Denny's: Where the Food Is Free and Drunks Can Pee

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Denny's, one of the many casual-dining chains whose sales are suffering in the recession, needs a few thousand customers like Cory McGrath. On April 7, McGrath, 20, saw a television ad for a Denny's promotion that was taking place the next day. The deal: buy one of its famous $5.99 "Grand Slam" breakfasts, and get a free "Grand Slamwich," a tasty heart attack consisting of scrambled eggs, sausage, bacon, shaved ham, mayonnaise and American cheese on potato bread, for a pal (or, if you are into wolfing down a ghastly amount of food, yourself).

Sold. The following afternoon, McGrath corralled three of his buddies and drove 35 miles from his New York City home to the nearest Denny's, in Avenel, N.J. They all downed their meals, two of them free, and considered themselves hooked. "It's amazing," McGrath said after jacking up his cholesterol. "It's cheap, and it's good." His one wish? That Denny's open a restaurant in Queens.

To lure customers in the midst of a recession, Denny's has turned to a radical strategy: giving away the store. On Feb. 1, the 56-year-old company aired a Super Bowl commercial that promised free Grand Slams to anyone who walked through the door from 6 a.m. to 2 p.m. on Feb. 3. Denny's, which is open 24/7, says some 2 million free meals were served. Pleased with the buzz and foot traffic, Denny's followed up with the two-for-one food sale on April 8. "We had to do something bold," says Denny's CEO Nelson Marchioli. "We said 'free' makes a lot of sense to us in this economy — with all the other offers the consumer is getting slammed with, we really need to come out and do something that people will stand up and notice. We need to reacquaint the consumer with Denny's." (See the best and worst Super Bowl commercials of 2009.)

The $760 million company, which has more than 1,500 locations in the U.S., needs a spark. The recession has forced diners to flee restaurants like Denny's, the Cheesecake Factory and P.F. Chang's and head to either cheaper fast-food joints or the comfort of home. "For Denny's, the core consumers are blue-collar families," says Anton Brenner, restaurant analyst at Roth Capital Partners. "They've been squeezed very hard." In the fourth quarter of 2008, same-store sales dropped 6.1%. Sales fell 3.7% for the year, and the company's stock price, at $2.14 a share, has dropped 30.5% over the past 12 months. "It wasn't a good year for us," Marchioli admits.

Denny's isn't the only eatery giving away food to generate goodwill and, it hopes, future sales. Cici's Pizza is scattering a million pennies on streets around its 650 restaurants. On the coins are stickers offering free meals, free drinks and buy-one-get-one-free deals. Tim Hortons, the Canadian coffee and sandwich chain, gave away free sandwiches in its U.S. locations on April 1. Shops in Great Britain, Australia and Spain have experimented with "pay what you want" options on their menus.

Do these promotions justify the cost? At Denny's, doesn't giving away high-margin breakfast meals drain the bottom line? No, says CEO Marchioli. The additional customers buying juice and coffee with their free breakfasts, plus the repeat business the giveaways generate, cover the cost. "We've already paid for the Super Bowl promotion, and then some," Marchioli said on April 8, the day of the two-for-one offer. "And today is a profit-making exercise. For giving it away, do I make less margin? Yes. But I drive new traffic. And in this economy, particularly for Denny's, it's important to drive new traffic. It's about taking share that we've had over the years, and that we've let other people take from us."

Some analysts, however, say freebies can backfire long-term. "Denny's is panicking, pandering and throwing up a Hail Mary and praying it works," says Rob Frankel, a brand expert who has consulted for a variety of Fortune 500 companies. To skeptics like Frankel, if a company gives away a product, the product must not be that good. "What does it do to the perceived value of your product when one day you are charging for it, and the next day you're giving it away?" asks Frankel. "In the long run, Denny's is cheapening its brand."

See the top 10 food trends of 2008.

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