Denny’s is still shrinking
Dive Brief:
Denny’s closed 57 units in 2023, for a net decrease of 29 units, according to the chain’s most recent earnings release.
It now takes $1.2 million in annual sales for a Denny’s unit to be profitable enough to sustain itself, up from $1 million, Denny’s Chief Financial Officer Robert Verostek said on the chain’s earnings call last week.
In response to an analyst’s question, Verostek said that the average sales of the lowest quintile of stores outpaced the $1.2 million annual target, meaning that a low percentage of Denny’s units are below the break point for closures. According to the chain’s earnings release, Denny’s anticipates net unit closures of 10 to 20 units in 2024, which would slow the rate of closure relative to 2023.
Dive Insight:
The brand’s system has shrunk from a high of 1,735 in 2017, the last year in which Denny’s experienced net unit growth, to a low of 1,573 at the end of 2023. This change translates to a loss of about 9% of its store count, not counting Keke’s Breakfast Cafe, which Denny’s acquired in 2022.
In late 2023, a 10-unit Denny’s franchisee filed for Chapter 11 bankruptcy, citing declining sales and high costs. A majority of Denny’s franchised units (65.6%) were operated by 35 franchisees with more than 10 units, and nearly 40% were controlled by just 11 franchisees with 30 or more units in 2022, according to the chain’s most recent annual report. With cost pressures still high in 2024, multi-unit operators could still be at risk for bankruptcy.
In 2023, Denny’s same-store sales rose 3.6%, barely outpacing the general rate of inflation by 0.2%. The chain also lagged behind its price increases, which were 7.5% throughout the year, according to the earnings call. Verostek said the chain’s traffic took a hit of roughly 6% in Q4 2023 versus the year-ago period. The company has forecast same-store sales growth between 0% and 3% for FY 2024.
Denny’s has undertaken a variety of strategies to strengthen its sales in recent years, including a new menu with an accompanying augmented reality promotion, and the addition of monthly challenges and other game-like elements to its loyalty program. Virtual brands and off-premise sales have been a point of particular concentration for the diner chain, as well.
In October, Denny’s said it would expand its market testing of virtual brand Banda Burrito to 90 total stores. CEO Kelli Valade said off-premise sales contributed about 20% of the chain’s sales in the fourth quarter of 2024. In early January, Denny’s said it would begin using virtual brand platform Franklin Junction at 250 restaurants. The chain has also operated two in-house virtual brands, The Burger Den and The Melt Down, since 2021.
But the impact of virtual brands on the company’s sales are questionable. According to an investor presentation included in Denny’s 8-K filing for its Q4 2023 earnings release, virtual brands have contributed about $1,000 per store, per week to Denny’s same-store sales, an amount that has not changed much since Q2 2021.
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