Checkers Drive-In Restaurants, Inc.
Checkers Drive-In Restaurants, Inc.
Sales: $194.25 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: CHKR
NAIC: 722211 Limited-Service Restaurants
Checkers Drive-In Restaurants, Inc., is a major U.S. hamburger chain. Checkers, and sister brand Rally's Hamburgers, feature retro-styled, double drive-thru restaurants in the South and Midwest. In 2005, Checkers had 509 company owned or franchised restaurants under its own brand and about 364 under the name of Rally's Hamburgers. Both operated "double drive-thru" restaurants; Checkers was centered in the Southeast, while Rally's stronghold was the Midwest. With its distinctive black and white checkerboard squares surrounded by bright red and chrome, Checkers and Rally's took the fast food hamburger market by storm in the early 1990s. Quickly building hundreds of unique, vibrantly colored modular restaurants throughout the southeastern United States, their high volume double drive-through windows and low overhead allowed them to dominate the burger market, shocking the complacent Big Four (McDonald's, Burger King, Wendy's and Hardee's) and smaller regional hamburger chains. Checkers offered a simple menu with low-priced burgers and combination meals, and by 1993 the entire fast food industry was engaged in a ferocious price war with many fatalities. The consumer was the clear winner as burger chains and other fast food franchises opted to offer their own versions of "value"-priced items. The mid-1990s brought a slowdown and losses for Checkers and Rally's, and the two fumbled for new products and concepts as same-store sales slipped. Excessive growth led to a debt crisis, which was not resolved until both came under the influence of CKE Restaurants, which infused money and ideas into them and merged the two in 1999. Though the company came close to bankruptcy, it still had believers among franchisees, observers, and customers. New management restored an emphasis on the basics, initiated a popular new "You Gotta Eat" advertising campaign, and returned the company to a growth track.
Mid-1980s Birth of "The Champ"
Alabama native James E. Mattei, a successful real estate developer credited with renovating parts of downtown Mobile in the early 1980s to the tune of over $60 million, dabbled in the restaurant industry by building a few Wendy's franchises. When the restaurants didn't perform, Mattei ended up owning them and found that not only was half of the franchise's business from the drive-through window but the menu's most popular items were burger combination meals. To Mattei, the dining room, large parking lot, and extensive menu were an unnecessary drain on the restaurant. So why couldn't a pared down burger joint with an emphasis on faster service and a simple menu thrive where more cumbersome chains didn't? "That's how I ended up in this Checkers business," Mattei later told Florida Trend magazine in 1992.
Mattei, along with another real estate developer named MarkB. Reed, researched the hamburger market and culled ideas from several local and national chains. Six months before their first restaurant opened, a competitor named Rollo's debuted with drive-through windows on each side of a small, portable modular building in Mobile. The first Checkers (purportedly named after the ever-present Checker cabs) opened in April 1986 as a back-to-the-basics hamburger hut housed in a prefabricated modular building with no dining room or parking lot, but with two drive-throughs. Within months, Mattei and Reed opened three more Checkers, but their enthusiasm couldn't put the new chain into the black. When losses approached $20,000 per month, Mattei started looking for an additional partner. In 1987, he found Herbert G. Brown, a Florida businessman who had developed shopping centers, mobile home parks, and a drug store chain he sold to Jack Eckerd back in 1970. Brown had also been chairman of his own furniture business for nearly 40 years.
When Brown came on board, Reed faded into the background. Mattei sold half of Checkers to Brown, and the two expanded into Tampa, Florida. Next came nearby Clearwater, a sort of last ditch effort, since Checkers was still losing money. Remarkably, the Clearwater restaurant raked in $70,000 in its first month and $100,000 in its second. The new Checkers location and a heavily touted grand opening helped put the company on the map. Mattei and Brown also improved their product, eschewing the segment leaders' premade sandwiches for made-to-order burgers. Checkers offered a sparse menu, good food, and fast service, advertised at 30 seconds or less. The chain's signature sandwich became the "Champ" burger, a fully dressed quarter-pound of 100 percent ground beef for only 99 cents every day—this at a time when similar sandwiches at McDonald's and Burger King went for double Checkers' price or more. The average ticket was $3.40, and with two drive-throughs, twice the number of customers were served in half the time.
The Checkers Way: 1989–91
Checkers was different from its competitors in several key aspects in addition to its shiny 1950s art deco-styled buildings and uniquely seasoned french fries. First, every restaurant began with a prefabricated 700-square-foot, 70,000-lb. modular unit produced by Champion Modular Restaurant Company, Inc. (a wholly owned subsidiary of the company bought in bankruptcy court for $650,000), which was then transported by truck directly to the new location. The slender modular units were cheaper to produce (selling for $230,000 to franchisees), could be relocated or recycled if necessary, were up and running in under three weeks rather than months, cut down on real estate costs, and Checkers was assured of quality and consistency as each unit was identical and came complete with all equipment (appliances, fixtures, grills, and computerized sales systems) and supplies. Start-up costs for a new Checkers restaurant, less land and franchise fees (which ran around $25,000), averaged less than $440,000.
Second, Checkers installed two drive-throughs as well as a walk-up window and small patio with tables to seat about 40 at each restaurant. Customers received their food more quickly, and the added expense of a large dining room and parking lot were eliminated. Third, Checkers concentrated on a limited menu of sandwiches (burgers as well as fish and chicken sandwiches), seasoned fries, soft drinks, and milk shakes which employees quickly learned to prepare. Prices were low, preparation was easy, and Checkers maintained its brief delivery time of 30 seconds or less to consumers.
By 1989 Checkers had doubled its size from 1988 and the partners (with Mattei as CEO and Brown as chairman) ruled over an ever-growing enterprise, finishing the year with total revenues of over $8.7 million and net earnings of $71,000. The next year Checkers was still going strong but the competition was heating up with its closest competitor, the Louisville, Kentucky-based Rally's franchise. Rally's was the double drive-through segment leader yet fell on hard times in 1990, giving Checkers an opportunity to surge in the market. In December, however, Taco Bell purchased a 77-unit burger chain called Hot 'n Now to join the double drive-through fray. Hot 'n Now's calling card was a burger combo meal (burger, fries and medium drink) for only $1.17, and though the bottom-of-the-barrel pricing attracted notice, neither Checkers nor Rally's paid much attention to the upstart despite the formidable clout of Taco Bell's parent company, PepsiCo. Checkers ended 1990 with overall revenues of $25.3 million and net earnings over $1.5 million just as Rally's, under new management, readied for a comeback.
As Checkers gained prominence and drew customers away from other burger chains, analysts declared its formula a winner. Not only did Checkers save money with the Clearwater-based Champion producing its restaurant units, but cleared 10 percent or more for every modular restaurant sold to franchisees as well. Capable of producing over two dozen 14-by-28 foot buildings per month or 300-plus per year, Champion's sales brought in over $10 million or 24 percent of Checkers' overall revenue in 1991, and $1.4 million in earnings. On November 15, 1991, Checkers went public (under the ticker symbol CHKR) with shares priced at $16 each on a day when the Dow Jones fell 124 points. Nevertheless, Checkers' stock rose by 50 percent to $24.25 per share by the time the market closed, and the company realized proceeds of some $26 million. By the end of the year, Checkers had 119 restaurants (Rally's had 300), and total revenue climbed to $50.5 million with net earnings of $4 million. Despite the hoopla, a red flag was waving, as same-store sales had declined from $914,000 in 1990 to $894,000 in 1991, a little-noticed sign of trouble.
Our mission is to operate with unstoppable passion and endless energy; to serve our guests with honesty; delivering the highest quality products for profit; with a smile on our face; while creating new opportunities for all employees and shareholders.
The Big Four Fight Back, 1992–93
In February 1992, Checkers promoted its first combo meal (Champ burger, small fries, and medium drink) for $2.29, followed by a chicken sandwich combo for $2.99—both a healthy 15 percent lower than most competitors' combinations. Margins improved in the first quarter, with even same-store sales rising 9.5 percent (helped by a four-point fall in food costs and the new combos), and Checkers moved full-steam ahead with expansion. Eight new restaurants opened by the end of March alone, and 32 more were slated for the rest of the year. In May, Checkers returned to Wall Street for a second stock offering, raising $36 million for additional growth. Amid a flurry of expansion, Checkers (which now had over 161 units) announced in July that it expected to bring its South Florida units from 15 to 50 by year-end. By concentrating in an already established market, Checkers hoped to keep marketing and operational costs to a minimum. Yet the downside of clustering was saturation, and when coupled with stiff competition from the Big Four and Rally's produced a considerable risk. Next came plans to build a second Champion manufacturing facility in Kentucky, Indiana, or Ohio to slash transportation costs and increase modular unit production.
The company opened 106 new units in 1992 bringing the total number of Checkers to 225, or exactly half those of Rally's. In another competitive move, Rally's followed Checkers' lead and bought a modular restaurant producer, Beaman Inc., in North Carolina. Though Rally's was still the segment leader, in areas where Checkers penetrated the market first like Tampa and Orlando, Florida, and Mobile, Alabama, Checkers drove Rally's under in a relatively short time. Unfortunately, the reverse was true in areas heavily populated by Rally's, like New Orleans, where Checkers' units floundered. On average each Checkers restaurant systemwide brought in roughly $919,000 in 1992, which helped raise total revenues to just over $105.1 million and net earnings to $12.3 million for the year.
By 1993 the fast food hamburger market reached $25 billion or just over 31 percent of the total U.S. fast food market of $80 billion. The Big Four's restaurants numbered 25,000 across the country, compared to a mere 1,200 double drive-throughs units nationwide. While the Big Four had already lowered prices to compete with Checkers and Rally's, McDonald's and Burger King were also testing back-to-basics hamburger shops with double drive-throughs—the former with McDonald's Express and the latter with B.K. ExpressWay. Checkers' expansion continued with 181 new units, predominantly in the southeastern portion of the United States (as far west as Texas and easterly up to Pennsylvania), along with several developing markets in the Midwest. "Our first plan was to become a regional presence, then a national chain and in time, an international force," Brown told the Tampa Bay Business Journal in May. The company had certainly accomplished the regional presence and was well on its way to becoming a nationally known outfit.
By the third quarter of 1993, Checkers' revenues increased by 81 percent to $49 million and net earnings were strong at $4.1 million, a leap of 32 percent from the same period in 1992. Yet same-store sales dropped 5.3 percent systemwide from slower traffic and competition from both its own stores and others. Undeterred, Checkers continued to expand in Florida and elsewhere, including the InnerCity Foods Joint Venture Company (75 percent Checkers) with former Chicagoan LaVan Hawkins. Hawkins, who had previously owned 13 Checkers in Philadelphia and Atlanta, had recently sold them back to the company for $13 million in stock. The new joint venture began again in Philadelphia and Atlanta, with 11 Checkers restaurants in economically-depressed communities. The new stores provided 700 jobs while taking advantage of a largely untapped market. InnerCity and Checkers had plans to open as many as 35 additional units before the end of 1994.
Checkers also worked on an extensive advertising campaign to offset the gains of Burger King, McDonald's, and Wendy's, who reported strong sales from value-priced sandwiches and combo meals. Since Checkers had doubled its size annually for four straight years, all proceeds from the first and second stock offerings were depleted. Management considered a third offering, but decided instead to seek financing and utilize an existing credit line. At year-end, Checkers had opened 181 new stores for a total of 404 (227 company-operated and 177 franchised) in 20 states, including 163 restaurants located in Florida. While overall revenue for 1993 topped $189.5 million with net earnings of $15 million, the warning flags were again unfurled as the fourth quarter figures brought another decrease in same-store sales, this time to 10 percent systemwide.
Mid-1990s Debt Crisis
The dawn of 1994 found Checkers and its two chief competitors (Rally's and Hot 'n Now) faced with sagging sales, the triumph of the Big Four's value-pricing, and the successful emergence of several smaller regional burger chains. Faced with a declining and saturated marketplace, Rally's and Checkers struck a $2 million deal to eliminate direct competition by granting one another exclusive dominions in some Southern cities. Checkers bought nine Rally's in Atlanta and another nine in Miami; Rally's took over 18 Checkers units in Memphis, Raleigh, North Carolina, and Columbia, South Carolina, and three other areas. Hot 'n Now, however, no longer seemed a threat since Taco Bell "temporarily" closed some 40 restaurants in March. Also in March came the retirement of president and CEO Mattei, who was replaced by James F. White, Jr. as vice chairman and CEO. In August, Richard C. Postle, formerly of Kentucky Fried Chicken and Wendy's, joined Checkers as president and COO along with several second tier managers to help guide the company through its increasing difficulties. Brown, White, and Postle hoped to get through the transition by reducing operational costs, introducing new products, and concentrating on existing core markets.
At the end of the year, despite plans to open as many as 200 additional restaurants, the cost of too-rapid expansion and over-clustering caught up with Checkers. Faced with lawsuits by disgruntled shareholders over accounting practices, and another from franchisees who said the company blocked their plans to offer their own stock, Checkers reported revenues of $221 million and a net loss of $6.7 million, with same-store sales falling 14 percent systemwide. Segment leader Rally's suffered further losses in both 1993 ($10.1 million) and 1994 ($19.3 million). Yet a slight turnaround for Checkers had already begun with the continued success of the InnerCity Joint Venture with La-Van Hawkins and the introduction of the Monster Value Menu (featuring a myriad of food items for 99 cents), kids' meals, and a honey-grilled chicken sandwich. Rally's also tried something new, a third-pound burger called the Big Buford, and hoped the large sandwich's debut would help pull the company out of the red.
- Rally's is formed in Louisville, Kentucky.
- Two real estate developers launch Checkers Drive-In Restaurants in Mobile, Alabama.
- Revenues reach $25 million.
- Checkers goes public and has 85 stores in the Southeast.
- Revenues exceed $105 million.
- Checkers merges with Rally's.
- Checkers replaces McDonald's as official burger of NASCAR.
By January 1995 there were 496 Checkers restaurants (261 company-owned and operated and 235 franchises) in 23 states and the District of Columbia. Rumors swirled that the company might merge with former foe Rally's (whose stores numbered 526), seen as a natural progression by some considering both double drive-through chains still suffered same-store slumps and heightened competition from the Big Four. Instead, both chains turned to Mexican food: Rally's unveiled a cobranding marketing ploy with Green Burrito while Checkers experimented with L.A. Mex, its own in-house variety of Mexican fare. Priced from 99 cents to $2.99, L.A. Mex sold burritos, fajitas, nachos, tacos, and grilled chicken salads alongside its standard sandwiches and fries. The first Checkers/L.A. Mex prototype opened in July 1995 and immediately produced a double-digit sales increase at the location. Another 50 combination restaurants in the Tampa, St. Petersburg, and Sarasota (Florida) markets were planned by the end of January 1996. Additionally, Checkers started negotiating with another fast food chain (with a strong breakfast presence) about sharing space and menu items.
Mid-year Checkers again shuffled its top executives when Rick Postle departed and was replaced as CEO by Albert J. DiMarco, former head of the Nutri/System weight-control chain. The last four of the founders also left the board of directors, including chairman Herbert Brown. As its stock price languished, it attempted to restructure a $36 million debt (of an original $50 million borrowed) from its recent expansion. The company suspended its advertising on its way to posting a $46 million loss for 1996.
Checkers still had its believers. Even as it teetered precariously close to bankruptcy, the chain made Success magazine's list of best franchises to own in America. The publication appreciated its good relationship with franchisees.
New Backing and Merger in the Late 1990s
CKE Restaurants Inc. of Anaheim, California acquired most of Checkers' debt in November 1996. CKE was parent of the Carl's Jr. burger chain and Dallas-based Taco Bueno, and had recently obtained some equity in Rally's.
Albert DiMarco stepped down as CEO in December 1996 and was replaced by CKE COO Thomas Thompson. There was hope CKE could work the same magic it had used to turn around Carl's Jr. and Rally's. Part of the formula was a shift towards larger, more expensive burgers. Both Checkers and Rally's were experimenting with adding dine-in seating. Both restaurants could save on supplies by combining purchases with other CKE-affiliated companies, and by airing essentially the same television ads under their respective logos.
Former Applebee's head Jay Gillespie became Checkers CEO in November 1997 (former CEO Tom Thompson stayed as vice-chairman for a couple of years and later succeeded William P. Foley II as CEO of CKE). Previously instituted cost-control measures were beginning to take effect, he told Nation's Restaurant News, and same store sales were increasing. A merger of Checkers with Rally's Inc. was announced in 1997 and finally completed in August 1999. The combined independent double drive-through specialist had 900 corporate and franchises stores.
Franchise Focus for 2000 and Beyond
Daniel Dorsch succeeded Jay Gillespie as Checkers CEO in December 1999. Dorsch had a long track record as a successful franchisee with Taco Bell, KFC, and Papa John's. He vowed in the Tampa Tribune to bring excitement back to Checkers and Rally's, which were still losing money. He also trimmed administrative staff and sold more than 200 company-owned stores to experienced franchisees (which raised $50 million). "Franchisees are much better operators," Dorsch told Florida. "They have the people, passion, money and the community tie." Checkers closed the Champion Modular Restaurant unit in 2000.
The advertising was updated with the "You Gotta Eat" campaign beginning in January 2001. More successful and less controversial than some of the companies earlier efforts, it lasted for years and was cited as a significant factor in a turnaround. Checkers successfully defended the tagline against a lawsuit by New York restaurant coupon business YouGottaEat.com. Checkers also started sponsoring a number of professional and college sports teams. It eventually became the official hamburger of NASCAR in 2005, usurping McDonald's.
Dorsch recruited new managers and sweetened the incentive structure with vacations and car giveaways as the company began opening dozens of new restaurants a year at reduced franchise rates. (Many underperforming ones were shuttered.) Checkers expanded into Mexico through an alliance with Tribecca S.A. de C.V. Another franchisee opened a couple of stores in the West Bank.
Keith E. Sirois, formerly vice-president of franchise operations, succeeded Daniel Dorsch as president and CEO of Checkers in May 2003. Checkers had gotten a new chairman, Ronald Maggard, two years earlier, as William P. Foley II left that position (while retaining his role as chairman of CKE). By this time, Checkers' condition had vastly improved, even when measured by the vital same-store sales metric. Revenues were $194 million in 2004.
By 2005, Checkers had 509 company owned or franchised restaurants under its own brand, and about 364 under the Rally's name. Though a recovery seemed to be underway, the company was looking for strategies to boost its share price.
CheckerCo, Inc.; Checkers of Puerto Rico, Inc.; Rally's of Ohio, Inc.
Back Yard Burgers, Inc.; Burger King Corporation; McDonald's Corporation; Sonic Corporation; Wendy's International Inc.
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—update: Frederick C. Ingram