Dive Brief:

• Denny’s will expand a 10-unit test of a new virtual brand, Banda Burrito, to 80 additional restaurants next month, the company said on its Q3 earnings call on Monday. A franchisee is also working on a 20-unit test of virtual brand platform Franklin Junction.
• The company’s off-premise sales held steady in Q3 at 19%, and grew somewhat over the last few weeks of the quarter to 20%. Still, the chain’s traffic is falling, and its sales growth is driven by menu price hikes.
• Denny’s sees virtual brands as a way to offset sluggish traffic and rising wages, the company said on its earnings call. Banda Burrito and Franklin Junction’s suite of brands would join existing virtual concepts, The Burger Den and The Meltdown, if scaled across its system.

Dive Insight:

Virtual brands like Banda Burrito can only boost sales without increasing costs if they offer operational simplicity and leverage underutilized labor and kitchen capacity. For Denny’s, the late-night daypart seems to be the right fit for growing off-premise and virtual brand sales, Chief Financial Officer Robert Verostek said on the call. 

California will be the primary site of Banda Burrito’s expanded test, Denny’s CEO Kelli Valade said on the call. 

“[Banda Burrito] has potential to efficiently expand our off-premise business with popular regional flavors while leveraging many existing SKUs in our pantry,” Valade said.

Denny’s is not directly impacted by AB 1228, which mandates that California QSRs start paying a $20 minimum wage in April, because it is is a full-service, casual dining restaurant, rather than a QSR as defined by the law. The chain anticipates the law will heat up labor market competition between all employers in the state, however.

“We do believe that it will have repercussions into all of the restaurant industry,” Verostek said.

Denny’s servers earn more than $20 an hour with tips on average and its cooks earn a shade less, Verostek said. Because Denny's wage level is already competitive with the $20 QSR pay floor, this could help the company retain workers without enduring a disruptive wage shock that employers with lower average hourly pay could face.

Verostek said Denny’s company-owned stores will hike menu prices about 3% in California. The chain has already raised menu prices 8.6% across its system, which is offset 0.2% by discounting. 

Valade said initiatives including virtual brands could help grow sales enough to negate the impact of rising wages on Denny’s balance sheet, while new or automated equipment could eventually restrain labor costs.

“There's things that we can absolutely do to offset that labor,” Valade said. “Those virtual brands we've mentioned a couple times, adding Banda Burrito and testing Franklin Junction, you can be sure we'll look to that market to be able to do whatever we can there first.”

Valade said an unnamed franchisee was testing a number of brands offered by Franklin Junction at about 20 restaurants, and Denny’s hopes to reach an agreement with the host kitchen platform in the coming months to bring its resources to a broader swath of its system.