Denny's plans to close up to 150 restaurants by 2025, joining the growing ranks of U.S. dining chains that are weeding out poorly performing locations from their portfolios as they face economic headwinds.
Officials of Spartanburg, South Carolina-based Denny's, owner of its namesake chain as well as Keke's Breakfast Cafe, said they're closing 50% of those troubled eateries this year and the remainder in 2025. The restaurant operator unveiled its real estate optimization drive, which includes some location remodels, during an investor day presentation given Tuesday in New York for its franchisees and Wall Street.
"To be perfectly transparent is we've shed, and will continue to shed, a good number of Denny's restaurants," said Robert Verostek, the company's chief financial officer.
Denny's, as have other chains that are slashing their fleets, talked about how difficult the current macroeconomic environment is, coming out of the pandemic and dealing with financially struggling consumers — particularly low-income ones — cutting back spending in stores as well as in full-service restaurants. Denny's locations are also most concentrated in California, where there is now a high-minimum wage for workers, increasing labor costs for restaurant operators.
The year has been so challenging that there has been a number of Chapter 11 filings by restaurant chains, including Red Lobster, Tijuana Flats, Buca di Beppo, World of Beer, Roti, BurgerFi, and Rubio's. Red Lobster managed to survive and has already emerged with a new owner and a smaller physical footprint. And Denny's, whose tag line is "America's diner," is up against a growing cadre of rivals in the breakfast sector.
"Denny's continues to be a victim of increasing competition from breakfast/lunch concepts like First Watch and Snooze, and A.M. Eatery," Darren Tristano, CEO of restaurant consultant FoodserviceResults, told CoStar News in an email Wednesday. "They are challenged by the efforts to maintain breakfast, lunch and dinner day parts. Although they continue to provide value pricing, their customer base, with a strong boomer generation, continues to age and look for better quality offerings. In addition to full-service competition, fast-casual restaurants like Panera offer healthy options and drive-through convenience."
Denny's didn't immediately respond to an email from CoStar News on Wednesday seeking a comment on Tristano's remarks.
In her presentation, Denny's CEO Kelli Valade offered several examples of the impact of the "choppy" economy and how diners are paring back their meal checks, a situation the company doesn't expect to end soon.
"People are figuring out what to do and how to manage their check," Valade said. "And you've heard it over and over again from many brands in the last few quarters, but [consumers] will go out less often. They will eat smaller portions or order less expensive items. ... We're seeing a lot more adults order kids meals, right?"
Denny's will be cutting its total namesake store fleet of about 1,525 worldwide locations by 10%. It has 167 restaurants internationally in its portfolio, with over 50%, or 86, in Canada.
Denny's conducted a extensive review of every restaurant in its domestic portfolio, according to Stephen Dunn, the company's chief global development officer.
"Through the disruption of the pandemic, most of our system had very nice sales gains and the top quintile saw that," he said. "However, the bottom quintile was the absolute opposite direction in our brand."
Some members of that group of 256 underperforming restaurants are old, foot traffic and commercial areas have changed, and people who went to quick-service chains during the pandemic never came back to those Denny's locations, according to Dunn.
"It's never easy to close restaurants," he said. "It's a challenge and you work with external factors, landlords and the like and of course you're dealing with lives. But we've realized that closing underperforming restaurants is strategically advantageous to a number of our franchisees as it strengthens the bottom-line cash flow for the long term."
The roughly other 100, or 40%, of the 256 underperforming locations not slated to close will undergo "rehabilitation" to boost their sales. That includes comprehensive operations business reviews, improved customer-service training efforts, incremental local store marketing efforts, and reviews of their lease terms for potential savings.
New Denny's restaurants are outperforming the chain's average by roughly $400,000, according to Dunn.
"This is the best validation by the guest of any legacy brand, that they're still coming to your restaurants," he said.
Denny's also reported its third-quarter earnings Tuesday, which reflected its fifth consecutive quarter of year-over-year drops in same-store sales. Tristano said he thinks the company's woes are far from over.
"With higher price points due to wage and food inflation, the value proposition for family-style chains like Denny's is getting lower," he said. "Lastly, I would expect to see Denny's shed underperforming stores as an ongoing annual process."
Denny's growing Orlando, Florida-based Keke's, acquired in May 2022 for $82.5 million, just opened its 62nd restaurant, according to that chain's president, David Schmidt. The majority of the Denny's and Keke's locations are franchises.
"Keke's is ready for national expansion," Schmidt said, adding that the chain has 140 development agreements in the pipeline.