`Someone Woke The Elephants'

It has become a common tale in business: A small, nimble upstart finds an untapped market niche and quickly stakes a claim while the bureaucracy-bound behemoths flounder. But what happens when the giants fight back?

Checkers Drive-In Restaurants Inc. is finding out--painfully. The eight-year-old chain, based in Clearwater, Fla., looked as if it had the fast-food formula for the 1990s. It offered quick service, low prices, and a limited menu focused on burgers, fries, and cola--the strategy McDonald's and Burger King were founded on, but which the giants seemingly forgot as they fumbled with pizza and table service. Checkers kept to the basics: 99 burgers, two drive-through windows to get cars through quickly, walk-up service, and no inside seating.

CHEF SHIFT. The strategy paid off. Revenues rose from $50.5 million in 1991, the year Checkers went public, to $189.5 million in 1993. Profits went from $4 million in 1991 to $15.1 million in 1993, and the chain grew to 277 company-owned stores and 177 franchised outlets. Checkers' stock went public at 39 16 and traded as high as 173 8, adjusted for three stock splits, by November, 1992. Consultant Technomic Inc. rated Checkers the fastest-growing U.S. restaurant chain in 1992. Checkers Founder James Mattei, an Alabama real estate developer, discounted short-sellers who said Checkers was ripe for a fall. "We're not a flash in the pan," Mattei told BUSINESS WEEK in January. "The newness is off of who we are, but we have so many opportunities."

Turns out the doubters had a point. On Mar. 9, Mattei, 45, announced he was retiring as president, citing personal and family reasons. A week later, Checkers announced it was scaling back expansion plans to 200 restaurants from 260 this year and would post its first quarterly loss as a public company, taking a charge of $4.5 million to cover costs of moving and swapping some restaurants. As of Mar. 21, the stock had fallen to 73 8. Mattei remains on the board. James F. White Jr., who joined the company in February, 1993, as chief operating officer, became president. Mattei did not return phone calls seeking comment, and White declined requests for interviews.

What happened? "Someone woke the elephants," says Robert Morrison of the Morrison Agency, Checkers' former ad agency. McDonald's and Wendy's have increasingly been chasing budget-minded customers with "value pricing." But the real blow came last fall, when Miami-based Burger King introduced 99 Whoppers and adopted a "back-to-basics" strategy emphasizing its core menu. "I think we are the major reason they are in pain," says Burger King franchisee Jerry Ruenheck. Sales at his Tampa-area stores are up 10% since the shift: "We're winning the share-of-belly battle."

It looks that way: Checkers' sales in stores open a year or more fell 5.9% in 1993--a sharp reversal from the 9.3% gain of 1992. Changes in sales at existing stores are a key barometer in the fast-food industry. While Checkers attributed the drop mainly to cannibalization from its own new units, it also cited increased competition as a factor.

WIDESPREAD SQUEEZE. Checkers wasn't the only regional upstart to feel the big guys' wrath. Rally's Hamburgers Inc., a double drive-through based in Louisville, saw existing-store sales fall 1.6% for the 52-week period ended Jan. 2.

If Checkers and Rally's have a common problem, they may also share at least a partial answer. At the moment, each is spread too thin to make TV advertising practical. So they're swapping 18 restaurants to gain concentration and clout in individual markets. Checkers is getting Rally's stores in Atlanta and Miami, plus three undeveloped sites, while giving up units in six markets.

But the small fry face other problems. Fast-food chains often jump-start sales by offering promotional items for a limited time--chicken fajitas, for example. That's difficult for Checkers because its kitchens are set up for efficient delivery of burgers and fries and may bog down on more esoteric fare, says Technomic analyst Nancy Kruse. Nonetheless, Checkers has started selling Cajun Chicken and other promotional items. The elephants, no doubt, will be watching.


REAL ESTATE Big chains have the best locations. Upstarts have to settle for out-of-the-way spots.

ADVERTISING Many chains have too small a presence in individual markets to support TV advertising.

SELECTION Limited burgers-and-fries menus help the upstarts provide speedy service but hamper their ability to roll out new products--a staple of the big chains' promotions.


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