In her first year as CEO, Kelli Valade has taken a “laser-like focus” to identifying Denny’s strengths and opportunities for improvement, as well as gaining a better understanding of its guests and their expectations for the legacy chain.
Armed with extensive customer research, the company is evolving and enhancing its existing strategies into a new framework that will guide its growth going forward. That initiative is dubbed CRAVE, an acronym for “Creating leading-edge solutions with technology and innovation; Robust new restaurant growth as a franchisor of choice; Assembling best-in-class people and teams through culture, tools, and systems; Validating and optimizing the business model to maximize restaurant margins; and Elevating profitable traffic through the guest experience and uniquely craveable food.”
“More than a new mnemonic device, CRAVE is a roadmap to how we think, operate, and ultimately, how we evolve and improve the total guest experience,” Valade said during Denny’s Q2 earnings call on Tuesday.
The company identified key guest cohorts that present significant growth opportunities. Valade didn’t disclose too many details about those findings, but she did say millennials and Gen Z emerged as areas of focus. The research also validated the primary motivators for those customers, including “craveable food at a reasonable price” along with convenience in the form of late-night hours and off-premises options.
The company delivered on the value proposition in Q2 with strong demand for the Super Slam deal it reintroduced earlier this year. Value items accounted for 16 percent of sales, up slightly from 15 percent in the previous quarter.
Systemwide same-store sales were up 3 percent year-over-year. The company attributed much of the comps growth to pricing of approximately 8.5 percent, half of which was carryover from fiscal 2022. Company-operated margins were 15.1 percent in the quarter versus 8.1 percent in the same period a year ago. Commodity inflation fell below double digits for the first time in two years, moderating sequentially from 10 percent in Q1 to 1 percent in Q2. Labor inflation was flat with the previous quarter at 4 percent.
With roughly 70 percent of the food basket locked, Denny’s is projecting commodity inflation between 1 percent and 3 percent for the full year. Labor inflation is expected to be approximately 4 percent. The company took pricing in January, March, and June. And while another round of increases is slated for mid-Q4, pricing is expected to moderate in the back half of the year as inflationary pressures ease.
“We are trying to be as judicious as possible,” CFO Robert Verostek told financial analysts during the earnings call. “June was by far the lowest that we’ve seen in any of our pricing cycles, and we roll off 1.5 points in carryover pricing in Q3.”
The CRAVE framework includes a new pricing model that will help protect Denny’s value leadership, and the company is working to align franchisees behind that strategy, he added.
“The lower the price, the better the traffic,” Verostek said. “We continue to guide and have frequent conversations with our franchisees about that correlation.”
Another lever for driving traffic is the brand’s revamped loyalty program. Denny’s worked with retail tech companies Sparkfly and Olo to introduce personalization and gamification into the experience via exclusive challenges guests can complete to unlock additional rewards. Over 200,000 customers have signed up since the launch in late June, boosting total membership to more than 6 million members.
The company is also introducing a fresh approach to menu development as part of its enhanced strategic focus. Valade said Denny’s delivered on craveability in Q2 with the return of its Baconalia menu after a 10-year hiatus. The program is putting the chain’s recently installed kitchen equipment to use with a variety of bacon-centric items, from loaded pancakes, burgers, and sandwiches to dessert items like milkshakes and ice cream sundaes.
Baconalia serves as an example of the type of menu innovation Denny’s will pursue under the CRAVE framework. The chain also plans to lean into simplification. It is in the early stages of downsizing its offerings with the goal of strengthening execution in the kitchen. The changes will start with pared-down customization options before expanding into other areas.
“Craveable food doesn’t have to be complicated, and there’s great work underway that will provide a streamlined menu that will be a huge win for our guests and our operators,” Valade said. “You’ll see changes to our October menu and then even more changes to our March menu.”
On the convenience front, Denny’s off-premises channel stayed consistent at 19 percent of sales, thanks in large part to ongoing strength across its two virtual brands. Three-quarters of the system is now operating at 24 hours. That’s a modest improvement from the end of Q1, when 71 percent of the system was open around the clock, but still a ways away from the goal of getting 90 percent of restaurants back to 24-hour service.
Along with a slew of guest-facing initiatives, the CRAVE framework includes a renewed focus on the employee experience. To that end, Denny’s is launching a four-part career development program called GAIN. It provides employees with a free solution for earning their GED as well as opportunities to earn credits at partnering universities, plus access to classes aimed at teaching life skills like personal finance and conflict management. Additionally, the company will offer career pathways for high schoolers so that students can gain employment, learn within the hospitality industry, and develop a long-term career path.
“We’re really pleased with the progress we’ve made with staffing and reduced turnover rates,” Valade said. “We believe our commitment to the GAIN program will continue that positive momentum.”
The company also has completed comprehensive research on Keke’s Breakfast Café. It landed on the brand’s scratch-made ethos and generous portion sizes as key differentiators, encapsulated with a new “Mornings from Scratch” tagline. It plans to execute against those elements with new menu offerings and updated restaurant designs as it gears up for expansion.
Keke’s first step outside of its home state of Florida will be a company-owned unit in Nashville, followed by a handful of additional corporate stores in that city as Denny’s works to refine the business and build out a support structure. The company is also starting to bring the concept into its larger chain’s franchise system.
The leadership team has been traveling and doing roadshows with Denny’s franchisees to launch the CRAVE framework. They’ve been receiving new requests and inquiries from operators to learn about the Keke’s opportunity while on the road, and they’re passing on names to the development team as a result.
“We have recently conducted over a dozen meetings with Denny’s franchisees who are interested in the Keke’s brand,” Verostek said. “A similar number of meetings with Denny’s franchisees are scheduled to take place over the next few weeks as we prepare to accelerate the growth of Keke’s over the next several years.”
One franchised Keke’s unit opened in Q2, pushing the total footprint to 47 franchised units and eight company-owned units. Denny’s saw nine franchised units open and 12 franchised units close. It ended the quarter with 1,525 franchised locations and 66 company-owned locations. The company expects to add 35 to 45 new restaurants in fiscal 2023, including eight to 12 Keke’s openings that will skew toward the back half of the year. That amounts to a consolidated net decline of 15 to 25 restaurants.
Verostek said the closure rate could come down next year if inflationary pressures continue abating and margins continue improving across the franchise system.
“We are cautiously optimistic that if these trends continue, we can move back to that net neutral place that we had been in for quite some time–slightly flat to slightly growing,” he said.