in average weekly sales per restaurant.

Ultimately, there are two concepts that factor into Denny’s highest-performing stores: 24/7 service and virtual brand offerings.

And being fully staffed matters. Only the stores with a near full staff can both open 24 hours and take the extra initiative that Denny’s virtual brands bring to the kitchen.

As for the ongoing macroeconomic factors, the recent rise in Delta variant COVID-19 cases marks a new chapter for restaurants in navigating how and whether they should reintroduce social distancing and mask policies.

“It's a challenging time for people,” Miller said. “I think people are trying to sort out what will come next. It introduces a certain level of uncertainty. And so it's the conversation of pretty much every business every day to mask or not to mask.”

So far, Denny’s is not seeing any change in consumer behavior, which Miller believes reflects consumer’s optimism that other methods can be taken besides another broad shutdown.

“I think people have more and more confidence that wherever these rises and spikes came from, they came from large events and 100,000 people gathering or beach parties and the like and not likely coming from responsible, socially distanced restaurants with servers in masks,” Miller said.

Looking at the quarter ahead, July preliminarily saw Denny’s domestic same-store sales jump 2.7 percent above 2019 levels, with a 2.4 percent increase at franchise locations and 6 percent at company locations. Denny’s anticipates Q3 systemwide same-store sales to increase by 2–4 percent.

Denny’s opened three franchises during Q2, including an international location in Canada. But seven franchise locations closed during the quarter, yielding a net decline of four restaurants in Q2 and five net closures year-to-date. Denny’s operates 1,645 units worldwide. This is the lowest year-to-date closures Denny’s had in over a decade.

Franchise profitability continued to improve in July as nearly 90 percent of franchise restaurants exceeded the 70 percent of 2019 sales required to cover both fixed and variable costs.

Altogether, Denny’s total operating revenue increased 164.3 percent to $106.2 million compared to last year.

“We still believe there are market share opportunities on the horizon,” Miller said. “We have an extraordinary group of dedicated franchises and an exceptional Denny's team which makes me very optimistic about the future of this brand.”