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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."

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In addition to the giveaways, the company is employing another aggressive plan to expand its brand in tough times. Denny's is embracing its history as an after-party haven for young, hungry drunks (and, the company is quick to point out, sober people too). For years, countless 20-somethings across the country, after a night of carousing, have suddenly craved a Grand Slam — pancakes, eggs, bacon, sausage, the works — to soak up the alcoholic suds in their stomachs. It's 3 a.m., the bars are closed ... let's go to Denny's. (Not that I, for one, know any of this from personal experience.) "When all of us were 18 to 24, we'd give up a lot of things when we didn't have money, but partying wasn't one of them," says Marchioli. "When it comes to disposable income, [young adults] might have less, but let me tell you, their priorities haven't changed."

To tap into this base — which the company says it has lost over the past decade — Denny's has created something called the Allnighter program. From 10 p.m. to 5 a.m., the chain has started playing alternative-rock music. It has sponsored more than 30 emerging bands — they get free meals while on tour — and organized late-night meet and greets, and occasional jam sessions, with the musicians in the restaurants. The servers wear casual black T shirts instead of buttoned-up uniforms. Denny's has also just introduced four new late-night menu items, each priced between $3 and $4. These include the "Pancake Puppy 12-pack," a dozen bite-size hotcakes rolled in cinnamon and sugar, and "Kickin' Flavor Wraps," two tortillas served with chicken strips. (See nine kid foods to avoid.)

The idea is to serve stuff that groups of amped-up rabble rousers can share. Denny's wants to give the late-night crowd a social experience they can't get at fast-food drive-throughs, which are now staying open later and eating away at the chain's graveyard-shift revenues. "The party is not going to stop once you get through those doors," says Michael Polydoroff, director of sales, promotions and licensing at Denny's.

Denny's has even instructed its servers to engage the tipsy customers, as long as they're not being too disruptive. "We want them to say, 'Looks like you guys were having some fun tonight — who wants coffee now?' " says Polydoroff. " 'I know where you're at; I've got what you need.' "

The company is marketing its new late-night program directly to young people, using Facebook, Twitter and other social-media channels to spread the word. Denny's is well aware that it needs to get younger. After all, the company is over half a century old, and famous for attracting the senior set for 10 a.m. powwows over coffee. Saturday Night Live recently skewered the chain's reputation with this doozy from "Weekend Update" comedian Seth Meyers: "The director of Iowa's Department of Aging said he will not use the abbreviation DOA, since it is also code for 'Dead on Arrival.' Some are suggesting that the Department of Aging go back to its original name, Denny's."

Denny's deserves credit for mapping out, and executing, these bold, relatively unique recession-fighting strategies. Sadly, they still might not work. Back in New Jersey, Pat Blakovich, a dog groomer, had just finished sharing the two-for-one Grand Slam meal with a friend. She went to Denny's just for the promotion, which she saw online the previous day. Blakovich was satisfied. But she's probably not coming back anytime soon. "It's not just here — I don't want Denny's to feel bad," says Blakovich, 46. "I'm cutting back everywhere, not going out as much at all. The economy sucks." Despite the best efforts of Denny's, free food and hungry drunks can't change that fact one bit.

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• Sean Gregory / Avenel, N.J.
• The low-cost restaurant chain is aggressively fighting the downturn by giving away free meals, and appealing to the late-night carousers