Denny’s value menu may lay an egg

The company gave away $5 million in free breakfasts two months ago, and is now stretching profits thin with $2-$8 offerings.

By InvestorPlace Mar 31, 2010 2:47PM

denny's denn value menuIn an effort to connect even more with cost-conscious consumers, Denny’s (DENN) is jumping on the value-menu bandwagon with its new “$2 $4 $6 $8 Value Menu.” The 16 items range from a-la-carte breakfast items like a $2 endless stack of pancakes to an $8 feast of Spicy Cowboy Chopped Steak, two sides, dinner bread and a drink.

What’s more, Denny’s is offering a number of all-you-can-eat meals on its new value menu -- a clear shot at some casual dining deals like Darden Restaurant's (DRI) endless salad and breadsticks offer at its Olive Garden chains, or Ruby Tuesday’s (RT) all-you-can-eat salad bar. That positions Denny's in a sweet spot as the cheapest casual dining option and a higher-quality restaurant for families with only a few bucks to spend.

But there’s a real risk here for the company as it takes the regional testing of this value menu to the national scale. The fact is that restaurant owners everywhere are feeling the sting of slower consumer spending, and that the corporate office may risk a mutiny among franchisees by flattening out already razor-thin profit margins.

Look at a lawsuit filed against Burger King (BKC) last fall by the National Franchise Association, where franchisees protested the corporate mandate that double cheeseburgers be sold for $1 -- only a few pennies above cost for certain locations. Eggs and pancake batter are pretty cheap, but some of the other items on the menu could be cutting it very close for some restaurants.


And let’s not forget that Denny's stock is already shouldering a huge free-breakfast giveaway in February that dished out hot meals to over 2 million people. The stunt cost the company a cool $5 million, by industry estimates. Though that probably came out of a marketing budget instead of regular cash flow, what’s going to happen when that money starts coming directly out of the cash registers for individual Denny’s locations?

Of course, it’s all a volume game. If Denny’s can put enough folks in the seats with its value menu, that will more than make up for the thinner profits. And if people keep ordering the menu items that are bigger money makers, the promotion won’t break the bank. But if Denny’s is simply serving its existing customers at a smaller margin, it could mean bad news for some stores that are already hurting in this economic downturn.

Denny’s appears to be willing to make that gamble. Whatever way you slice it, the menu is a novel approach where the restaurant isn’t just pitching a single price tag like the McDonald’s (MCD) Dollar Menu. It allows Denny’s to offer cheap a-la-carte items like the conventional model, as well as entire meals. But it remains to be seen whether consumers will agree it’s a deal to get an $8 Denny’s Asian chicken salad and a drink instead of eight double cheeseburgers at McDonald’s or Burger King to feed the whole family.

Whatever you think about the prices or the food, Denny’s is sure to get some attention for its efforts. And in the wake of the huge free-breakfast giveaway, it’s hard to argue that there’s a restaurant out there that’s courting the “value” label harder than Denny’s right now. Whether the label sticks with consumers and whether restaurants can afford to keep up the act is a different egg for Denny’s to crack.

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