TW Services Has Right Recipe for Denny’s Health
It was a Saturday in February when the El Pollo Loco restaurant in Laguna Beach unexpectedly acquired a new employee: Jerome J. Richardson, president of the food service company that had recently acquired the Mexican-style char-broiled chicken chain when it bought the Denny’s coffee shop chain.
Richardson, who had traded in his traditional suit in favor of a khaki restaurant uniform, spent the day grilling chicken, mixing salsa and preparing pinto beans, says Howard F. Massey, who heads the chicken outlets.
“I was a little surprised that he just showed up without talking to anybody,” said Massey, who learned of Richardson’s appearance from puzzled field managers. But, then again, said Massey, maybe he should have expected such a surprise visit: “I know he’s a hands-on type of person.”
Richardson’s willingness to get behind the grill with employees and his preoccupation with operations have won him friends among employees at Denny’s, which was purchased by Richardson’s company--TW Services--a little more than one year ago. Besides boosting morale, Richardson has also managed to boost the financial performance of the nation’s largest coffee shop chain, industry analysts say. Fortunes of the 1,200-unit chain, which began in Southern California more than 30 years ago, had been sagging since it went private in a management buyout in 1985.
TW--which also owns about 400 Hardee’s hamburger outlets, 42% of Winchell’s Donut Houses and the Canteen food service firm--has moved to cut corporate staff, remodel restaurants and infuse employees with new enthusiasm that--managers hope--will result in improved customer service.
So far, the efforts have paid off: Denny’s profit margin has increased about 25% in the past year, Richardson says.
“I thought the profit margin improvement would take longer,” said Lloyd C. Rixie, a securities analyst with D. A. Davidson. “But these people are making some changes very quickly.”
“It’s a more of a back-to-basics approach--they’re going back to what they do well,” said Robert S. Goldin, senior principal at Technomic, a Chicago restaurant consulting firm.
Wants to Stay Independent
But about two weeks ago, restaurant operations took a back seat to an unwanted takeover offer for TW. The company rebuffed Coniston Partners, a New York investment firm whose offer was valued at $1.3 billion. However, Coniston, which already owns about 19% of TW stock, says it has not dropped its takeover plans.
“We would prefer to remain independent,” said Richardson early last week at Denny’s La Mirada headquarters after flying in from Spartanburg, S.C., where he is permanently based. “Nobody can manage this business better than we can.”
Many industry analysts would have challenged Richardson’s assertion only a few months ago. Many thought that TW had paid too much for Denny’s and was taking on too many problems. “Their customer counts were flat,” Goldin said. “They were certainly not moving ahead. They were stagnating. They were getting tired.”
But TW executives thought otherwise. “It’s a great trademark,” said Richardson of Denny’s, “but the restaurants can be operated better.”
Yet signs indicate that there were more problems than expected. Richardson recently moved back to Spartanburg after living in Newport Beach with his wife for nine months, often working weekends and evenings. He devoted 80% of his time to Denny’s in 1988. “I didn’t think it would be that much.”
Denny’s top management was preoccupied with paying off the huge debt incurred when the company was taken private, Richardson said. Although profitable, Denny’s was losing customers and market share to other family restaurants and fast-food chains. Employee morale was low and relations with the La Mirada headquarters were strained.
Were Headed for Trouble
“All the backgrounds of the top managers were in finance and accounting,” said James C. Verney, president of Winchell’s. “Operations were being delegated to the back of the room.”
“I don’t think they could have continued,” Richardson said. “They were headed for trouble.”
TW moved quickly to shore up Denny’s. The old management departed and headquarters staff was cut back 25% to save $15 million a year. The marketing department, for instance, shrank to 23 people from 90. But no jobs were lost at the restaurants themselves. “It not only saved us money,” Richardson said, “but it demonstrated to the people who run the restaurants that they are the heroes.”
To help boost morale, the company announced that Denny’s would close for the first time on Christmas Day--the chain’s busiest and most profitable day.
Under leaner management, decisions are made much faster, executives say. Under the previous regime, committees studied the idea of introducing new uniforms for Denny’s employees. “For two years we talked about it,” said Tom Mourkas, vice president of operations. After posing the idea to Richardson and the new management, the decision to go ahead with new green and ivory-colored outfits “took a few minutes,” Mourkas said.
“The most important change is in the spirit of the company and the mood,” said Robert J. Krist, Denny’s chief financial officer. “It once was a very cumbersome environment.”
With a renewed emphasis on operations, coffee mugs are now replacing cups and saucers, which are harder to handle and take more time to clean and store, Mourkas said.
The number of items on Denny’s extensive menu was also reduced 25%, and the emphasis was shifted to more traditional and simpler fare such as hamburgers that appealed to the chain’s middle-class clientele. Gone from the menus are such upscale fare as chicken Dijon. “That’s not what you go to Denny’s for,” said Goldin at Technomic. People go there for simple, hearty food such as Denny’s “Grand Slam” breakfast, he said.
More Franchisees
Besides changing the menus, Denny’s will also spend $25 million to $30 million annually to remodel aging restaurants. It is a rather costly process that will take at least five years to complete, concedes Richardson, but “it’s less risky than building new restaurants.”
And in a change from past company policy, most of the new Denny’s restaurants will be opened by franchisees--allowing for faster growth at a lower cost to the company.
At money-losing Winchell’s, the company will also remodel stores and introduce oven-baked goods--such as muffins--in 400 of its stores. The company will also continue to expand its fastest growing business--El Pollo Loco--to about 240 by the end of next year from about 160.
Yet Denny’s executives and industry analysts say the company still faces a tough battle to grow and survive. The $6.3-billion family food industry, in which Denny’s is the largest player, has been stagnant for the past few years and is losing customers to fast-food restaurants that are offering broader menus from breakfast to dinner, Goldin said. “Staying even in the restaurant business these days is getting ahead,” he said.
And other family restaurant chains, such as International House of Pancakes, are also beefing up their operations. “At Denny’s, a lot of their problem is fixing up restaurants fast enough,” Goldin said. “Another challenge is labor--it’s difficult to recruit good, quality labor in today’s market.”
Richardson says he fears that Denny’s revenues would once again be siphoned off to make debt payments related to a Coniston takeover instead of reinvesting that money in the company. Paying off such debt, Richardson said, “would not allow us to do the things to remain competitive. We just can’t take on huge debt.”
