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Why IHOP and Denny’s are leading a roadside diner revival

A server in New Jersey delivers orders at IHOP, America’s largest pancake house. (Photographer: Emile Wamsteker/Bloomberg News)

America’s roadside diners, pancake houses and coffee stops have enjoyed a sweet ride in recent months. Within the past week, IHOP and Denny’s said their average restaurant’s sales last year climbed 3 percent over 2013, the biggest year-over-year jump in a decade. Denny’s emboldened investors pushed the stock for “America’s Diner” to a 17-year high this week.

They have none of the newness, hype or prestige of fancy eateries or fast-casual chains. But amid super-low gas prices and an improving economy, analysts said, diners offer something far more attractive: Cheap menus, unavoidable restaurants and a direct line to the all-American appetite.

“Folks who go to family dining restaurants, these are not people making a million dollars a year,” said Mark Kalinowski, a research analyst with Janney Montgomery Scott. “These are everyday Americans, and when they leave the gas station with $20 more in their pocket, a little bit of that finds its way into the cash registers of the family dining chains.”

Mild winter weather, cheap gas and a better job market have helped persuade more hungry Americans to go out to eat. The chain-restaurant industry in the last quarter saw the best same-store sales growth in six years, Black Box Intelligence data show. The conditions also have pushed Americans to take more road trips, where they’ll pass diners on nearly every highway exit.

At Cracker Barrel Old Country Store, where more than 80 percent of its southern-fried Americana eateries are plunked directly next to interstate off-ramps, sales at the average restaurant soared 8 percent in the last three months. The chain’s stock has also climbed to its highest point since publicly debuting in 1981.

“Our demographic is average American, good working people,” Bruce Dean, a co-founder of the Black Bear Diner chain, told industry journal Nation’s Restaurant News. “Money has been tight traditionally. Wages are relatively flat. But if gas prices go down 30 percent, you just got a raise.”

Decades-old diners have made clear that they are not ready to go quietly into retirement. IHOP’s parent company, DineEquity, said Wednesday that franchisees nationwide will open, on average, a new diner every week this year. Waffle House is partnering with a sharing-economy app, Roadie, by turning its diners into pit stops for travelers who deliver packages along their drives.

Denny’s, the South Carolina-based chain famous for workaday fare like the Grand Slam and Moons Over My Hammy, opened two dozen restaurants in the last three months of the year and even reopened some shuttered diners, including a Denny’s around Thanksgiving near the Las Vegas Casino Royale.

The chain is busting into the fast-casual market pioneered by Chipotle with a millennial-targeted spin-off, called The Den, one of which opened last month near a college campus in San Diego. But it’s also going upscale, opening its first diner in New York City with a full bar and a $300 Grand Cru Slam, a brunch for two that comes with a bottle of vintage Dom Perignon champagne.

Denny’s, which calls itself “the world’s largest full-service family dining chain,” is also pushing heavily to expand worldwide, and it now has 100 diners across Canada, Curaçao, Honduras, New Zealand and other countries. The food, however, is not just flapjacks: In Japan, Denny’s has offered up rich plates of massaman curry, promoting it as “the most delicious food in the world.”

That push has taken the humble homestyle brand into unexpected territory. The chain plans to open 30 diners across the Middle East over the next decade. This year, a franchisee plans to open the first Denny’s in the United Arab Emirates.

“Our unique ‘America’s Diner’ brand positioning serves as that foundation … (for) a differentiated and relevant brand,” Denny’s chief executive John C. Miller said in a call with analysts last week. “It provides the warm welcome that we all want, that place to be ourselves, and that place affectionately known as Denny’s.”

As with most diners, the chain has won lots of business and customer loyalty simply by keeping its food cheap. Denny’s “$2 $4 $6 $8 Value Menu” has been a rousing success, Miller said, and was “very helpful during the tougher economic time.”

But with improvements in the economy and consumer confidence, the chain is now also profiting both off subtly raised prices — for example, a $2 biscuit, gravy and egg breakfast that now costs $4 — and guests who are opting to splurge on pricier-but-still-cheap dishes, like steaks and salmon.

Denny’s has stretched its marketing across all ends of the consumer spectrum, from extending long-running seniors’ discounts to launching a Millennial-targeted animated Web series. To reach Hispanics, the diner’s fastest growing demographic, the chain has run Spanish-language advertising and social media campaigns, like a Denny’s Latino Facebook page. (In 2012, the chain sponsored a spoof video in which “Dog Whisperer” Cesar Millan is seen “taming an unruly Denny’s Sizzlin’ Skillet.”)

The diner chains, analysts said, are also just getting better at knowing what customers want. IHOP dropped pot roast, tilapia and other unpopular dishes in recent years to better focus eaters’ appetites (and chefs’ time) on its better-selling dishes. Denny’s launched a new menu last month that Miller said features “more pictures and opportunities for up-selling.”

Even simple changes, applied on a national scale, have proven to be wildly profitable. When IHOP added prices on the menu for all its appetizers, orders of the dishes climbed, research analyst Kalinowski said, because patrons could see just how cheap those Monster Mozza Sticks really were.

Denny’s has credited some of its growth to a massive “new Heritage” remodeling project, in which the chain’s outposts will be made to look more like an old-fashioned diner. But it offers more than just looks: Among the upgrades are floors that are easier to clean, helping save workers’ time and keep eaters happy.

The roadside-diner business will always remain vulnerable to climbing gas prices, bad weather and volatile food costs (though prices for bacon, a diner staple, have recently plunged). And some of those changes could happen quicker than others: Gas prices have climbed every day for the last month, AAA data show.

But diners have a few fundamental strengths, too. They offer so many things on the menu that they’re more insulated when food prices shift: A diner could shake off the same climbing beef prices, for instance, that would make a steakhouse sweat. And many are open 24-7, guaranteeing them a consistently captive audience late at night.

Yet the sweetest part of the diner business, analysts said, may be how easy it is to love: by all ages, at all price points and at all times of day.

“If it was just blue-hairs in the restaurant, I’d be worried about where the sales would be 10 years from now,” said Mark Smith, a senior research analyst at Feltl & Co. “But they have customers coming in as kids on the weekend with their family, who then grow up into college kids stumbling in during the middle of the night, who then later come in and bring their own kids. They’re able to keep that lifelong customer, which is very appealing when you’re looking long term.”