Rally’s Hamburgers, Inc.

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Rally’s Hamburgers, Inc.

14255 49th Street North
Clearwater, Florida 33762
U.S.A.
(727) 519-2000
Fax: (727) 519-2001
Web site: http://www.rallys.com

Public Company
Incorporated: 1984
Employees: 5,500
Sales: $144.9 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol. RLLY
SICs: 5812 Eating Places; 6794 Patent Owners & Lessors

Rally’s Hamburgers, Inc. operates a chain of limited-menu, fast-food establishments featuring double drive-thru order and pickup service but no indoor seating except at five experimental locations. One of the largest chains using this arrangement, Rally’s has always placed its emphasis on delivering a quality hamburger more cheaply and quickly than its competitors. It features the original signature Rallyburger and Big Buford (a double-patty cheeseburger), two other, newer signature burgers, and a chicken breast sandwich, plus uniquely seasoned fries and onion rings, and soft drinks and milkshakes to complement its entrees. Its menu has remained simple, originally consisting of 11 basic items, all of which are readied within 45 seconds after a customer places an order.

By the close of 1997, the Rally system operated 477 restaurants in 18 states, predominantly in the Midwest and the South. Of these, the company owned 229 units. Another 221 were private or group-owned franchises, and an additional 27, operating under Rally’s name, were owned by CKE Restaurants, Inc., one of the principal shareholders of Rally’s Hamburgers. CKE, which is the parent company of the Hardee’s and Carl’s hamburger chains, operates its units as Rally’s Hamburgers in California and Arizona and has an affiliate relationship with Rally’s.

Rally’s is a franchiser and, under the names Rally’s Management, Inc. and Rally’s Finance, Inc., both a corporate manager and lending agency for franchisees needing loans to finance the purchase of equipment and construction of Rally’s modular restaurant units. Within the Rally’s system, its subsidiaries—Rally’s Hamburgers, Inc., Rally’s of Ohio, Inc., Self-Service Drive Thru, Inc., and Hampton Roads Food, Inc.—own and operate Rally’s drive-thru restaurants in diverse locales. The company also owns Zipps Drive-Thru, Inc. (ZDT), a subsidiary created to procure and manage the Zipps company and its franchise system.

A Recent Company

Rally’s Hamburgers, Inc. is a recent addition to the fast-food business. It was founded and incorporated in Tennessee in 1984 and opened its first restaurant in January 1985, but did not offer franchises until November 1986. It waited an additional three years, until 1989, to go public, the same year in which it created its first subsidiary, Rally’s of Ohio, Inc.

At the outset, Rally’s adopted its double drive-thru system, basing it on the fact that about half of all fast-food hamburger service is takeout or drive-thru. Rally’s restaurants do provide outside patio benches and tables, but, except for the five experimental units, no interior seating, hence the emphasis has always been on quick takeout service and quality food. The arrangement has a 1950s drive-in ambiance, providing a bit of nostalgia that sets it apart from giant chains like McDonald’s, Burger King, and Wendy’s and giving it a distinct identity.

In 1990, one year after Rally’s went public, the company’s management reins passed to Burt Sugarman, a film and television producer and major investor in the business. To attract new owner-managers, Sugarman began reducing royalty costs for franchise holders, and, in 1992, after two very promising and profitable years, Rally’s even rebated $700,000 to franchisees. These moves and the company’s quick expansion prompted analysts to note that Rally’s had become a serious contender in the fast-food chain market.

Sugarman oversaw the expansion. It included the buyout of Maxie’s of America and Snapps Drive-Thru in 1991 and Zipps Drive-Thru in 1992, purchases which added an additional 100 units to Rally’s chain. In that same year, Rally’s organized MAC 1 to purchase Reaman Corporation, after that company became insolvent and was forced into bankruptcy. Rally’s bought all of Reaman’s common stock for about $200,000. Reaman, located in Greensboro, North Carolina, had been the contracted fabricator of Rally’s modular restaurant units.

1993–96: Difficult Years

The expansion continued in 1993, when Rally’s bought West Coast Restaurant Enterprises in a stock exchange agreement and acquired three franchised Rally’s restaurants in Bakersfield, California. However, the expansion was becoming too rapid, and in that same year the company lost money, primarily from a $12 million outlay to cover the cost of closing 26 units. It also opened only half the number of its projected 100 new units. Rally’s management responded to the losses with attempts to improve efficiency through streamlining its operations. Among other things, it installed computers in each of the company-owned units. Networked to the main office, these point-of-sale computers gave the company logistical control of the day-by-day operation of its restaurants. They also provided a means of monitoring the progress of the various units and making better-informed decisions about market strategies. Still, losses worsened, increasing by 100 percent between 1993 and 1994.

A managerial shake-up followed. Sugarman, who had earlier stepped down, returned as chairman. Losses continued, however, largely because the company’s overexpansion and discount-pricing strategy was not advancing Rally’s share of the fast-hamburger market. It was reeling under the impact of the “margin-eroding 99-cent sandwich wars” being conducted by giant competitors. Thus, in 1994, the company was forced to abandon some planned expansion projects, including additional real estate purchases and infrastructure investments. It made alternative plans to dispose of up to 60 company-owned units. However, the drastic reduction was modified the following year, despite the fact that the company suffered a net loss of $47 million. Alternative financial strategies helped planners limit downsizing to the closure of 16 of the 60 selected units and an additional nine units that had been performing poorly at core market sites.

In 1995, Rally’s introduced some new sandwiches and price points in an effort to outflank the value-meal strategy adopted by Wendy’s and McDonald’s that was deeply undercutting the 99-cent signature hamburger market of the double drive-thru chains. It also bought out Hampton Roads Food, Inc. and divested itself of the Beaman Corporation, selling all common stock in the module-fabricating company for about $3.1 million. However, it still lost ground. Its stock, once valued at $20 a share, dropped to about $2.50 in the last quarter of 1995, and the company was suffering losses at 55 underperforming units outside its core market. In addition to a frustrating failure to make gains in its tough market, mostly out of its control, in its worst years the company also faced problems of its own devising. For example, its 1996 advertisements were found by industry analysts to be extraordinarily inept, “adolescent, brainless, and offensive,” full of appetite-suppressing sexual suggestiveness. Nevertheless, Don Doyle, the new president and CEO of Rally’s remained convinced that value and convenience were the keys to a financial turnaround, and despite repeated losses, Rally’s was not ready to abandon its basic double drive-thru scheme. What it needed was some new marketing strategies and restructuring.

1997: Checkers Attempt to Purchase Rally’s and Alternative Arrangements

At the end of 1966, Rally’s shifted its brand positioning strategy partly away from price towards even better quality. The changes resulted in an increase in the size of its basic hamburger patty from 2.8 to 3.2 ounces and the addition of two new signature hamburgers to its core product line—the Barbecue Bacon Cheeseburger and the Super Double.

Other, more essential changes began in 1997. In response to its financial reversals, Rally’s began negotiations with a projected buyout of its chain by Checkers Drive-In Restaurants, partly owned by CKE Restaurants, but financial obstacles imposed by the Securities and Exchange Commission prompted the two companies to withdraw from a full merger.

Company Perspectives:

As we work on delivering great food served consistently, our marketing group is working to ensure that a consistent brand positioning gives the consumer a reason to stop in at Rally’s. An overall brand positioning focused on serving the BEST hamburger in the industry is being established. A new creative positioning was introduced in April 1998 to support the new brand positioning. “Make me a burger. Hold the hype.” communicates the message that great food is the reason to visit a hamburger restaurant, and that toys, movie tie-ins or massive playlands are not a substitute for a great burger.

However, both companies saw potential benefits in a close affiliation. In fact, they had actually entered agreements as early as November 1994, when Rally’s, through an exchange of property and a waiver arrangement, acquired some leases for Checkers restaurants and converted five existing units into Rally’s restaurants. New negotiations were started in November 1997, when Rally’s entered a management agreement with Checkers. Under its terms, Checkers began providing various administrative services for Rally’s. That move was followed by a stock exchange agreement in December. Rally’s purchased over 19 million shares of Checkers common stock, including 14.4 million shares owned by CKE and Fidelity National Financial (FNF), a California-based title insurance underwriting firm headed by William P. Foley, II, who was then chairman of both CKE and Checkers. Also involved in the arrangement was the Giant Group, a masonry and portland cement company headed by Sugarman and holder of a large block of Rally’s stock. In the exchange, Rally’s issued shares of its common stock and a new series of preferred stock. The purchase made Rally’s, with 27 percent of the outstanding shares, the largest holder of Checker’s common stock. When converted, the two major investors, CKE and FNF, would own about 44 percent of the outstanding shares of Rally’s common stock.

Although it was not an official merger, the stock-exchange plan allowed Rally’s and Checkers to restructure and consolidate their managerial staffs. Foley replaced Sugarman as Rally’s chairman. Corporate headquarters also moved from Louisville, Kentucky, to Clearwater, Florida, into the same building housing the headquarters of Checkers. This was a costsaving move that combined the operational and administrative functions of the two companies. It thereby allowed for the benefits of a merger without obligating either company to undertake the costly accounting procedures required by the Securities and Exchange Commission. Among the benefits was a reduction in food costs made possible by the fact that the 5,000 restaurants in the CKE family were in a better position to leverage prices than was possible for the individual companies comprising the cooperative group.

New Strategies for 1998 and After

The cooperative managerial team also sought to develop a new “positioning” strategy designed to counter the low-price promotional strategy employed by other major chains like McDonald’s and Burger King in their special “value” packages and low-price promotions. As part of the new strategy, Rally’s began experimenting with indoor seating, responding to the fact that about 50 percent of fast-food customers want to dine in. Beginning in 1997, as a test, it remodeled five double drive-thru units into restaurants with indoor dining, with encouraging but inconclusive results. In addition, it has permitted a few franchisees to open Rally’s restaurants in some empty buildings that had formerly housed restaurants using concepts incompatible with a double drive-thru arrangement. In 1998, Rally’s also sought to enhance its public face by negotiating a $12 million ad campaign with M&C Saatchi, replacing the agency that prompted the harsh criticism of its earlier Rally’s ads. The new spots with the keynote motto—“Make me a Burger. Hold the hype.”—began airing on national television in March. The company also entered into an agreement with the North Carolina-based Fresh Foods, Inc. (formerly named WSMP, Inc.) that resulted in the placing of Rally’s brand products in retail stores and clubs. Fresh Foods, comprised of wholly owned subsidiaries, packages and markets branded sandwiches in its prepared food division. Its tie-in with Rally’s as well as CKE and Checkers was strengthened with the addition of Foley and Andrew F. Puzder, executive vice-president of both CKE and FNF, to its board of directors in May 1998.

Nonetheless, Rally’s continued to face problems. In 1997, its revenues dropped to $144.9 million, off about 11 percent from the previous year. Its slide in a very difficult market needed to be reversed, but as of mid-summer 1998 there had been no indication of an imminent turnaround. Its original strategy of offering a good hamburger at a low price was still being hurt by the marketing strategies of much larger competitors. In addition, it remained a defendant in putative class-action lawsuits originating in 1994 which were yet to be resolved and could prove costly, although Rally’s management assured investors that the litigation should not have a negative impact on either its operations or financial condition.

Rally’s management believed the company would survive and prosper, though perhaps in modified form. In the playing out of the financial arrangements, CKE would have effective control of Rally’s, Checkers, Hardee’s, Carl’s, and Carl’s, Jr., and appeared in a position to further streamline operations in cost-cutting maneuvers that should promote a greater profit margin for each of the associated companies. That and Rally’s flexible marketing strategies kept the company’s officers upbeat about the future.

Principal Subsidiaries

MAC 1, Inc.; RAR, Inc.; Rally’s Finance, Inc.; Rally’s Management, Inc.; Rally’s of Ohio, Inc.; Self-Service Drive Thru, Inc.; Zipps Drive Thru, Inc. (ZDT); Rapid, Inc.; Hampton Roads Food, Inc.