Customers lined up in Feb, 2010 for free breakfast at a Georgia Denny's

SAN DIEGO – What has emerged from turmoil of free meals and CEO succession in the Denny's chain is a restaurant network that has become the epitome of collaboration between franchise owners and franchisor. That renewed collaboration is helping the chain turn the corner.

Last month franchisees, the staff of Denny's Corporation and vendors gathered in San Diego to hold the brand's annual convention and trade show for franchise owners. The convention highlighted an interesting partnership between the independent Denny's Franchisee Association (DFA) and franchisor Denny's Corporation (NASDAQ: DENN). Out of the 1,670 restaurants in the chain, over 80 percent are represented by members of the Denny's Franchisee Association.

There are over 100 owner groups in the franchise industry. These independent associations thrive because they advance the self-interests of franchised business owners. That's necessary because franchisors typically aim to expand top-line store sales since they receive royalties on revenues. But franchisees are beholden to maximizing their bottom-line profits. Given that built-in conflict in franchising, the Denny's system is a lesson in collaboration between these sometimes opposing forces.

Franchisees collect funds, direct and set the annual conference agenda

"There are franchisors who listen and then tell you anyhow what you are going to do," says Craig Barber, the chairman of the Denny's Franchisee Association.

He thinks Denny's is different. To prove his point, the independent association of over 1,200 members is fresh from funding, setting the agenda, and leading the brand's annual convention. It's done so since 1997.

"This is the 15th year for the DFA to be a primary sponsor for the convention," says Barber. He describes the event as the collaborative culmination of a year's efforts between corporate employees and the franchise community to strategize on the brand's growth plans for 2012 and beyond.

John Miller, the new president and chief executive officer of Denny's Corporation since January of this year, thinks the conference was a good one. The franchisor accorded a number of restaurant owners high praise and awards. For example, franchisees Bob Langford received the President's Guiding Principle Award. And Michael Manos was named Franchisee of the Year in the large operator category.

In the Denny's system, award giving can be a two-way street. Last year the association bestowed honors to the chief administrative officer of Denny's Corporation, Mark Wolfinger, for outstanding contributions to the network.

Barber, a franchise owner in the Nashville, Tennessee area, declares: "This year's convention celebrated the strong collaboration between the DFA, our franchise community and Denny's brand leadership and the progress that we have made in growing the brand over the past year. This year's theme, 'Capturing the Wind in our Sales' was very appropriate as we continue to gain momentum in driving traffic and guest loyalty. We look forward to further strengthening the brand's connection with consumers as we head into 2012."

Franchisees come to the rescue of Denny's board in proxy battle

All has not been smooth for this brand. The recession has hit fast casual restaurants hard. On top of that, the former CEO had blessed a marketing plan for a day of free Grand Slam breakfasts after the Superbowl to recession-hit Americans to introduce the brand to a new group of consumers. The two-year-in-a-row stunt only further squeezed margins, while doing little to increase long-term traffic.

In March of 2010, a proxy battle ensued in which investor members of "the Committee to Enhance Denny's" tried to take over the board of directors of Denny's Corp because of dissatisfaction over financial and operational performance of the franchising company. The independent association of franchisees publicly endorsed the existing board.

"In the midst of the proxy battle, we were very clear that we did not support the dissidents," declares the chair of the association. Barber observes, "We cared about the brand and we wanted what was good for the brand."

The hostile takeover failed.

Disliked CEO goes, new CEO blessed by franchisees

Shortly after the attempted takeover, CEO Nelson Marchioli was ousted, to the delight of many franchisees.The chair of Denny's board of directors Debra Smithart-Oglesby filled the CEO position on an interim basis from June 2010 until the end of the year. She has continued on as chair.

Barber thinks the change has been positive. "As a group, the operators of Denny's now have a higher level of confidence and optimism," he declares.

The DFA was pleased about John Miller as Denny's next CEO and publicly announced support of Miller in a press release. "The DFA board had the pleasure of working closely with Debra as she defined a clear and productive course for the brand during this important period of transition," declared Barber in January. "During this time, our work with the Denny's executive leadership team has been collaborative, inclusive and transparent. We welcome John's insight and vision as we work closely with the strong leadership team to execute in a manner consistent with the important initiatives created during 2010. We look forward to the success that lies ahead for our Brand."

Franchisees as a whole think the new CEO and the executive team has been a breath of fresh air.

"The franchise community at large, in my opinion, has confidence in this leadership team," declares Barber. "They have confidence in their ability to lead. Franchise owners have confidence in the company's style of leadership. They have confidence in their inclusion and their collaboration with the franchise community to make sure that the initiatives, the strategies and the tactics are aligned for the good of the brand and ultimately for the good of the franchisees. "

Denny's and Association create Franchise Advisory Council

In 2010, the association and the franchisor worked together to form the Denny's Advisory Council, a group of franchise owners whose main job is to provide advice to the franchisor on its plans.

Says Barber, "DFA and Denny's last year sat together and formed the Denny's Advisory Council. Those groups worked together all year to advance the brand. The convention, while important, was really successful because of all the groundwork through the year in working together on the brand."

Franchisee creates and leads 2-4-6-8 marketing rollout

After Denny's Corp had a promotional run of giving away free breakfasts at largely the franchisees' expense, things began to turn around after a franchisee and association board member created and led the 2-4-6-8 marketing rollout.

The chairman of the board of directors for Denny's has been one of those who has led the company to more collaboration. When she needed assistance, she reached out to the franchise owners.

"I'd be remiss in not letting you know that campaign was rolled out by my partner in business, a member of the DFA board, Bob Langford, who served as the interim chief marketing officer," says Barber, DFA chairman. "As a franchisee and someone who has had great marketing experience, he was the advocate to the franchisee community that although it might on the surface appear to be a challenge to margins, it would ultimately become a strong and healthy aspect of the franchisees' business."

John Gordon, a restaurant unit economist and analyst, thinks the 2-4-6-8 campaign has been quite successful. "The implementation and focus of the Denny's 2-4-6-8 is a clear accomplishment," says the founder and principal of Pacific Management Consulting Group. "The 2-4-6-8 was a driver to recent positive restaurant traffic and sales trends, snapping a four-year decline. In my opinion, it is simple, elegant, covers all three day parts and hasn't resulted in an unmanageable erosion to the average check, due to its four-tier price components. At the same time, direct competitor IHOP's sales and traffic trends have turned unfavorable, and Denny's has captured momentum."

Barber explains how franchisee Langford nurtured the support for the new marketing program from the chain's franchisees. "Bob would send out a bi-weekly voice mail on the state of affairs with the 2-4-6-8 rollout, what we were seeing, what we were learning and how we were modifying the menu rollout, and what was coming next," says Barber. "The voice of all of that was a franchisee leader. And Denny's was comfortable with that."

Barber declares, "The good things that you see today are really things that began (with franchisees) in 2009. There was a lot of discussion, a lot of collaboration and a lot of agreement on the line."

Early Results

Association chair Craig Barber thinks that there has now been a shift for the better with the brand's new leaders. "I think the transition has been to have collaborative, combined leadership," he says. He lauds Miller and the executives at Denny's for their leadership and for knowing how to tap into franchise talent. "In Denny's we all agree to be part of this brand, ultimately to make money. Franchisees don't own the brand. We agree to be part of the group that owns the brand. Franchisees need to respect the distinct differences that there are. But those differences don't keep you from being successful."

The real world results of such collaboration have been felt early.

Interim CEO Debra Smithart-Oglesby told Nation's Restaurant News in September of 2010, "In August, we refreshed our $2-$4-$6-$8 menu with a number of new items and we are getting tremendous guest response to that." With the help of its franchise owners, she thought the company had quickly moved into a much better position. "We're building tremendous momentum; we just announced our 1,600th store opening, and for the first time in a long time we are experiencing growth," she declared.

Restaurant analyst Gordon thinks the ability to dip into the deep pools of management innovation, operating know-how and executive talent of a chain's franchise owners can be a huge competitive advantage for a brand. "This is another example of where a franchisee-led initiative was extremely productive for a restaurant chain. The $5 dollar foot-long campaign at Subway, which unquestionably worked, was franchisee originated, led and managed. Many of McDonald's product offerings, such as breakfast items (Egg McMuffin) and sandwiches (Big Mac) were 100 percent franchisee inspired, for example."

John Miller thinks part of the juice that is helping turn things around is the association. "The DFA is an invaluable resource to the Denny's brand, and plays a very important role in advising and assisting management in charting the future direction of the company," states Denny's chief executive. "The DFA provides a collective voice for the franchise community to share insights and ideas and we work very closely and collaboratively with the DFA to ensure our goals and strategies are aligned."

While the NASDAQ index at the time of this writing is down 2.71 percent year to date, Denny's Corporation (NASDAQ: DENN) is up 7.69 percent. At the dawn of the new year, analysts have increasingly gone long on Denny's.

Related reading:

• Board Seats Doubtful for Denny's Dissidents
• The Battle of Denny's
• Denny's Franchisees Officially Support Management But Secretly Grumble
• Board Seats Doubtful for Denny's Dissidents
• Denny's Free Meal Hits a Grand Slam
• Another Round of Free Breakfasts at Denny's