What are the implications of the restrictions on suppliers (Item 8) for a Checkersrallys franchisee's ability to offer competitive pricing and promotions?
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. Our intention is not to earn a profit, but instead to use all revenues collected from franchisee and company-owned restaurant purchases of products and services to offset expenses we incur in administering system-wide programs such as people, guest and operations programs, insurance procurement, promotional and price management tools, supply chain programs, brand protection (including quality assurance and food safety) programs and research and development. However, we may earn a profit from franchisees' required purchases and leases of products and services.
Our affiliate, CDSI, also earned $7,890,469.14 in gross revenue from required purchases and leases of products and services by franchisees during our 2024 fiscal year.
Other than CDSI, none of our affiliates derived any revenue or other material considerations from required franchisee purchases or leases during the fiscal year ended December 30, 2024.
Suppliers may pay us rebates or allowances based on purchases by Checkers and Rally's franchisees and by us for our company-owned Checkers Restaurants and Rally's Restaurants. The payments may vary from supplier to supplier, and in some cases, the basis for the payment varies over time with respect to the same supplier. Suppliers who exhibit at our conventions contribute to the cost of the conventions.
In the fiscal year ended December 30, 2024, one supplier provided allowances directly to Checkers Restaurants and Rally's Restaurants, their affiliates, as well as the NPF, based in large part on the amount of sales to all Checkers Restaurants and Rally's Restaurants.
What This Means (2025 FDD)
According to Checkersrallys's 2025 Franchise Disclosure Document, franchisees are required to purchase goods, services, supplies, fixtures, equipment, and inventory only from approved suppliers. This is to ensure high and uniform standards of quality and service are maintained. While franchisees are not required to purchase or lease anything directly from Checkersrallys or its affiliates, these entities can be approved suppliers. Checkersrallys estimates that the initial and ongoing costs of these required purchases and leases exceed 95% of the franchisee's total initial investment and ongoing operating expenses, respectively. This gives Checkersrallys significant control over a franchisee's costs.
Checkersrallys may modify the specifications and standards imposed on franchisees and suppliers, communicating these changes through the Operations Manual or written notices. While Checkersrallys attempts to negotiate favorable purchase arrangements with suppliers for all restaurants, franchisees are not given any material benefits for using designated or approved suppliers. Suppliers may also provide rebates or allowances to Checkersrallys based on purchases made by both franchisees and company-owned restaurants. One supplier provided allowances directly to Checkers Restaurants and Rally's Restaurants, their affiliates, as well as the NPF, based in large part on the amount of sales to all Checkers Restaurants and Rally's Restaurants. For each participating Checkers Restaurant and Rally's Restaurant (whether companyowned or franchised), the supplier paid a fixed dollar amount per gallon of beverage syrup directly to each participating restaurant, and paid a fixed dollar amount per gallon of beverage syrup to the NPF.
These restrictions impact a franchisee's ability to control costs and offer competitive pricing and promotions. The franchisee must use only approved suppliers, potentially limiting their ability to find lower-cost alternatives. The franchisor's ability to change specifications and standards can also impact costs. While Checkersrallys negotiates with suppliers, the franchisee has no direct control over these negotiations. The requirement to participate in gift card and loyalty programs, and to use designated service providers for delivery and order-ahead programs, further restricts the franchisee's autonomy in pricing and promotions.
Checkersrallys also requires franchisees to submit advertising and promotional materials not already approved by them for prior approval, and they may not use any disapproved materials. Furthermore, franchisees need consent from Checkersrallys to promote or sell products or services related to their restaurant through the Internet, which can be withheld for any reason. This includes stipulations regarding domain names, website content, hyperlinks, and use of third-party materials. These restrictions could limit a franchisee's ability to respond quickly to local market conditions or to implement creative marketing strategies, potentially affecting their competitiveness.