Checkers Drive-Up Restaurants Inc.

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Checkers Drive-Up Restaurants Inc.

600 Cleveland Street, Suite #1050
Clearwater, Florida 34615
U.S.A.
(813) 441-3500
Fax: (813) 443-7047

Public Company
Incorporated: 1986
Employees: 8,000 (1995)
Sales: $200.9 million (1994)
Stock Exchanges: NASDAQ
SICs: 5812 Eating Places; 6794 Patent Owners & Lessors

With its distinctive black and white checkerboard squares surrounded by bright red and chrome, Checkers Drive-Up Restaurants Inc. 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, Checkers’ high volume double drive-through windows and low overhead allowed it 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. Though 1994 and 1995 brought a slowdown and losses for Checkers and most of its double drive-through competitors, Checkers retrenched and continued to stake its claim in the ever-volatile burger industry.

Birth of “The Champ,” 1986-1988

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 Mark B. 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 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 made-to-order 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, 1989-1991

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.

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.

Company Perspectives

Checkers’ mission is to be the best nontraditional quick-service restaurant in the marketplace, exceeding expectations of our customers, associates, and shareholders by always offering quality products and a better value.

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 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 La-Van 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.

The New Era, 1994-1996

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 Bu-ford, and hoped the large sandwich’s debut would help pull the company out of the red.

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 by Albert J. DiMarco as CEO. Rumors reported that White, too, was stepping down as vice chairman. While little was constant in the fast food industry, Checkers’ continuing survival was contingent on a few key factors: to stop cannibalization of its own markets and proceed carefully with expansion plans; to maintain its identity amid so many competitors; and to keep making and selling what Brown deemed the “best burger” in the marketplace—the award-winning, fully dressed Champ Burger.