What are the implications of the restrictions on suppliers (Item 8) for a Checkersrallys franchisee's ability to respond to supply chain disruptions and price fluctuations?
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 are required to purchase goods, services, supplies, fixtures, equipment, and inventory only from suppliers approved by Checkersrallys. This mandate is in place to maintain high and uniform standards of quality and service across all franchised restaurants. While franchisees are not obligated to purchase or lease anything directly from Checkersrallys or its affiliates, these entities can be approved suppliers. The initial cost of these required purchases and leases is estimated to exceed 95% of the franchisee's total initial investment, and the ongoing cost is estimated to exceed 95% of their total ongoing operating expenses. This heavy reliance on approved suppliers has significant implications for a franchisee's ability to manage supply chain disruptions and price fluctuations.
The restrictions on suppliers limit a franchisee's flexibility to quickly adapt to changing market conditions. In the event of a supply chain disruption, such as shortages or delays, a franchisee cannot simply switch to an alternative supplier to maintain operations. They are bound to the approved suppliers, which may or may not be able to resolve the disruption promptly. Similarly, if a key ingredient or product experiences a significant price increase, a franchisee cannot seek out more cost-effective alternatives without Checkersrallys's approval. This lack of autonomy can impact profitability and competitiveness.
Checkersrallys does retain the right to modify the list of approved brands and/or suppliers. If a franchisee proposes to use a non-approved brand or supplier, they must notify Checkersrallys and submit sufficient information for evaluation. Checkersrallys may charge fees to cover their costs for this evaluation, and they will notify the franchisee of their decision within 60 days. Checkersrallys also attempts to negotiate purchase arrangements with suppliers, including price terms, for the benefit of all restaurants. While this may provide some stability, franchisees are still subject to the negotiated terms and lack individual negotiating power. Ultimately, the franchisee's ability to respond to supply chain issues and price changes is heavily dependent on the responsiveness and effectiveness of Checkersrallys and its approved suppliers.