The Invincible Business of Diners
Summary
TLDRThis script delves into the enduring appeal of American diners, iconic for their classic breakfasts and all-day comfort food. It examines three major chains—Denny's, Cracker Barrel, and IHOP—each with unique strategies. Denny's, with its 24/7 service, focuses on reinvigorating sales beyond breakfast. Cracker Barrel, avoiding franchising for quality control, offers a retail twist to the dining experience. IHOP, under Dine Brands, has been complacent, recently pushing beyond pancakes. Despite evolving strategies, diners remain a cultural staple, valued for their consistency and nostalgic comfort.
Takeaways
- 🍽️ Diners are iconic American establishments, offering a traditional and nostalgic dining experience with classic dishes like pancakes, burgers, and milkshakes.
- ⏳ Diners have remained largely unchanged since the 1940s, maintaining a consistent menu, 24/7 operation, and a relaxed atmosphere that appeals to a wide demographic.
- 🏪 The three major diner chains - Denny's, Cracker Barrel, and IHOP - each have distinct strategies to attract customers, with Denny's focusing on a 'come as you are' approach, Cracker Barrel emphasizing Southern classics, and IHOP known for its pancake innovations.
- 📈 Denny's operates primarily on a franchise model, which allows for a wide geographical spread and a business model that is resilient to economic changes, with a steady growth in sales over the years.
- 📊 Cracker Barrel differentiates itself by incorporating a retail element into its business model, offering a unique shopping experience alongside dining, which contributes significantly to its revenue.
- 🍳 IHOP, despite being the largest diner chain, has been less proactive in innovation compared to its competitors, focusing heavily on its pancake offerings and only recently expanding its menu to include non-breakfast items.
- 💰 The diner business model relies on low prices and high volume, using low-cost processed ingredients to maintain profitability while offering a wide variety of menu options.
- 🔗 Denny's has cultivated a positive relationship with its franchisees through active collaboration and feedback, which is unusual in the franchise industry and contributes to its success.
- 📉 While diner chains have seen steady but slow growth, they face challenges in a competitive market where fast-food chains and changing consumer preferences can impact their business.
- 🌐 The diner concept has a universal appeal, offering a familiar and comforting dining experience that has remained popular across generations and cultural shifts.
Q & A
What is the iconic American breakfast meal described in the script?
-The iconic American breakfast meal described includes fluffy pancakes, sunny-side eggs, crispy bacon, golden hash browns, buttered toast, and coffee.
How does the script characterize the typical diner experience?
-The script characterizes the typical diner experience as sitting on tall vinyl stools, being immersed in old-school decor, being serviced by fast-talking waitresses, and watching griddle magic behind the counter.
What are the key elements that have allowed diners to remain consistent since the 1940s?
-Diners have remained consistent with huge menus, 24/7 or late-night operation, traditional human service with pen and paper, simple comfort foods, and a basic, non-judgmental, relaxed atmosphere.
What is the significance of the 'Grand Slam' in Denny's history?
-The 'Grand Slam' is Denny's signature product, offering a plate of 2 eggs, 2 pieces of bacon, 2 pancakes, and 2 sausage links for around $10, and it represents the brand's focus on serving hearty meals at affordable prices.
How does the script describe the relationship between Denny's and its franchisees?
-The script describes Denny's relationship with its franchisees as proactive and positive, with franchisees being able to collaborate with corporate leadership through the Denny's Franchisee Association, which has committees dedicated to various aspects of the business.
What is unique about Cracker Barrel's business model compared to other diner chains?
-Cracker Barrel's business model is unique in that it combines a full-service restaurant with a retail shop, selling distinctive candy, apparel, home goods, and seasonal merchandise, which contributes significantly to its revenue.
How does the script suggest that IHOP differentiates itself from other diner chains?
-The script suggests that IHOP differentiates itself by focusing on dessert-like breakfast items such as cheesecake-stuffed pancakes and cupcake pancakes, and by normalizing eating dessert for breakfast in America.
What challenges has IHOP faced in maintaining its appeal, according to the script?
-According to the script, IHOP faced challenges in maintaining its appeal due to a stagnant focus on pancakes, outdated decor, and unremarkable product offerings, which led to a slow growth in sales and the need to invest in renovations and new products.
How does the script analyze the financial performance of the three diner chains: Denny's, Cracker Barrel, and IHOP?
-The script analyzes the financial performance by discussing the operating margins, sales growth, and revenue streams of each chain, highlighting that while Denny's has a stable franchise model, Cracker Barrel has a high-margin retail business, and IHOP has faced slower growth despite its large number of franchises.
What is the script's perspective on the future of the diner business in America?
-The script suggests that the diner business in America is 'invincible' due to the enduring appeal of simple, familiar, consistent, and predictable food, but also notes that nostalgia is a fragile currency and the industry may not generate rapid or spectacular growth.
Outlines
🍽️ The Timeless Charm of American Diners
American diners are iconic establishments known for their hearty breakfasts and classic dishes like burgers and milkshakes. They offer a nostalgic and comforting experience with their traditional service and decor. Despite the pressures of evolving consumer tastes, diners have remained consistent since the 1940s, offering huge menus, round-the-clock service, and a relaxed atmosphere. They have carved a niche for themselves by providing a predictable and reliable experience, attracting a diverse clientele that values their simplicity and affordability. The episode will analyze the business model of American diners and explore the strategies of three major chains: Denny’s, Cracker Barrel, and IHOP.
🏪 Denny's: The Grand Slam of Diner Chains
Denny's, the oldest and most widespread diner chain, is recognized for its all-day breakfast and the iconic Grand Slam meal. With over 1,600 locations, primarily in the United States, Denny's operates on a franchise model, which leads to variations in pricing. The company has cultivated a positive relationship with its franchisees through the Denny's Franchisee Association, fostering collaboration and shared success. Denny's strategy focuses on competing with fast food for the value-conscious customer, emphasizing its ability to serve hot meals beyond breakfast at affordable prices. The brand has also made efforts to reinvigorate its image by renovating its restaurants and diversifying its menu to appeal to a broader audience beyond breakfast-goers.
📈 Denny's Financials and Market Strategy
Denny's financial performance is driven by a mix of food and drink sales from corporate-run restaurants and royalties from its franchised locations. Despite a decline in the top-line revenue, the company's operating margins are stable, averaging around 13%. Denny's has seen a modest growth in annual sales, with the average franchise grossing $1.7 million in 2022, a 46% increase over 11 years. The company's advertising efforts target seniors, millennials, and Hispanics, with a focus on generating sales from a value menu that competes with fast food prices. Denny's has also explored virtual brands to increase sales during off-peak hours, leveraging its existing menu for delivery apps under different names.
🍖 Cracker Barrel: A Home-Style Dining Experience
Cracker Barrel is a leading diner chain known for its Southern classics and old-fashioned atmosphere. With a focus on quality and affordability, Cracker Barrel operates without franchising, maintaining control over its 664 locations. The company has a unique business model that includes a retail component, contributing 20% to its annual revenue. Despite higher costs in labor and food due to its commitment to fresh ingredients, Cracker Barrel has maintained a steady growth in sales, with the average location grossing nearly $5 million. The company's advertising strategy relies on traditional media, reflecting its old-school approach to business.
🥞 IHOP: The Pancake Powerhouse
IHOP, the largest diner chain globally, is famous for its indulgent pancake creations and all-day breakfast offerings. With over 1,700 locations, IHOP is entirely franchised, with Dine Brands extracting revenue through royalties, pancake mix markups, and rent. IHOP has been slow to evolve, focusing primarily on its pancake identity. However, facing sales regression, the company has started to diversify its menu and invest in renovations. IHOP has also adopted virtual brands to boost晚餐和深夜时段的销售. Despite a hands-off approach from Dine Brands, IHOP has managed to maintain positive sales, demonstrating the resilience of the diner business model.
🔄 The Resilience and Limitations of the Diner Business Model
Diners like Denny's, IHOP, and Cracker Barrel exemplify a resilient business model that thrives on simplicity, familiarity, and consistency. These establishments have endured because they offer a predictable and comforting experience that appeals to a wide demographic. However, the nature of the diner business also limits their potential for rapid growth or innovation. Nostalgia and tradition are valuable, but they can only be leveraged so much in the competitive food industry. The future of diners lies in striking a balance between maintaining their classic appeal and adapting to changing consumer demands.
Mindmap
Keywords
💡Diner
💡American Breakfast
💡Comfort Food
💡Franchising
💡Full-Service Restaurant
💡Value Proposition
💡Menu Engineering
💡Virtual Brands
💡Franchisee
💡Operating Margin
Highlights
Diners are iconic American establishments, offering classic comfort food in a relaxed atmosphere.
Diners have remained consistent since the 1940s, with huge menus and traditional human service.
Customers at diners seek predictability, reliability, simplicity, and modestness.
Diners position carbohydrates as the star of the show, offering high margins despite low prices.
Denny’s is known as 'America’s Diner', with a signature product being the Grand Slam.
Denny’s has a positive relationship with its franchisees, collaborating on various aspects of the business.
Denny’s sees fast food as its primary competition and has revamped its lunch and dinner offerings.
Cracker Barrel is the highest-grossing diner chain, with a focus on authentic country food and quality service.
Cracker Barrel operates without franchising, maintaining control over its restaurants for consistent quality.
Cracker Barrel combines a full-service restaurant with a retail shop, offering distinctive merchandise.
IHOP, the world’s largest diner chain, is known for its dessert-like pancakes.
Dine Brands, the corporation behind IHOP, has a hands-off approach, focusing on maximizing its own profits.
IHOP has a significant advertising budget, but high spend hasn't necessarily translated to better results.
Diners are an invincible business that doesn’t need much to survive, offering simple, familiar, and consistent food.
Nostalgia is a fragile currency in the diner business, valued more in memory than in actual experience.
Transcripts
Fluffy pancakes, sunny-side eggs, crispy bacon, golden hash browns with buttered toast and coffee
is a meal as American as guns, tipping, and iced water. While you can easily whip up these foods
at home, it just hits differently at a diner, where you’re sitting on tall vinyl stools,
immersed in old-school decor, being serviced by waitresses that move as fast as they talk,
and watching griddle magic behind the counter. For decades, diners have specialized in serving
not just the hearty American breakfast but also classics like burgers, waffles, milkshakes, soup,
and pie. Due to their sustained popularity and continuous depiction in TV & film, diners have
become so ingrained into American culture that they’re iconic establishments over the world.
While every industry is under constant pressure to evolve,
diners are the rare example of a business that has been invincible to change. While
the restaurant industry has gravitated towards off-premise dining, small menus, originality,
and automation, diners have remained consistent since the 1940s - huge menus, open for 24/7 or
into the late night, traditional human service with pen and paper, simple comfort foods,
and a basic, non-judgemental, relaxed atmosphere. Customers aren’t looking for reinvention or
modernization. When people go to a diner, they’re not expecting award-winning Canadian maple syrup,
hand-cut potatoes, organic eggs, artisan bread, European butter, fancy cheeses, third-wave coffee,
and house-made vinaigrettes. Instead, what people crave are the tried-and-true, nostalgic,
basic flavors - processed Kraft singles, store-bought bread, spreadable fake butter made
from vegetable oil, steamed frozen vegetables, premixed salads, Thousand Island from the bottle,
and Quaker Oats from the packet. Through history, diners built their
reputation as an establishment for families and the working class. This value prop has remained
unchanged decades later as even modern customers continue to value diners for their predictability,
reliability, simplicity, consistency, and modestness. Drunk college students come in
late at night and leave just as satisfied as the blue-collar workers who come in after their shifts
or the families making a pit-stop on their road trips. At a diner, there are no reservations,
no VIPs, no private areas, no policies, no minimums, and no judgment. Everyone
is accepted and treated the same. In this episode, we’ll cover the invincible business
of the American diner and analyze the 3 biggest chains in the world - Denny’s, Cracker Barrel,
and IHOP - who each have their own strategy and go after customers in different ways.
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LDiners don’t compete on the conventional measures of exceptionalism and originality
where restaurants typically live or die by either having the most creative or best food in their
category. While there are certainly diners who claim to have the best pancakes in town,
these are marketing measures designed more to differentiate themselves from diners rather
than all other restaurants. As businesses, diners orient towards value and breadth. The
large menus pull customers in with something for everyone while the low prices encourage frequent
visits and maintain expectations. Since customers don’t expect beef wellington, organic lettuce,
or even real butter, diners make profits with lower prices and bigger menus through cheap,
low-quality processed ingredients. Instead of buying fresh beef or produce, diners
can get by with cases of frozen, premade burger patties, meatballs, chicken patties, liquid eggs,
vegetables, desserts, and even soup by the tub - ingredients that can be stored for
long periods and can be quickly cooked onto a flat-top, dropped into a fryer, or thrown into
an oven for a fraction of the time and cost. While independent restaurants would be shamed for
such shortcuts, diners operate on a different spectrum where the expectations of cheap,
simple, comfort foods enables the open and widespread use of such ingredients.
While most restaurants center on protein as their draw, diners position carbohydrates as
the star of the show. Diners generously pile on carbs in order to cheaply satiate customers
and to net high margins despite selling at low prices. Whenever protein prices go up,
restaurants must adjust their costs by passing on that bill to customers. Thus,
the strategic carb-centric design and substantial simplification insulate
diners from commodity swings that ordinary restaurants would not be able to avoid.
With its iconic red-and-yellow sign, Denny’s is the oldest diner chain in the world. Known as
“America’s Diner”, Denny’s signature product is the Grand Slam, where for around $10,
you can get half of your daily caloric intake on a single plate of 2 eggs, 2 pieces of bacon,
2 pancakes, and 2 sausage links in the morning, in the evening, or in the late night. Most Denny’s
locations are open 24/7 with breakfast served all day and a “come as you are” atmosphere
that’s accepting of families, couples, seniors, rowdy college students, and late night drunks.
There are over 1,600 Denny’s locations worldwide - of which, 90% were in the United States. To
put this number in perspective, we can compare Denny’s to other leading US-based full-service
and fast-casual chains. Denny’s scale is greater than that of traditional full-service restaurants
like the Cheesecake Factory and Olive Garden but lower than fast casual chains like Panera and
Chipotle. The average Denny’s is a freestanding 4400 square foot building that supports a seating
capacity of 140 guests. In terms of space, a Denny’s is twice the size of a Chipotle
but not quite as spacious as a steakhouse or conventional full-service restaurant.
Over 96% of Denny’s are franchised, which explains why prices vary so widely from
location-to-location - but what’s most interesting is Denny’s relationship
with its franchisees. As we’ve covered in past episodes like Burger King and KFC,
the relationship between a franchisor and its franchisees is typically contentious.
Franchisees are the ones running the restaurants day-to-day, footing the bill, serving the food,
and managing the staff so they can get disgruntled when they feel like their franchisor is not
supporting them. Unsupportive franchisors can come in two forms: one is that they’re out-of-touch
slumlords who make little contributions, sit in ivory towers, and count their cash from
royalties with no skin in the game. The other form is franchisors who do too much are seen
as uptight micromanagers who care too much about day-to-day affairs when they should be focused on
the big picture. On the other end, the franchisor can perceive its franchisees as mercenaries who
will opportunistically cut corners, deviate from established standards, and jeopardize the brand
in order to squeeze a buck for themselves. When you add in contrasting incentives where
franchisors make money from the top-line and franchisees make money from the bottom-line,
it’s no surprise that these relationships are generally so fragile and strained.
Denny’s is a refreshing outlier in that the company has proactively sought a positive
relationship with franchisees for decades. Every franchisee gets to join the Denny’s Franchisee
Association and the DFA is more than just a suggestion box or group therapy. There are
5 committees, each dedicated to a single part of Denny’s business in Development, Marketing,
Operations, Supply Chain, and Technology. Franchisees directly collaborate with corporate
leadership on all five aspects with the goal of maximizing earnings for both parties. This two-way
feedback and open partnership is rare. In the case of Burger King or KFC, similar associations
exist but they’re self-organized groups that don’t have official recognition from corporate
and boil down to knowledge-sharing and networking opportunities between franchisees as peers.
In the US, Denny’s is a name brand and the strategy behind the diner has been the same
since the 2010s. Reinvigoration is the name of the game. The company’s goal has been to drive sales
beyond breakfast and to push to customers that they don’t need to go to fast food exclusively
for cheap hot meals. To Denny’s, they see their primary competition as fast food and not the
traditional mom-and-pop diners, boujee Instagram brunch spots, and other corporate diner chains.
For example, It was only when McDonald’s rolled out all-day breakfast in 2015 that
Denny’s replaced the water in its powdered pancake mix with eggs and buttermilk. While
Denny’s promoted that the finished product was now 50% fluffier, the company had made no effort
to improve its pancakes until McDonald’s jumped in. And despite rising food costs, Denny’s value
menu remains a focal point of the company as an answer to fast food’s low prices.
While breakfast remains the most popular section on the menu, Denny’s has proactively revamped
its lunch and dinner offerings over the years with spaghetti, lasagna, milkshakes, skillets,
and burgers. Coffee was improved while salmon, whole-grain rice, and oven-roasted vegetables were
introduced to drive more credibility to Denny’s as a diner serving more than breakfast. In the
early 2010s, the average Denny’s building was over 20 years old and showing its age,
resembling a cheap cafeteria more than a family-friendly diner. Once again,
the company proactively rolled out renovations to update its atmosphere with new floors,
walls, colors, tabletops, and roofing. While remodeling might seem like an ordinary investment,
this topic will come up again later when we cover IHOP who chose a very different strategy when it
came to keeping up appearances. Since most locations are open 24/7,
Denny’s closely tracks when a sale occurs. For the past 10 years, 61% of food and beverage sold
and consumed at Denny’s happens between breakfast and lunch. The remaining 39% of sales happens at
dinner and in the late night. This nighttime business serving night owls, drunk students,
and graveyard shift workers contributes 17% of Denny’s sales every year. The company has opened
up locations not just in new markets, but also non-traditional venues like college campuses and
military bases yet overall expansion has remained slow. The number of Denny’s grew from 1,685 in
2011 to 1,735 before COVID and has dwindled back down to roughly 1,600 in 2022. Denny’s franchisees
pay an initial fee of $30,000, a royalty up to 4.5% of gross sales, and contribute up to
another 3.25% of gross sales to fund advertising. With a franchise-heavy business, one might expect
Denny’s profit margins to be in the 20-30% range. Yet Denny’s overall operating margin on average is
just 13% - which is on-par with chains that own and operate their own locations like Chipotle
and BJ’s Brewhouse. Denny’s top-line has been declining year-over-year, but it’s not accurate
to say that this is due to less people eating at Denny’s. The company’s revenue on closer look
is made up of two income streams - one is food & drink sales at corporate-run restaurants and the
other being royalties. As Denny’s has operated fewer and fewer restaurants, it’s expected that
income from food & drink will go down while royalties go up - but royalties haven't grown
significantly in 10 years. If we separate the franchise royalty business and the conventional
restaurant business, the operating margins between the two are actually on par with each other.
Despite the proactive investment, annual sales for the average Denny’s franchise hasn’t grown
significantly, just 2% year over year when we exclude COVID. The average Denny’s franchise
grossed $1.3M dollars in 2010 and reached $1.7M dollars a year in 2022. The average
corporate-owned and operated Denny’s experienced stronger growth going from $1.8M to nearly $3M by
2022. The probable explanation for this is that these remaining corporate restaurants
are likely some of the highest-performing Denny’s that enjoy location and demand so
good that the corporate isn’t willing to give up their cash flow. If we exclude the variable of
ownership by blending location types - the average Denny’s went from grossing $1.6M a year in 2011 to
$2.3M in 2022. This 46% sales growth across 11 years boils down to 3-4% annual growth.
In 2019, a Denny’s guest spent on average $10.89 per visit, not including tax and tip - which is
well below the average per-guest spend at conventional full-service restaurants like
Olive Garden, the Cheesecake Factory, and BJ’s Brewhouse. While the margins for diners might be
high, the check sizes are also so low that the actual profit captured is small from a dollar
perspective. This slow growth has not been lost on franchisees as Denny’s has started leaning into
virtual brands to squeeze more sales during the slower dinner and late night shifts. The
Burger Den and The Melt-Down are just pre-existing Denny’s menu items that have been renamed and are
sold to ignorant customers on delivery apps. When we step into the shoes of a Denny's manager, we
find that the greatest cost is labor as a single Denny’s is run by 50 people across 2 shifts.
Despite theoretically lower costs with tipped FOH positions, labor has accounted for 39% on average
of a Denny's sales in the past decade. Food costs represent 25%, which is less when compared
to other full-service restaurants. As mentioned earlier, franchisees are required to give another
3% of their gross sales to fund advertising. These contributions give the company an annual $70-80M
dollar use-it-or-lose-it warchest to target seniors, millennials, and increasingly, Hispanics
- Denny’s fastest growing demographic. For every $1 spent on advertising, Denny’s generates $47 in
sales. For Denny’s, the diner business is solid, not spectacular, but invincible nonetheless.
Cracker Barrel is the youngest and highest-grossing diner chain whose earnings are
7 times that of Denny’s. At Cracker Barrel, you can get breakfast any time of the day like eggs,
pancakes, grits, biscuits and gravy alongside Southern classics like fried chicken, chicken
pot pie, meatloaf, country-fried steak, and chicken and dumplings all at affordable prices.
The average spend per guest at a Cracker Barrel is comparable to that of Denny’s. Cracker Barrel
is so old-school that the company has rejected franchising since its founding under the belief
that the good food and good service can only be maintained through control. Without franchising,
Cracker Barrel’s scale and rate of expansion is smaller and lower than that of Denny’s with only
664 restaurants and having opened only 69 new stores in 12 years. Cracker Barrels are
concentrated in the South and the East with 80% of locations strategically stationed alongside
highways to attract road warriors and traveling families. In the past decade, 39% of transactions
occur at lunch between 11AM and 4PM, 25% of sales happen at breakfast, and the remaining 37% at
dinner as Cracker Barrel is not open 24/7. Cracker Barrel has two twists compared to the
typical American diner. They serve beer and wine and as we covered in the steakhouse video,
alcohol is critical to driving higher spend and profits across all categories. Cracker Barrel is
not just a full-service restaurant, but also a retail shop where you can buy distinctive candy,
apparel, home goods, seasonal merchandise, and rare novelties. The average Cracker Barrel
clocks in at 8,900 square feet of which 1,900 is dedicated to the retail shop, and overall supports
seating capacity for 170 guests. Customers can’t miss the opportunity to browse the merchandise
as the waiting area, entrance, and exit for the restaurant is through the retail shop.
Retail is a $700M business and contributes on average 20% of the company’s annual revenue.
With gross margins of 50% on merchandise sold and shared staffing across the shop and restaurants,
the retail business is a high-margin supplement to Cracker Barrel’s low-margin restaurant business.
The company’s total revenue, across retail and restaurant, grew from $2.4B in 2010 to $3.2B by
2022 but the emphasis on quality and affordability also came at the cost of profits.
Cracker Barrel built its reputation through the decades with authentic country food and
quality service - to its leadership, shortcuts would only dilute the established standards,
culture, and brand. The company spares no expense when it comes to service and product,
cooking with fresh ingredients and employing over 100 employees across 2 shifts every day
in every location. The use of fresh ingredients makes Cracker Barrel more susceptible to price
changes in protein and dairy. While labor was just 39% of sales for a Denny’s in 2022, labor cost 45%
of sales for the average Cracker Barrel. Cracker Barrel’s spend on food and labor as a percentage
of sales is higher relative to not just Denny’s, but also other full-service restaurants. Yet
these investments in labor and product are clearly productive as the average Cracker Barrel location
grosses much higher earnings than its competition. In 2022, the average Cracker Barrel grossed nearly
$5M in retail and restaurant sales, which is twice as much as Denny’s and on-par with the posh Ruth’s
Chris’s Steakhouse. If we look exclusively at the restaurant business for a true apples-to-apples
comparison, the average Cracker Barrel grossed nearly $4M in food & drink sales in 2022,
which is still ahead of Texas Roadhouse, Denny’s, and Outback Steakhouse. Despite the
clear above-average emphasis on quality, Cracker Barrel has experienced the same slow, resilient
growth in sales year-over-year from 2010 to 2019 with an average annual growth rate of 2.9%.
Cracker Barrel and Denny’s store-level operating margins are identical at 13% - for Denny’s,
the survivorship bias of their high-performing corporate locations inflate their true
fundamentals whereas Cracker Barrel’s high-margin retail business lifts up their unreported,
low margin restaurant business. While Denny’s earns 1/7th the revenue of Cracker Barrel,
Denny’s operating margins are far more stable with its franchise business model. Cracker
Barrel’s operating income is more volatile as a conventional restaurant business that
dips to single digits in rough years and back to double digits in good years.
Cracker Barrel is a dinosaur with its slow-moving, old-fashioned approach to business, which is a
refreshing contrast to small-cap public companies that are always so desperate to show off to Wall
Street just how cutting-edge and innovative they can be. Rather than monologues about strategy
and flashy product launches, Cracker Barrel executives highlight their uneventful, lumbering,
old-school progress every year to analysts. They talk about wins like consolidating the breakfast
menu and dinner menu into one handout so customers don’t get confused when they’re presented with two
menus when they sit down and training staff not to hand checks early to guests at dinner so they
don’t feel rushed. Since most Cracker Barrels are located by highways, the company’s primary
advertising channels to this day are old-school billboards, cable television, and radio. As a
newer entrant with only 40 years of history compared to Denny’s 70, Cracker Barrel outspends
Denny’s on advertising with an annual budget of $90M. On a per location basis, a Cracker Barrel
spends over $100,000 a year on ads, which is twice as much as a Denny’s. And from an efficiency
standpoint, each $1 Cracker Barrel spends on advertising generates roughly $36 in sales.
IHOP, which stands for the International House of Pancakes, is the world’s largest diner chain.
IHOP helped normalize eating dessert for breakfast in America with heart-stopping inventions served
all-day like cheesecake-stuffed pancakes, cinnamon-roll filled pancakes topped with
cream cheese icing, and cupcake pancakes smeared with cake frosting. There are over 1,700 IHOPS
worldwide all of which are run by third-party franchisees or licensed operators. The average
IHOP sits at 5,000 square feet, features an iconic blue roof, and supports a seating capacity of 170
guests. Like Denny’s, most IHOP locations are open 24/7. Dine Brands is the corporation behind IHOP,
who also owns Applebees. While most franchisors would gladly avoid conflict to ensure better
long-term outcomes, Dine Brands is the exact opposite as a soulless public corporation with an
unapologetic focus on maximizing its own profits. Without any corporate-run locations, Dine Brands
extracts revenue from IHOP franchisees in 3 ways: a standard 4% royalty on gross sales, a markup
on a proprietary pancake mix that franchisees are required to purchase and use every day, and
a markup on rent for the buildings that it leases to its franchisees.
Since the late 2000s, Dine Brands has opted to do less, leaving it up to each franchisee to figure
out financing and location on their own. While Denny’s provides assistance and guidance with
site selection, Dine Brands offers no resources for operators interested in IHOP. It’s up to you
to find a suitable spot to open an IHOP in and even though you won’t get any help or advice
along the way, you still need to get final approval on the location from Dine Brands
before you can start building. There are no longer any payment options for equipment,
land, and material - everything must be paid upfront in full if you want
to open an IHOP. On top of the 4% royalty, pancake mix markup, and rent markup , IHOP
franchisees must also pay an additional 3.5% of their gross sales to fund advertising.
For over a decade, Dine Brands has been so preoccupied with saving Applebee's that the
company has only made a handful of reactive investments in IHOP. IHOP developments were
rare as a majority of investor attention and company resources went towards Applebee’s.
In a time where Denny’s and Cracker Barrels were both investing to broaden their appeal,
IHOP remained stagnant and unwaveringly focused on pancakes. Dine Brands believed that consistent
advertising and cheap limited-time pancake promotions would be enough. “IHOP is top of
mind for guests for breakfast and enjoys clear leadership. Most importantly, breakfast also
enjoys the lowest food costs between 400 and 600 basis points which make the unit economics
for IHOP restaurants a compelling proposition. It’s about pancakes all the time. Even though we
sell other items, pancakes represent who we are. Everyone loves pancakes, they’re warm,
they’re comforting, they’re inviting just like our restaurants. And in today’s divisive society,
we believe that we offer a truly differentiated experience and one that’s more sought after than
ever before. We offer a place for people to pancake together.” It’s hard not to cringe a
little at not only the dead-serious framing of IHOP as some holy bipartisan frontier, but also
the conversion of the word pancake into a verb to an audience of Wall Street analysts.
From Dine Brand’s ivory tower, everything at IHOP was good. Food and drink sales had increased
30% from $2.5B to $3.3B. Dine Brands has been raking in nearly $200M every year in royalties,
pancake mix, and rent with almost no effort. This revenue from IHOP franchisees had grown
consistently at 4% on average for the past 12 years. And as the franchisor,
Dine Brands has been enjoying over 80% gross margins every year on IHOP as a business
division. The company got so complacent that they even stopped reporting basic IHOP data,
last mentioning the average check per guest in 2015 at $11.53. Yet when we look
on a per-location basis, we see a much harsher reality. The average IHOP grossed just $1.9M in
2022, far less than that of Denny’s and Cracker Barrel. And while Dine Brands was raking in 4%
growth in fees every year, the average IHOP had only grown sales 9% in a total of 12 years. With
the most franchises and the highest contribution rates, it should be no surprise that IHOP has the
largest advertising budget with over $100M+ spend every year. But high spend hasn’t translated to
necessarily better results as each $1 spent on ads generates roughly $29 of sales for IHOP.
It was only when sales regressed in 2017 that Dine Brands finally reacted - investing
in renovations and launching new products that were not pancakes like steakburgers,
chicken sandwiches, and grilled melts. These days, IHOP is pounding the importance of broadening
appeal beyond breakfast, nearly 8 years after Denny’s and Cracker Barrel had made their own
improvements. And just like Denny’s, IHOP has staked its growth on virtual brands that can
drive dinner and late night sales by selling the same products with different names to customers
on delivery apps. Compared to the competition, Dine Brands was extremely hands-off with IHOP
to the point of complacency and neglect - and yet the diner was able to squeeze out positive
sales just about every year on its own even with outdated decor and unremarkable product.
As seen with Denny’s, IHOP, and Cracker Barrel - diners are truly an invincible business
that don’t need much to survive. No matter how forward-thinking or proactive a company is in its
strategy, certain businesses like diners are so commoditized they will never generate that rapid,
spectacular growth. In the big picture, a cheap plate of pancakes, eggs, and bacon is
just a cheap plate of pancakes, eggs, and bacon. While the new and flashy draws the crowd, there
will always be hunger for the simple, familiar, consistent, and predictable - but in the end,
nostalgia is a fragile currency that will always be worth more in your head than in your stomach.
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