14255 49th Street North
Company Perspectives:
Rally's: You Gotta Eat!
A unit of Checker's Drive-In Restaurants Inc., Rally's is 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. In 1997, the Rally system operated 477 restaurants in 18 states, predominantly in the Midwest and the South. By the close of the decade, amid mounting financial losses, Rally's merged in a stock swap that formed Checkers Drive-In Restaurants, Inc., which continued to operate both its own Checkers restaurants as well as the Rally's restaurants.
1980s Origins
Rally's 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 Beaman Corporation, after that company became insolvent and was forced into bankruptcy. Rally's bought all of Beaman's common stock for about $200,000. Beaman, located in Greensboro, North Carolina, had been the contracted fabricator of Rally's modular restaurant units.
Challenges in the Early and Mid-1990s
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.
Late 1990s Troubles
At the end of 1996, 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.
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 cost-saving 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.
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 the following year there was no indication of an imminent turnaround. The company's original strategy of offering a good hamburger at a low price was still losing to the marketing strategies of much larger competitors. In addition, Rally's remained a defendant in putative class-action lawsuits originating in 1994 which were yet to be resolved and could prove costly.
Late 1990s: Striving To Reach New Markets
In 1999, Rally's and Checkers announced that they would merge operations in a stock swap. The merger was complete in the summer of 2000, and thereafter the two operated as brands of the Checker's Drive-In Restaurants holding company. In a bid to reach new markets, Rally's management announced an alliance with WSMP Inc., a food processor and restaurant operator, in March 1998. WSMP planned to work with Checkers and Rally's to create a new line of sandwiches available in supermarkets and had the capacity to produce four million microwaveable burgers a week. This move was followed by a partnership with Canteen Vending Services in late June, a company that planned to make Rally's and Hardees and Blimpie's sandwiches available through vending machines west of the Mississippi in over 7,000 locations. July saw the introduction of Rally's' new USA combo meal, which included a chili-cheese hot dog, french fries, apple-pie turnover, and a soft drink. It was launched at the same time as new ten- and 30-second ads promoting the product.
In August 1998 Rally's left Saatchi for Crispin Porter & Bogusky, a Miami-based ad firm already producing ads for Checkers. September saw an even more momentous change: Rally's and Checkers merged at last, picking up a Rally's investor company Giant Group Ltd. in the process. The management of all three companies was pleased with the deal, stating that they hoped to save money and use the increased cash flow to add more sit-down dining to Rally's and Checker's drive-through restaurants, and to remodel Rally's exteriors to be more welcoming to customers. Sugarman, owner of Giant Group, remained the largest stockholder, and those next in line were controlled by California entrepreneur William P. Foley II, who owned several restaurant chains through his holding companies. It was announced that Foley would become the new company chairman, although Sugarman would remain involved in day-to-day operations as vice-chairman.
Third quarter financial news improved slightly in 1998, but was still a loss of over $1 million dollars for Rally's; nor was there good financial news for Checkers, which posted a third-quarter loss of $1.47 million. The new company remained hopeful, however; Rally's and Checkers jointly launched a new 99-cent Chicken Sandwich in January 1999. In late 1999 Rally's and Checkers teamed with NFL Alumni to promote a new Superbowl Weekend Sweepstakes and a Kid of the Year essay contest, the winner of which would get a trip for four to the Superbowl. 2000 opened with a different kind of ad campaign. Following months of discussion about launching something edgier a new japamimation style character burst onto the scene, a busty gal in a hotrod and in a hurry, running on empty. The new tagline: "High performance, human fuel." Rally's management expected the new ads to appeal to the all-important 18-25 demographic. By mid-July an important debt restructuring program was underway, and new CEO Daniel Dorsch was confident that company debt had been reduced to a level that allowed refinancing to begin. Over 150 restaurants had been sold to franchises, and plans were on to build some 80 new stores. When asked about the Rally's downslide, Dorsch had this to say to Restaurant Hospitality magazine: "What happened was the chain got very successful very quickly. So, everyone pulls their money out, the guys with all the passion left, and they pulled in managers. Managers who, maybe, didn't have the passion I'm bringing. I'm bringing the passion back."
Innovation followed, including a 2001 campaign to award a car to managers of each of the top-performing Rally's or Checkers chains, and a new series of hip-hop ads with the tag-line "gotta' eat." Innovation seemed to produce results; same-store sales rose 11.2 percent for December 2001, the first time the company had been out of the red in several years. CKE Restaurants divested its interest in Checkers during this time in order to focus on the Hardee's chain. By the end of 2002 same store sales at Checkers/Rally's had risen another 10.8 percent, and by the middle of 2003 Rally's had secured the rights to be the "exclusive hamburger provider" at the Indianapolis 500 and Brickyard 400 auto races. Under the auspices of the Checkers parent company, the Rally's brand was rebounding.
Principal Competitors: McDonald's Corporation; Wendy's International Inc.; Sonic Corporation.
Comment about this article, ask questions, or add new information about this topic: