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Denny's Franchisees Officially Support Management But Secretly Grumble

Despite press releases in the papers saying the contrary, this bird is hearing major rumblings of discontent with Denny’s franchisees who are not happy with its CEO, Nelson Marchioli, and the direction of the chain.

A group of shareholders, headed by dissident hedge fund investors Oak Street Capital Management, LLC and Dash Acquisitions LLC, call themselves The Committee to Enhance Denny's. They want to nominate three seats of Denny's board, arguing that its current leadership has done a terrible job. The committee says they want to lift the health of Denny's franchisees, and of Denny’s. As part of the reason for the proxy war, the group stated back in January that franchise sales have dropped.

“Over the past decade, Denny’s management and board oversaw a 15% decline in total system-wide restaurants to 1,551 units.  This stands in stark contrast to the Company’s closest competitor, IHOP, which during the same timeframe increased system-wide restaurants from 922 units to 1,433 units(3). The group continued, “management has resorted to selling restaurants to franchisees at fire sale prices.” They added, “We are deeply concerned that many of the largest franchisees of Denny's have lost faith in management's ability to turn around the Company's operating performance.”

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Chart:The Committee to Enhance Denny's

But something is up. Three days ago, the brand’s independent franchisee association finally weighed in on the proxy war. They say not so. Franchisees are actually happy with Marchioli’s leadership.

Craig Barber, chairman of the Denny’s franchisee association, wrote a letter of encouragement to the CEO, refuting the dissident group's claims that Denny's management has not been responsive to its franchisees and expresses a desire to continue working with the current board and company. The association’s chairman wrote, “we have commended the decisions made relative to brand leadership along with recent changes to the brand's marketing strategy in collaboration and alignment with franchise leadership to address the everyday affordability of our brand.”

The safest route may be to publicly support the current leadership.

But there are those who describe the franchisee situation another way. Two years of Super Bowl ads have made Denny’s franchises flip the bill to feed America a free Grand Slam breakfast for a day in 2009 and then in 2010. Since the restaurants have largely had to pay for the cost of offering free food, Denny’s persuaded franchisees that the corporation's super marketing efforts would give fruit by having consumers rush back to the restaurants.

It was a huge gamble.

Consumers didn’t.

Denny's customer traffic has continued to decline in seven of the last eight years. Such charts as the one above, do not make franchisees smile.

Said one insider to this eavesdropper in regard to the spin in the press releases flying about, “Oh what a wicked web we weave when at first we practice to deceive.”

The battle will culminate in a May 19 shareholders meeting.


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