---
title: "Why diners never go out of business"
url: https://modern-mba.com/case/diners
sector: "Food & beverage"
sector_url: https://modern-mba.com/sector/food-and-beverage
published: 2023-08-13
updated: 2026-09-02
reading_time_minutes: 14
charts: 14
video: https://www.youtube.com/watch?v=3mLEZaqUdE0
publisher: Modern MBA
license: All rights reserved. Quote with attribution and a link.
---

# Why diners never go out of business

Every other corner of the restaurant industry has been forced to evolve — smaller menus, off-premise dining, automation, originality. Diners have changed almost nothing since the 1940s and have survived all of it. This case study reads the unit economics of Denny's, Cracker Barrel and IHOP to explain why: a business built on cheap carbohydrates and zero expectations is insulated from commodity swings, immune to taste cycles, and structurally incapable of growing fast. Three chains, three opposite strategies, and near-identical store margins.

## Key figures

- **13%** — Store-level operating margin at both Denny's and Cracker Barrel
- **$10.89** — Average spend per Denny's guest per visit, before tax and tip
- **9%** — Total sales growth at the average IHOP across twelve years

## The argument

Diners are the rare American business that has been invincible to change, and the reason is that they never competed on anything change could take away. While the rest of the restaurant industry chased off-premise dining, tight menus and automation, diners kept the 1940s formula — enormous menus, open through the night, pen-and-paper service, and comfort food nobody pretends is good. That is not stubbornness. Customers want Kraft singles, store-bought bread and packet oatmeal, and they want it to cost nothing.

The economics follow from the expectation. Most restaurants build around protein and live or die on commodity prices; diners put carbohydrates at the center, satiate customers cheaply, and insulate themselves from the swings that force everyone else to reprice. Frozen patties, liquid eggs and tubbed soup would end an independent restaurant’s reputation. At a diner they are the product, because value and breadth — not quality — are what the customer came for.

The three chains prove how little strategy matters here. Denny’s has been proactive for a decade and treats franchisees as genuine partners; Cracker Barrel refuses to franchise, cooks with fresh ingredients and spends more on labor than anyone; Dine Brands neglected IHOP for over ten years while extracting royalties, a pancake mix markup and a rent markup from operators it gave no support to. All three land on the same 13% store margin and the same 2-4% growth. A cheap plate of pancakes is a cheap plate of pancakes — and nostalgia is a fragile currency, always worth more in your head than in your stomach.

## Charts

### Denny's has stopped opening restaurants

Locations by geography. The US count peaked at 1,610 in 2016 and has fallen every year since; international growth has not covered the difference.

|  | United States | International |
| --- | --- | --- |
| 2012 | 1,590 | 98 |
| 2013 | 1,599 | 101 |
| 2014 | 1,596 | 106 |
| 2015 | 1,599 | 111 |
| 2016 | 1,610 | 123 |
| 2017 | 1,607 | 128 |
| 2018 | 1,578 | 131 |
| 2019 | 1,559 | 144 |
| 2022 | 1,445 | 157 |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-1 · Sources: https://modern-mba.com/case/diners#sources

### The smallest room in full service

Average location size in square feet, 2022. A Denny's is roughly half an Olive Garden and barely a third larger than a Chipotle counter.

|  | Measures |
| --- | --- |
| Denny's | 4,400 sq ft |
| Chipotle | 2,580 sq ft |
| Outback | 6,000 sq ft |
| BJ's | 7,500 sq ft |
| Olive Garden | 7,700 sq ft |
| Texas Roadhouse | 8,000 sq ft |
| Ruth's Chris | 8,500 sq ft |
| Cheesecake Factory | 8,750 sq ft |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-2 · Sources: https://modern-mba.com/case/diners#sources

### It is a breakfast and lunch business that never closes

Share of customers by time of day. Two thirds of the traffic arrives before dinner, and the overnight hours the brand is known for bring in 17%.

|  | Percentages |
| --- | --- |
| Breakfast | 26% |
| Lunch | 36% |
| Dinner | 22% |
| Late night | 17% |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-3 · Sources: https://modern-mba.com/case/diners#sources

### The franchisee's restaurant never caught the company's

Annual sales per location by ownership type. Corporate stores went from $1.8M to $3.0M; the franchises that are 96% of the system went from $1.4M to $1.7M.

|  | Corporate | Franchise |
| --- | --- | --- |
| 2011 | $1.8M | $1.4M |
| 2012 | $1.9M | $1.4M |
| 2013 | $2.0M | $1.4M |
| 2014 | $2.1M | $1.5M |
| 2015 | $2.2M | $1.6M |
| 2016 | $2.3M | $1.6M |
| 2017 | $2.3M | $1.6M |
| 2018 | $2.3M | $1.6M |
| 2019 | $2.5M | $1.7M |
| 2022 | $3.0M | $1.7M |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-4 · Sources: https://modern-mba.com/case/diners#sources

### Eleven years of proactivity bought 3% a year

Annual sales per location, ownership blended. $1.61M in 2011 to $2.36M in 2022 — 46% across eleven years, most of it arriving after 2019.

|  | US dollars |
| --- | --- |
| 2011 | $1.61M |
| 2012 | $1.67M |
| 2013 | $1.72M |
| 2014 | $1.8M |
| 2015 | $1.89M |
| 2016 | $1.91M |
| 2017 | $1.93M |
| 2018 | $1.96M |
| 2019 | $2.07M |
| 2022 | $2.36M |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-5 · Sources: https://modern-mba.com/case/diners#sources

### The check is the ceiling

Average spend per guest before tax and tip. Denny's cleared $10.89 in 2019 and Cracker Barrel $10.84 — the two chains price within a nickel of each other.

|  | Cracker Barrel | Denny's |
| --- | --- | --- |
| 2015 | $10.23 | $9.69 |
| 2016 | $10.63 | $9.95 |
| 2017 | $10.19 | $10.14 |
| 2018 | $10.48 | $10.38 |
| 2019 | $10.84 | $10.89 |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-6 · Sources: https://modern-mba.com/case/diners#sources

### Labor is the constraint, not food

Food and labor as a share of sales. Denny's spends 39% on labor against 25% on food, the widest gap of any chain here.

|  | Food costs | Labor costs |
| --- | --- | --- |
| Denny's | 25% | 39% |
| BJ's | 27% | 38% |
| The Cheesecake Factory | 25% | 37% |
| Texas Roadhouse | 35% | 33% |
| Shake Shack | 30% | 30% |
| Chipotle | 30% | 26% |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-7 · Sources: https://modern-mba.com/case/diners#sources

### Every advertising dollar comes back thirty-seven times

Sales generated per dollar of advertising. The return sat between $36 and $38 for seven straight years, then jumped to $47 in 2022.

|  | US dollars |
| --- | --- |
| 2013 | $37 |
| 2014 | $37 |
| 2015 | $38 |
| 2016 | $37 |
| 2017 | $36 |
| 2018 | $36 |
| 2019 | $38 |
| 2022 | $47 |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-8 · Sources: https://modern-mba.com/case/diners#sources

### Cracker Barrel is a shop with a restaurant attached

Revenue by income stream. Retail is a $700M business and about 20% of revenue, and customers walk through it on the way in and on the way out.

|  | Food & drink | Retail |
| --- | --- | --- |
| 2010 | $1.91B | $0.49B |
| 2011 | $1.93B | $0.50B |
| 2012 | $2.05B | $0.53B |
| 2013 | $2.10B | $0.54B |
| 2014 | $2.14B | $0.55B |
| 2015 | $2.27B | $0.57B |
| 2016 | $2.32B | $0.59B |
| 2017 | $2.35B | $0.58B |
| 2018 | $2.44B | $0.58B |
| 2019 | $2.48B | $0.59B |
| 2020 | $2.03B | $0.49B |
| 2021 | $2.23B | $0.59B |
| 2022 | $2.56B | $0.70B |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-9 · Sources: https://modern-mba.com/case/diners#sources

### And the shop is where the margin is

Gross margin on retail merchandise. Around 50% on the rocking chairs and candy, against a restaurant that breaks even on the food.

|  | Percentages |
| --- | --- |
| 2015 | 51% |
| 2016 | 51% |
| 2017 | 52% |
| 2018 | 52% |
| 2019 | 51% |
| 2022 | 49% |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-10 · Sources: https://modern-mba.com/case/diners#sources

### Opposite strategies, the same store margin

Restaurant-level operating margin. One refuses to franchise and cooks fresh, the other franchises 96% of its system. Both land in the same band.

|  | Cracker Barrel | Denny's |
| --- | --- | --- |
| 2012 | 13% | 16% |
| 2013 | 13% | 14% |
| 2014 | 13% | 14% |
| 2015 | 14% | 16% |
| 2016 | 15% | 17% |
| 2017 | 16% | 17% |
| 2018 | 14% | 15% |
| 2019 | 14% | 11% |
| 2022 | 9% | 10% |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-11 · Sources: https://modern-mba.com/case/diners#sources

### Dine Brands takes $200M a year out of IHOP

Earnings from royalties, the pancake mix operators must buy daily, and rent on buildings it leases them. Up 4% a year while the restaurants were not.

|  | US dollars |
| --- | --- |
| 2010 | $149M |
| 2011 | $154M |
| 2012 | $159M |
| 2013 | $161M |
| 2014 | $170M |
| 2015 | $184M |
| 2016 | $185M |
| 2017 | $191M |
| 2018 | $199M |
| 2019 | $205M |
| 2020 | $143M |
| 2021 | $190M |
| 2022 | $199M |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-12 · Sources: https://modern-mba.com/case/diners#sources

### At an 85% margin on money it does nothing to earn

Segment profit margin on the IHOP franchise business. Royalties, the pancake mix and the rent markup clear 80% or better in every year the episode charts.

|  | Percentages |
| --- | --- |
| 2010 | 82% |
| 2011 | 83% |
| 2012 | 82% |
| 2013 | 85% |
| 2016 | 87% |
| 2017 | 88% |
| 2018 | 87% |
| 2019 | 87% |
| 2020 | 79% |
| 2021 | 89% |
| 2022 | 85% |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-13 · Sources: https://modern-mba.com/case/diners#sources

### The restaurant it was extracted from grew 9% in twelve years

Annual gross revenue of the average IHOP. $1.76M in 2010, $1.92M in 2022 — neglect produced the same low single-digit growth as Denny's proactivity.

|  | US dollars |
| --- | --- |
| 2010 | $1.76M |
| 2011 | $1.74M |
| 2012 | $1.71M |
| 2013 | $1.76M |
| 2014 | $1.83M |
| 2015 | $1.95M |
| 2016 | $1.97M |
| 2017 | $1.87M |
| 2018 | $1.89M |
| 2019 | $1.90M |
| 2020 | $1.34M |
| 2021 | $1.72M |
| 2022 | $1.92M |

Source: Modern MBA, “Why diners never go out of business”, published August 2023. Chart: https://modern-mba.com/case/diners#chart-14 · Sources: https://modern-mba.com/case/diners#sources


## Takeaways

1. Diners survived by refusing to compete on excellence. While restaurants gravitated to off-premise dining, small menus, originality and automation, diners kept the **1940s** formula — huge menus, open **24/7**, pen-and-paper service, and no pretense of quality. The customer is not asking for reinvention.
2. The menu is built on carbohydrates on purpose. Most restaurants center on protein and are therefore exposed every time protein prices move. **Diners position carbs as the star**, satiate customers cheaply, and are structurally insulated from the commodity swings that force other restaurants to reprice.
3. The low expectations are the margin. Frozen premade patties, liquid eggs, tubbed soup, frozen vegetables and packaged desserts would shame an independent restaurant. At a diner they are simply the product, because customers arrive expecting cheap, simple and consistent.
4. **Denny's** is the oldest diner chain in the world and the most proactive of the three, with over **1,600** locations, **90%** of them in the United States, **96%** franchised, in freestanding **4,400 sq ft** buildings seating **140**.
5. Denny's treats franchisees as partners, which is genuinely rare. Every franchisee joins the Denny's Franchisee Association, which runs **five committees** — Development, Marketing, Operations, Supply Chain and Technology — collaborating directly with corporate. The equivalent bodies at **Burger King** and **KFC** are self-organized and carry no official recognition.
6. Denny's sees **fast food**, not other diners, as its competition — and reacts to it. It only replaced the water in its pancake mix with eggs and buttermilk after **McDonald's** launched all-day breakfast in **2015**, then promoted the result as **50% fluffier**.
7. None of the proactivity moved the number. The average Denny's franchise grossed **$1.3M** in 2010 and **$1.7M** by 2022; blended across ownership types the average location went from **$1.6M** in 2011 to **$2.3M** in 2022 — **46%** over eleven years, or **3-4%** a year. Locations went from **1,685** in 2011 to roughly **1,600** by 2022.
8. The check is the ceiling. A Denny's guest spent **$10.89** in 2019 before tax and tip, well below Olive Garden, the Cheesecake Factory or BJ's Brewhouse. High margins on tiny checks still produce very few dollars.
9. Labor, not food, is the constraint. A single Denny's runs on **50 people** across two shifts, and labor has averaged **39%** of sales over the past decade against food costs of **25%**. The **$70-80M** advertising warchest returns **$47 in sales for every $1 spent**.
10. **Cracker Barrel** rejected franchising outright on the belief that food and service can only be held to standard through control — so it has just **664** restaurants and opened only **69** in twelve years, against Denny's 1,600-plus. **80%** sit alongside highways to catch travelers.
11. It is also a retail business wearing a restaurant. Of **8,900 sq ft**, **1,900** is shop floor, and customers enter and exit through it. Retail is a **$700M** business at **50% gross margins**, contributing **20%** of revenue — a high-margin supplement propping up a low-margin restaurant.
12. And it lands in exactly the same place. Cracker Barrel's store-level operating margin is **13%**, identical to Denny's — Denny's inflated by the survivorship bias of its few remaining high-performing corporate stores, Cracker Barrel's propped up by retail. Growth from 2010 to 2019 averaged **2.9%** a year.
13. **IHOP** is the largest diner chain in the world, over **1,700** locations, **all** franchised or licensed, and it has been neglected for over a decade while **Dine Brands** was preoccupied with saving **Applebee's**.
14. Dine Brands extracts from IHOP franchisees three ways — a **4%** royalty, a markup on the proprietary pancake mix operators are required to buy daily, and a markup on the rent for buildings it leases them — plus **3.5%** of gross sales for advertising. It offers no site selection help, no financing options, and requires everything paid upfront in full.
15. It worked beautifully for the franchisor and barely at all for the franchisee. Dine Brands took nearly **$200M** a year out of IHOP at over **80% gross margins**, growing **4%** annually for twelve years — while the average IHOP grossed just **$1.9M** in 2022 and grew total sales **9% in twelve years**. The company stopped reporting average check after **2015**, when it was **$11.53**.
16. The conclusion is the same in all three directions. Proactive investment, refusal to compromise, and outright neglect all produce a 13% store margin and low single-digit growth. **Certain businesses are so commoditized that strategy cannot make them grow fast, and nothing can make them die.**

## Common questions

### Why are diners so resistant to change?

Because they never competed on the things change destroys. Diners don't win on originality, quality or innovation — they win on value and breadth, with enormous menus and low prices that set expectations no trend can raise. Customers arrive wanting Kraft singles and packet oatmeal, not artisan bread and third-wave coffee. A business that promised nothing exceptional has nothing to be disrupted out of.

### How do diners make money on such low prices?

By making carbohydrates the star of the plate instead of protein. Carbs satiate customers cheaply and are far less volatile than meat, so diners avoid the commodity swings that force other restaurants to reprice. Combine that with frozen premade patties, liquid eggs, tubbed soup and packaged desserts — all acceptable at a diner and unacceptable anywhere else — and the margin holds even at a $10.89 average check.

### Which diner chain makes the most money?

Cracker Barrel by a distance — its earnings are roughly seven times Denny's, and the average location grosses nearly $5 million across restaurant and retail against $2.3 million at Denny's and $1.9 million at IHOP. But store-level operating margin at both Cracker Barrel and Denny's is an identical 13%. Cracker Barrel gets there on volume, Denny's on franchise fees.

### Why doesn't Cracker Barrel franchise?

Because it believes food quality and service can only be maintained through direct control. The cost of that conviction is scale: 664 restaurants and just 69 new ones in twelve years, against over 1,600 Denny's. The benefit is the highest average unit volume in the category. It also makes the earnings more volatile — as a conventional restaurant operator, Cracker Barrel's operating income dips to single digits in bad years, where Denny's franchise royalties stay stable.

### How does Dine Brands make money from IHOP?

Three ways, none of them running restaurants. A 4% royalty on gross sales, a markup on the proprietary pancake mix franchisees are required to buy and use every day, and a markup on the rent for the buildings it leases to them — plus a further 3.5% of gross sales for advertising. It owns no locations, provides no site selection help and no financing. The arrangement returned nearly $200 million a year at over 80% gross margins while the average IHOP grew sales just 9% in twelve years.

### Is the diner business dying?

No, and that is the point of the case. Denny's shrank slightly from 1,735 locations before COVID to about 1,600, but all three chains have posted positive sales in nearly every year regardless of how well or badly they were run. What diners cannot do is grow quickly — 2 to 4% a year is the ceiling, because a cheap plate of pancakes, eggs and bacon has a hard limit on what it can be sold for.

### Why is labor the biggest cost at a diner?

Because 24-hour service and table service both require bodies, and the food is too cheap to dilute the ratio. A single Denny's runs on about 50 people across two shifts, and labor averages 39% of sales against 25% for food. Cracker Barrel employs over 100 people per location and spends 45% of sales on labor. The check size is what makes those percentages hurt: high labor against an $11 average ticket.

### What are Denny's and IHOP's virtual brands?

The Burger Den and The Melt-Down at Denny's, and IHOP's equivalents — existing menu items renamed and listed as separate restaurants on delivery apps to squeeze sales out of slow dinner and late-night shifts. Nothing new is cooked; the customer ordering from a delivery app simply doesn't know they are ordering from a diner.

## Discussion

- Denny's invested proactively for a decade, Cracker Barrel refused every shortcut, and Dine Brands neglected IHOP outright — and all three landed on the same store margin. What does that say about how much strategy is worth in a commoditized category?
- Diners put carbohydrates at the center of the plate specifically to escape protein commodity risk. Where else could a business redesign its product to opt out of an input market rather than hedge it?
- Cracker Barrel's restaurant business is low-margin and its 50%-margin retail shop is what makes the numbers work. Is Cracker Barrel a restaurant with a store attached, or a store with a restaurant attached — and does the answer change how you would run it?
- Dine Brands extracts royalties, a pancake mix markup and a rent markup from operators it gives no support to, and the franchise still grows. How long can a franchisor take without giving before the model breaks?
- The episode ends on nostalgia being worth more in your head than in your stomach. If that is true, what is the actual asset these chains own — and can it be depleted?

## Sources

Location counts, average unit volumes, daypart mix, franchise fees and royalty rates, labor and food costs as a percentage of sales, advertising spend and advertising efficiency, retail revenue and segment margins from Denny's Corporation, Cracker Barrel Old Country Store and Dine Brands Global annual reports, 10-K filings and franchise disclosure documents, 2010 through 2022; per-guest check averages as last reported by each company

---

From [Modern MBA](https://modern-mba.com/). Read this case in full at [https://modern-mba.com/case/diners](https://modern-mba.com/case/diners), or watch the episode at https://www.youtube.com/watch?v=3mLEZaqUdE0.