What are the implications of the restrictions on suppliers (Item 8) for a Checkersrallys franchisee's ability to innovate and introduce new menu items?
Checkersrallys Franchise · 2025 FDDAnswer from 2025 FDD Document
ESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES**
Generally
To ensure that high and uniform standards of quality and service are maintained, you are required to operate your Franchised Restaurant in strict conformity with our methods, standards and specifications and you are required to purchase goods, services, supplies, fixtures, equipment and inventory only from suppliers we have approved. You are not required to purchase or lease anything from us or any of our affiliates; however, we and our affiliates can be approved suppliers for items. Currently, we are not an approved supplier for any items except that we may from time to time sell used modular restaurants and restaurant equipment to Checkers and Rally's franchisees. We estimate the initial cost of all of required purchases and leases of goods, services, supplies, fixtures, equipment and inventory to be in excess of 95% of your total initial investment (see Item 7). We estimate the ongoing cost of these required purchases and leases to be in excess of 95% of your total ongoing operating expenses.
We may formulate and modify, at our sole discretion, specifications and standards we impose on franchisees and suppliers. Specifications and standards are issued to franchisees through the Operations Manual (defined below) and to suppliers by written notice. The "Operations Manual" is our confidential operations manual, as we may amend at any time, which may consist of one or more manuals or communications, containing our mandatory and suggested standards, specifications and operating procedures relating to the development and operation of Restaurants and other information relating to your obligations as a franchisee and operator of a Restaurant. The term "Operations Manual" also includes all instructions or communications we or our representatives may transmit to you or a substantial number of franchisees, whether in writing or through other media, concerning aspects or modifications to the System, standards, specifications and operating procedures, including bulletins, emails, limited access intranet sites, videotapes, audio tapes, or any other electronic medium. We attempt to negotiate purchase arrangements with suppliers (including price terms) for the benefit of all Restaurants, including those owned by franchisees. We do not provide material benefits (e.g., renewal or additional franchises) to a franchisee based on his use of designated or approved suppliers.
There are no franchisee purchasing or distribution cooperatives.
None of our officers own an interest in any privately-held suppliers, or a material interest in any publicly-held suppliers, of the Checkers or Rally's franchise systems. From time to time, our officers may own non-material interests in publicly-held companies that may be suppliers (or have subsidiaries that may be suppliers) to Restaurants; however, we have an internal "Conflict of Interest Policy" that prohibits officers and employees from using our property, position, or information for improper and unusual personal gain.
Items We Supply or Derive Revenue From
We and our affiliates may receive revenues from required purchases and leases of products and services by franchisees. The revenues are collected by approved suppliers or distribution centers on behalf of the system and are paid to us. Our total revenues for the fiscal year which ended December 30, 2024 were $300,381,238 of which $6,189,551 or 2.1% were revenues from required purchases and leases of products and services by franchisees. Our total revenue from franchisee purchases includes $2,225,520 in gross revenue from subleases with franchisees. We generally collect rent as a pass through for landlords on the underlying lease but may earn a profit. We did not earn any profit from subleases during our 2024 fiscal year.
What This Means (2025 FDD)
According to Checkersrallys's 2025 Franchise Disclosure Document, franchisees face significant restrictions on where they can source products and services, impacting their ability to innovate and introduce new menu items. Checkersrallys requires franchisees to purchase goods, services, supplies, fixtures, equipment, and inventory only from approved suppliers to maintain uniform standards of quality and service. While franchisees are not required to purchase or lease anything directly from Checkersrallys or its affiliates (unless they are approved suppliers), the initial and ongoing costs associated with these required purchases and leases are substantial, estimated to be in excess of 95% of the total initial investment and ongoing operating expenses.
This reliance on approved suppliers limits a franchisee's autonomy in sourcing ingredients or products for potential new menu items. If a franchisee wishes to use a non-approved brand or supplier, they must first notify Checkersrallys and submit detailed information, specifications, and samples for approval. Checkersrallys has the right to charge fees to cover the costs of this evaluation, and the decision-making period can take up to 60 days. Furthermore, Checkersrallys may impose obligations on suppliers, potentially requiring them to enter into written agreements. Checkersrallys can also set required, optional, or test menu items, and may impose limits on the number of suppliers or brands for any items.
The approval process introduces a hurdle for franchisees seeking to introduce unique or locally sourced ingredients or products. The time and potential costs associated with gaining approval, along with the risk of disapproval, may discourage franchisees from pursuing innovative menu options. While Checkersrallys does conduct market research to determine consumer trends and the salability of new food products and services, franchisees are still obligated to participate in test marketing and provide feedback, further emphasizing the franchisor's control over menu innovation.
Overall, the strict control over suppliers and required adherence to Checkersrallys's standards significantly restricts a franchisee's ability to independently innovate and introduce new menu items. Franchisees are heavily reliant on the franchisor's approval for both suppliers and menu offerings, which can limit their flexibility and responsiveness to local market demands or unique customer preferences.