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FDD Talk 2016: The Denny’s Franchise Opportunity (Financial Performance Analysis, Estimated Costs, and Other Important Stuff You Need to Know)

by Franchise Chatter on July 26, 2016

in Casual-Dining Restaurant Franchise, Diner Franchise, FDD Talk 2017: Food Franchises, Franchise Earnings

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Denny's Franchise Photo by AnnaleeBlysse

In this FDD Talk 2016 post, you’ll learn the following:

  • Section I – Background information on the Denny’s franchise opportunity, including relevant news updates
  • Section II – Estimated initial investment for a Denny’s franchise, based on Item 7 of the company’s 2016 FDD
  • Section III – Presentation and analysis of Denny’s financial performance representations, based on Item 19 of the company’s 2016 FDD, including information on the:
  • 2015 average net sales; food costs; crew labor; management labor; gross profit; taxes/fringe benefits; utilities; repairs and maintenance; other expenses; and EBITDA before royalties, advertising, occupancy cost, and management fees for the Top Third, Middle Third, and Bottom Third of 158 Denny’s restaurants owned and operated by the company in the United States during the twelve month period beginning January 1, 2015 and ending December 30, 2015, excluding only those restaurants which were open for only part of such period
  • 2015 average sales for the 158 company-owned and 1,384 franchised Denny’s restaurants that were open the entire calendar year

Section I – Background Information

Remodels Boost Sales

In 2013, Denny’s began a multi-year brand revitalization with plans to remodel locations in what they are calling their “Heritage” layout. As of 2016, 36% of Denny’s locations have been remodeled.

The remodels have proven to be highly effective and have given the Denny’s brand a big boost. The chain reported a 16.6% increase to their net income for the first quarter of 2016. Domestic same-store sales have also seen a 2.5% increase in the first quarter. Denny’s expects the remodels to continue having positive effects on income for the rest of the year.

Menu Changes Reflect New Consumer Demands

Not only has Denny’s been working on a physical makeover of their locations, they have also initiated plans to use higher quality, sustainable, and ethical ingredients. As consumer concerns over ethical sourcing in the food industry grow, Denny’s has committed to using only cage-free eggs in all its U.S. locations by 2026. Other restaurants like McDonald’s and Dunkin’ Donuts have also stated that it would take about a decade to ensure all their eggs are cage free.

The move toward sourcing cage-free eggs is in line with Denny’s commitment to ethically sourcing other animal products, including pork, turkey, and beef. Denny’s menu changes also include using premium ingredients like USDA Select beef, wild-caught and sustainable Alaskan salmon, fresh-cut seasonal fruit and vegetables, and seven-grain bread.

Denny’s Taps Into the Youth Market

Denny’s has also given their kid’s menu a makeover by partnering with DreamWorks to offer interactive games, puzzles, and digital content featuring characters from DreamWorks’ movies and TV series. They are also offering customizable, healthier options on the kid’s menu approved by the National Restaurant Association’s Kids LiveWell healthy dining program.

In addition to all the changes to their existing menu and locations, a fast-casual spin-off concept called The Den is in the works. The Den, which hopes to draw in the millennial crowd, already has locations at seven U.S. colleges. In early 2015, the first off-campus location opened in San Diego. In addition to a few Denny’s staples like the Grand Slam, the Den offers veggie, turkey, and beef burgers, salads, burritos, and pretzel bites.

From Danny’s Donuts to America’s Diner

In 1953, Harold Butler and Richard Jezak set out to offer the best donuts and coffee and opened Danny’s Donuts in Lakewood, CA. A few years later, after Jezak left, Butler set the foundations for the Denny’s we know today by changing its operations to 24 hours and serving up breakfast, lunch, and dinner.

The restaurant went through a couple name changes before finally becoming Denny’s in 1961. Though several U.S. locations already existed, franchising did not begin until 1963.

For over 60 years, Denny’s has continued to open locations both domestically and internationally and as of 2016 has over 1,700 locations worldwide. The company continues to grow and seeks to open locations in Africa, Asia, Australia/New Zealand, Canada, Central America, Middle East, Mexico, and South America.

Red, White, and Bacon

Denny’s offered a limited-time menu called Red, White, and Bacon that tied in with the movie Independence Day: Resurgence. The menu celebrated bacon by offering dishes that included their new premium bacon varieties: thick-cut Honey Jalapeño Bacon, hickory-smoked bacon, and turkey bacon.

Other items included the Triple Bacon Sampler; a Honey Jalapeño Bacon Sriracha Burger; the Loaded Bacon, Steak, and Potato Skillet; and Bacon Cheddar Tots. There are also two new drinks just in time for summer:  the Berry Blue Lemonade and the Lemon Berry Smoothie.

Consistently in the Top 100

With over 60 years in business, Denny’s continues to hold its place as “America’s Diner” as it continues to rank in the top 100 of Entrepreneur magazine’s Franchise 500. The diner-inspired family restaurant comes in at No. 9 on Entrepreneur’s 2016 Franchise 500 rankings; down from No. 8 in 2015.

In the past decade, Denny’s has never dipped below the top 100 and has maintained a spot in the top 10 since 2011. Their lowest rank was No. 61 in 2006 and their highest place was No. 7 in 2012.

Section II – Estimated Costs

  • Please click here for detailed estimates of Denny’s franchise costs, based on Item 7 of the company’s 2016 FDD (updated).

Section III – Financial Performance Representations (Item 19, 2016 FDD) and Analysis

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