Denny’s Corporation (DENN) has recently forged a deal with Great China International Group (“GCIG”) to expand its footprint in one of the most dynamic markets in the world. Per the agreement, the group will set up 50 Denny’s restaurants in China over the next 15 years.
The terms of the deal were not disclosed. The outlets will be located in six provinces of southern China namely Guangdong, Fujian, Guizhou, Jiangxi, Chongqing and Sichuan. The first unit is slated for a 2013 opening.
The latest alliance replicates management’s intent to make China one of the prime markets for international expansion considering its stepped-up economic growth and under-penetration of quick-service restaurants in North American countries. The deal also marks the company’s entry into China and the brand’s biggest international expansion plan to date.
Operating 1,680 franchised, licensed, and company-owned eateries globally, Denny’s presently remains on an expansion spree both on domestic and international fronts. Apart from last month’s entry into the Dominican Republic, Denny’s has its presence in other south and Latin American countries like Costa Rica, Mexico, Honduras, Curaçao and Puerto Rico.
According to the company, the brand has so far been well accepted abroad. In fact, Denny’s intends to capitalize on this opportunity by expanding in new as well as existing markets. The latest China deal with GCIG is one such effort.
GCIG, one of the largest business groups in China, has superior local market knowledge and a proven track record of venturing into industries as diverse as finance, real estate, commercial development, hotels, food service, television media, energy resources and port logistics.
The group has also developed some eminent Western hotel brands like Hilton and Sheraton. The franchise partner also seems excited about working with one of America’s largest full-service family restaurant chains encouraged by strong international response to the brand.
However, the Chinese market is not free from competition. Following the growing demand for American dining brands, several U.S. restaurateurs like Yum! Brands Inc. (YUM) and McDonald’s Inc. (MCD) are currently serving the market with a much wider scale of operation.
In fact, since the last couple of quarters, China is driving Yum! Brands’ growth story. In February, Yum! commented that Chinese consumers are likely to double over the next decade as urbanization steps up. Growing income for the larger populace also makes China a lucrative investment proposition. However, to be distinctive in this competitive market, Denny’s will have to bring about varieties in menu to attract consumers from various social strata as well as focus on value offerings.
Denny’s currently retains a Zacks #3 Rank that translates into a short-term Hold rating. We are maintaining our long-term Neutral recommendation on the stock.
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