The Invincible Business of Diners

Summary

This 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

00:00

🍽️ 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.

05:01

🏪 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.

10:06

📈 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.

15:12

🍖 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.

20:15

🥞 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.

25:18

🔄 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.

Keywords

💡Diner

A diner is a type of restaurant historically associated with American culture, known for serving classic comfort food in a casual setting. In the video, diners are depicted as iconic establishments that have remained consistent since the 1940s, offering huge menus, 24/7 service, and a relaxed atmosphere. They are portrayed as invincible to change, continuing to offer traditional human service and simple comfort foods, which is a significant part of their appeal and cultural significance.

💡American Breakfast

American Breakfast refers to a hearty meal typically consisting of items like pancakes, eggs, bacon, and hash browns. The video emphasizes how diners specialize in serving this kind of breakfast, which is deeply ingrained in American culture. It's mentioned as a staple of the diner experience, contributing to the nostalgic and familiar appeal that diners offer.

💡Comfort Food

Comfort food encompasses dishes that are typically high in calories and provide a sense of emotional comfort and nostalgia. The video discusses how diners are known for their comfort food, using terms like 'hearty' and 'traditional' to describe the meals. Examples from the script include the use of processed Kraft singles and premixed salads, which are familiar and basic flavors that customers crave.

💡Franchising

Franchising is a business model where a company, the franchisor, allows entrepreneurs, the franchisees, to operate under its brand and sell its products or services. The video discusses the franchising model in the context of Denny's and IHOP, highlighting how it affects the relationship between the parent company and the individual restaurant owners, as well as the uniformity and quality of the dining experience.

💡Full-Service Restaurant

A full-service restaurant is a type of dining establishment where customers are seated at tables and served by waitstaff. The video contrasts diners, which are a form of full-service restaurant, with fast-food establishments and other types of dining experiences. It mentions that diners offer a 'traditional human service with pen and paper', distinguishing them from more modern, automated dining options.

💡Value Proposition

A value proposition is a promise of value to be delivered to customers in return for their engagement with a product or service. In the video, the value proposition of diners is discussed as a key to their success, emphasizing predictability, reliability, simplicity, consistency, and modestness. The video mentions how diners maintain their value proposition over decades, which is a significant factor in their enduring appeal.

💡Menu Engineering

Menu engineering involves strategically designing a menu to maximize profits and customer satisfaction. The video touches on how diners use menu engineering to offer a wide variety of options at low prices, such as 'huge menus' and 'low prices', which encourage frequent visits. It also discusses how diners position carbohydrates as the star to satiate customers cheaply and achieve high margins despite low prices.

💡Virtual Brands

Virtual brands refer to the practice of selling menu items under different names on delivery apps to attract more customers. The video mentions how Denny's and IHOP use virtual brands to increase sales during slower hours. For example, Denny's uses 'The Burger Den' and 'The Melt-Down' as virtual brands to sell their menu items as if they were from separate, specialized restaurants.

💡Franchisee

A franchisee is an individual or company that owns and operates a franchised business. The video discusses the dynamics between franchisors and franchisees, particularly in the context of Denny's and IHOP. It highlights how franchisees are responsible for the day-to-day operations and bear the costs and risks, while the franchisor provides the brand and support. The video also notes the financial contributions franchisees make, such as royalties and advertising funds.

💡Operating Margin

Operating margin is a measure of a company's operating efficiency and profitability, calculated as operating income divided by revenue. The video uses operating margin to compare the financial performance of different diner chains, such as Denny's, Cracker Barrel, and IHOP. It shows how the margin can reflect the effectiveness of a company's operations and business model, with the video noting that Denny's has a relatively stable operating margin despite its franchise-heavy business model.

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.