Denny’s turnabout provides blueprint to aid McDonald’s

McDonald’s Corp. Chief Executive Officer Steve Easterbrook could learn a few things from the resurgence of Denny’s Corp.

While the world’s largest fast-food company has been mired in a prolonged slump — hurt by the loss of younger customers, deteriorating customer service and concerns about the quality of its food — Denny’s has seen its sales and stock price surge after overcoming similar challenges.

The secret, said Denny’s CEO John Miller, was basic execution rather than grand ideas. The chain improved its food and service and embarked on a remodeling program that so far has given about 20 percent of its 1,600 U.S. locations a face-lift.

“We spent a lot of time asking customers what they want, and we don’t stray too much from that,” Miller said. “They want us to be who we are, just a little bit better.”

Denny’s, known for serving breakfast 24 hours a day, saw same-store sales at companyowned restaurants rise by 7.6 percent in the first quarter. That’s the biggest jump in more than 12 years, according to Janney Capital Markets. The stock climbed 66 percent in the 12 months through Tuesday, trouncing the 12 percent gain for the Standard & Poor’s 500 Restaurants Index.

McDonald’s, meanwhile, slipped 5.6 percent, hampered by six straight quarters of declining U.S. sales.

The company has announced its own turnaround plan, which includes reorganizing its leadership, cutting costs and returning cash to shareholders.

Denny’s started its turnaround by asking customers what they wanted. The findings helped Denny’s rally around the slogan “America’s Diner,” which conveys that the restaurants will offer a broad menu and good value, said John Dillon, the company’s chief marketing officer.

“We have a brand with a very clear DNA as a diner, and we understand what it means,” Dillon said.

McDonald’s, by contrast, has tried to be all things to all people, resulting in a bloated menu that’s slowed service and alienated customers. Recently, the company has both mocked kale in an advertisement for its 530-calorie Big Mac and experimented with the greens in salads targeting health fanatics.

“They don’t know who they want to go after,” said Michael Halen, an analyst at Bloomberg Intelligence.

Denny’s ingratiated itself with younger customers by using a witty Twitter presence and humorous online ads, including a series produced with CollegeHumor.com. Denny’s also is testing “The Den,” a restaurant concept aimed at millennials.

It remains to be seen whether Easterbrook can change how millennials view McDonald’s. The chain recently brought back the Hamburglar — reimagined as a hipster with stubble — to push its premium sirloin burgers.

The company will have to do more, said Don Boodel, a longtime McDonald’s franchisee in the Denver area. He’s seen millennials come through his drive-thru and furtively order fries.

“They don’t want their friends to know they eat there,” said Boodel, who recently sold his last two restaurants.

McDonald’s relationship with its U.S. franchisees is at a nadir, according to Janney Capital Markets. Without their cooperation, Easterbrook will struggle to implement his plans to transform McDonald’s into a “modern, progressive burger company,” which likely will require expensive upgrades financed by franchisees.

Miller dedicated himself to repairing Denny’s rapport with its franchisees, which had deteriorated as the brand suffered in the 2000s. The improved relations helped him persuade them to spend as much as $300,000 to upgrade their restaurants.

Denny’s has improved about 50 percent of its menu with enhanced ingredients and new offerings since 2010. The company prints new menus twice a year and has used promotional items to generate traffic. Its breakfast fare, including the signature Grand Slam, remains popular, accounting for about 55 percent of the chain’s sales.

Easterbrook has taken steps to improve the perception of McDonald’s offerings. Earlier this year, he said the chain will stop serving chicken raised with antibiotics and renew its focus on “hot, tasty food.”

McDonald’s said it is toasting buns longer to keep sandwiches hotter and has changed how it sears and grills burgers to make them juicier. It also started selling “artisan” chicken and a premium sirloin burger. Easterbrook said recently that while American consumers want natural and organic food, McDonald’s has to keep prices low.

“The vast majority of the population live paycheck to paycheck in all of our markets around the world,” Easterbrook said at an investor conference in New York. “If we can bring some of the aspirational quality to them without making a premium price, that’s where we hit the sweet spot.”