FDD Talk 2018: Denny’s Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk 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 2018 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Denny’s franchise, based on Items 5 and 6 of the company’s 2018 FDD

• Section IV – Number of franchised and company-owned Denny’s outlets at the start of the year and the end of the year for 2015, 2016, and 2017, based on Item 20 of the company’s 2018 FDD

• Section V – Presentation and analysis of Denny’s financial performance representations, based on Item 19 of the company’s 2018 FDD, including information on the:

• 2017 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 the 163 Denny’s restaurants owned and operated by the company in the United States during the twelve-month period beginning December 29, 2016 and ending December 27, 2017, excluding only those restaurants which were open for only part of such period

• 2017 average sales for the 163 company-owned and 1,379 franchised Denny’s restaurants that were open the entire year

Section I – Background Information

19 Things You Need to Know About the Denny’s Franchise

Expands Digital Ordering Network With Amazon Alexa

1.  In early March 2018, Denny’s announced that it had teamed up with Amazon to further expands its digital ordering network, called Denny’s on Demand, with the addition of an Amazon Alexa voice ordering skill. Denny’s is the first family-dining brand to partner with Amazon Alexa.

2.  John Dillon, chief marketing officer of Denny’s, said, “Since our launch of Denny’s on Demand last May, we have seen a clear and growing demand for greater convenience from our guests. Our digital ordering sales are continuing to grow, and we are seeing the benefit that digital ordering technology is bringing to both our restaurants and our guests. We are pleased to continue building on our momentum, offering more and more of our guests a taste of Denny’s available at their fingertips with the introduction of ordering by Alexa.”

3.  At the time of the announcement, Denny’s skill for Amazon Alexa went live and allows Denny’s customers to place their order directly via Amazon Alexa from the comfort of their own homes. After enabling the skill in the Alexa app and linking their Denny’s account and payment information, customers can simply speak command prompts that will activate Amazon’s cloud-based voice service, Alexa.

4.  From there, the order will be sent directly to their nearby Denny’s restaurant, whether for pickup or delivery (at participating restaurants). The skill also provides estimated pick-up times and allows guests to re-order recent menu items.

Partners With New Star Wars Movie to Help Fight Childhood Hunger

5.  To celebrate the latest film in the Star Wars franchise, Solo: A Star Wars Story, Denny’s launched a promotional campaign for the movie at the beginning of April 2018. As part of the campaign, Denny’s offered a variety of movie-inspired items, including a new menu and exclusive Solo: A Star Wars Story trading cards. All net proceeds from the sale of the trading cards benefited Denny’s longtime partner, No Kid Hungry.

6.  John Dillon, chief marketing officer of Denny’s, said, “We are thrilled to collaborate with the team at Lucasfilm and No Kid Hungry for the much-anticipated release of Solo: A Star Wars Story. We’re incredibly excited to join forces and bring America an out-of-this-world campaign that will not only feed the excitement of every Star Wars fan and Denny’s guest, but will also do some good along the way by helping fight childhood hunger and raise awareness for this important mission.”

7.  Each exclusive trading card pack contained 12 different character cards, featuring Han Solo, Chewbacca, Qi’ra, Lando Calrissian, and more. The card packs cost $3 and also came with a Denny’s coupon for future use. Denny’s guaranteed that it would donate at least $1 million to No Kid Hungry from the money the brand raised through the sale of the cards.

8.  Denny’s special menu included the Co-Reactor Pancakes, featuring fresh strawberries, strawberry sauce, and whipped cream, plus a side of Crystal Crunch Rocks and a pitcher of warm citrus sauce to pour over the pancakes; the Blaster Fire Burger, which offered up chipotle Gouda cheese, bacon, and spicy Ghost Pepper sauce atop a hand-pressed 100 percent beef patty; along with the new Two Moons Skillet and Denny’s Lightspeed Slam. Guests were also able to activate their taste buds by adding a side of Crystal Crunch rocks to their favorite Milk Shake.

9.  In addition to the special trading cards and new menu, customers were able to enjoy their drinks in one of Denny’s Limited Edition “Solo: A Star Wars Story” collector cups featuring characters from the film and topped with a Millennium Falcon lid. The promotional campaign ran until June 26.

Expands International Footprint

10.  Over the past few years, Denny’s has continued to expand its global portfolio with the opening of new restaurants in untapped international markets. In late 2017, Denny’s expanded into the United Kingdom and Guatemala. The United Kingdom agreement marks Denny’s debut into the European market and Guatemala is the brand’s 13th international market.

11.  As part of the UK agreement, Denny’s will open 10 locations in the United Kingdom over the next 10 years. At the time of the announcement, Denny’s said that the first UK restaurant was expected to open in Wales by the end of 2017.

12.  John Miller, president and CEO of Denny’s, said, “We believe there is considerable opportunity to grow the brand internationally, and are confident that Leon Esfahani and his team’s experience with leading restaurant brands makes him the right partner to introduce the Denny’s experience to the United Kingdom, and more broadly Europe, for the first time. Our expanding global footprint has attracted new interest from a number of franchisees and we continue to have an active pipeline for growth as we gain momentum beyond North America.”

13.  Denny’s new Guatemala restaurant opened around the end of November 2017 and is located near the country’s main airport. The new restaurant is owned and operated by Honduras-based franchisee, Comidas Especializadas S. de R.L., led by experienced franchisee Roberto Larach, an existing Denny’s franchise partner.

14.  Larach said, “For years, we have been bringing American restaurant concepts to Central America and are thrilled to share Denny’s with the residents and visitors of Guatemala. Denny’s is an outstanding brand, with a great menu and a business model like no other brand in the industry. With restaurants in Honduras and El Salvador, Guatemala was the natural next step in our plan to bring the brand to more guests in the region.”

Company History

15.  Denny’s, which started out as Danny’s Donuts, was founded by Harold Butler and Richard Jezak in Lakewood, California in 1953. The first location was successful from the start and Butler and Jezak were able to grow Danny’s Donuts to six stores within three years. In 1956, Jezak left the company and Butler shifted the concept from a donut shop to a coffee shop. Butler also renamed the chain Danny’s Coffee Shop and changed its operation to 24 hours.

16.  By the end of the 1950s, there were 20 Danny’s Coffee Shop restaurants and Butler changed the company’s name once again to avoid confusion with another California restaurant chain. Danny’s became Denny’s Coffee Shop and by the time franchising officially began in 1963, the chain’s name was shortened to Denny’s.

17.  In 1987, Denny’s was acquired by Trans World Corporation (TW Corporation) and its headquarters was moved to Spartanburg, South Carolina where it still remains today. After private equity firm Kohlberg Kravis Roberts acquired a 47% interest in TW Corporation (later known as The Flagstar Companies) in 1992, TW Corporation was encouraged to sell non-core businesses and focus primarily on Denny’s.

18.  Eventually, Denny’s operations dominated its parent company that it changed its name to Denny’s Corporation. Today, Denny’s has grown into a large international franchise with over 1,700 restaurants all over the world.

Entrepreneur’s Franchise 500

19.  Denny’s ranked No. 76 on Entrepreneur’s 2018 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Denny’s franchise costs, based on Item 7 of the company’s 2018 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on Denny’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2018 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2015

• Outlets at the Start of the Year:  1,435
• Outlets at the End of the Year:  1,435
• Net Change:  0

2016

• Outlets at the Start of the Year:  1,435
• Outlets at the End of the Year:  1,441
• Net Change:  +6

2017

• Outlets at the Start of the Year:  1,441
• Outlets at the End of the Year:  1,429
• Net Change:

Company-Owned

2015

• Outlets at the Start of the Year:  161
• Outlets at the End of the Year:  164
• Net Change:  +3

2016

• Outlets at the Start of the Year:  164
• Outlets at the End of the Year:  169
• Net Change:  +5

2017

• Outlets at the Start of the Year:  169
• Outlets at the End of the Year:  178
• Net Change:  +9

Section V – Financial Performance Representations (Item 19, 2018 FDD) and Analysis

Part 1 – Operating Performance of Denny’s Company-Owned Restaurants

• This section presents the actual operating results with respect to sales and selected costs of 163 Denny’s restaurants owned and operated by the company in the United States during the twelve-month period beginning December 29, 2016 and ending December 27, 2017, excluding only those restaurants which were open for only part of such period.

• The three tiers are comprised of 54 Denny’s restaurants in the top and middle tiers and 55 in the bottom tier.

• The schedule is based upon data received from the company’s employees at each restaurant who, in the normal course of business, collect such data.

• Net sales represent all revenue derived from the restaurants, including all sales of food, goods, wares, merchandise, and all services made in, upon, or from the restaurants, including catering services, whether for cash, check, credit, or otherwise, without reserve or deduction for inability to collect the same.

• Net sales do not include rebates or refunds to customers or the amount of any sales taxes or other similar taxes that restaurants may be required to collect from customers to be paid to any federal, state, or local taxing authority.

• Denny’s is not able to provide similar information relating to Denny’s restaurants operated by franchisees because the company does not have reliable information relating to costs incurred by franchise operators.

• However, during the same period (a twelve-month period beginning December 29, 2016 and ending December 27, 2017), the average Net Sales of all Denny’s restaurants (including both franchised restaurants and restaurants owned and operated by the company) was $1,667,000. This figure excludes any restaurant that was open for only part of such period.

• The restaurants included in this section have been open for periods as short as one year and as long as 59 years. No restaurant has been open for less than twelve months.

• All dollar figures are in thousands.

Top Third (54 Restaurants)