Rally’s Plans to Bite Into Fast-Food Market by Expanding Into County : Restaurants: About 25 franchise outlets will be built, offering a burger-based menu and double drive-through lanes.
There is more than a trace of “Back to the Future” in the corporate game plan at Rally’s Inc., a fast-food chain based in Louisville, Ky., that recently announced a major expansion into Orange County.
“I remember McDonald’s, when I was very, very young,” said Rally’s Chairman Burt Sugarman, a former Hollywood producer. “I used to drive out to San Bernardino (to a McDonald’s) where the burgers cost 15 cents. They had a very limited (hamburger-based) menu, but they served you quickly.”
Sugarman, who produced the “Midnight Special” pop music television show during the 1970s, entered the fast-food arena in 1985 after a friend introduced him to one of Rally’s founders. “I saw the concept when there were just five restaurants and I liked it immediately,” Sugarman said. “I got very much involved in it.”
Rally’s remains a small player in an industry dominated by McDonald’s and Burger King. But since going public in 1989, Rally’s revenue has quadrupled and it has been one of the industry’s fastest-growing chains.
Growth is fueled by a relatively simple formula.
Rally’s promises a burger-based menu, prompt service and quality food at a low price. Takeout orders drive Rally’s sales because its restaurants have double drive-through lanes and walk-up service windows--but no indoor seating.
With 451 locations, Rally’s is the market leader in the fast-food industry’s small-but-growing double drive-through segment, said Ron Paul, president of Chicago-based Technomic, a marketing firm. Rally’s on Thursday reported a $9.3-million net profit on $120.6 million in revenue for the fiscal year ended Jan. 3, up from a $6.1-million net profit on $94.1 million in 1991 revenue.
None of the nation’s major burger chains are jumping into the double drive-through segment. McDonald’s and Burger King have experimented with double drive-throughs, but the majors have stuck with sit-down restaurants and broader menus, Paul said.
Checkers Drive-In Restaurants of Clearwater, Fla., with 235 locations in the Southeast and Midwest and Baldwin Park-based In-N-Out, with 81 locations in California and two in Nevada, are the only other large players in the segment. Smaller players, including PD Quix out of Raleigh, N.C., with 20 units, and Upland-based EZ Take Out Burger, with seven units, have emerged, but “there is no (national) fourth-place contender,” Paul said.
Double drive-through proponents argue that their concept is built on strong financial footing.
Buildings are smaller because there is no indoor seating. And, absent table service, operating costs are lower. Those economies bring lower break-even points, and it is generally easier to recoup investments, Sugarman said.
Yet, while Rally’s executives are confident that the double drive-through concept will succeed in car-crazed Orange County, industry analysts caution that the Louisville-based company will have to fight for market share in a region already jammed with restaurants.
For example, burger-hungry Orange County residents have their choice of more than 150 McDonald’s, Burger King and Carl’s Jr. locations. Pacific Bell’s Orange County Inland Yellow Pages directory boasts 17 full pages of restaurant listings.
And, Rally’s is entering Orange County at a time when In-N-Out, which pioneered double drive-throughs in Southern California, is emphasizing single drive-through restaurants with indoor seating.
In-N-Out dropped the second drive-through lane and added seats in its newer locations because “the customers told us they wanted a place to sit down,” said In-N-Out Vice President Carl Van Fleet. “That’s the very simple answer to why we changed.”
A majority of In-N-Out’s 14 Orange County restaurants now have indoor seating and reduced drive-through service. One In-N-Out in Placentia has no drive-through lanes--just plenty of seats.
“I don’t know why In-N-Out, which has been doing double drive-throughs in California for years . . . left the concept,” Sugarman said. “But I do know that they’re no longer double drive-throughs.”
David Malcolm, a San Diego businessman and California Coastal Commission member who plans to build as many as 25 franchise Rally’s restaurants in Orange County, is not worried about In-N-Out’s return to indoor seating.
Malcolm contends that Rally’s is poised to fill an important niche: “Nobody provides a fully dressed burger, fries and a 16-ounce drink for $2.22,” Malcolm said. “No one gives the (drive-through) service that Rally’s does.”
While Rally’s and In-N-Out differ on the lure of indoor seating, executives agree that Southern Californians increasingly want good-tasting food at an affordable price. And, both chains believe that they can meet the demand by sticking to limited menus that do not include the breakfast items, turkey sandwiches and salad bars found at competing restaurants.
That limited menu is playing well with some Americans, according to results of a consumer survey released late last week by Restaurants & Institutions magazine. Rally’s burgers were ranked second in the nation, behind Wendy’s Old-Fashioned Hamburgers. Last year, Rally’s burgers ranked 10th.
Sugarman said Rally’s does not intend to expand its decidedly limited menu.
“We’ve seen over the years that many good people have lost their niche,” Sugarman said. “They decide they need turkey burgers or 16 sizes of french fries to appeal to different (consumer) segments . . . but that’s not us.”
“We’re not inventing the wheel” with Rally’s, Malcolm said. “We’re taking the wheel that McDonald’s used (decades ago) . . . with a very simple menu, quick service and good prices with good quality.”
Rally’s ventured unsuccessfully into Orange County several years ago when an unrelated, out-of-town franchise operation opened its doors in Costa Mesa--but quickly closed down.
Malcolm has yet to open his first restaurant in Orange County but there are nine company-operated locations in Los Angeles County. Rally’s has 10 restaurants in San Diego County and has a relatively strong presence in Arizona and Nevada.
Rallying Around Fast Food Though Rally’s drive-through restaurants are popular in the Southwest, the company is not as well known in Southern California. But the Louisville-based firm is making inroads. It plans to build 25 restaurants in Orange County during the next couple of years. *Revenue and Profit Since 1989, Rally’s has nearly quadrupled its sales and increased profits by 417%. *Revenue In millions of dollars 1989: $ 31.1 1990: 62.1 1991: 94.1 1992: 120.6 *Profit In millions of dollars 1989: $1.8 1990: 4.1 1991: 6.1 1992: 9.3 *Stock Rally It took the company nearly three years to get its stock price back to its initial public offering level. *Oct. 1989: $15.67 Nov.: 11.83 Dec.: 9.33 Jan. 1990: 8.33 Feb.: 9.50 Mar.: 9.83 Apr.: 11.50 May: 12.67 June: 11.83 July: 10.67 Aug.: 8.50 Sept.: 6.67 Oct.: 5.33 Nov.: 5.58 Dec.: 5.33 Jan. 1991: 5.25 Feb.: 6.17 Mar.: 5.67 Apr.: 5.50 May: 6.58 June: 6.00 July: 5.42 Aug.: 5.33 Sept.: 5.58 Oct.: 8.25 Nov.: 8.67 Dec.: 10.83 Jan. 1992: 12.50 Feb.: 15.00 Mar.: 15.33 Apr.: 15.00 May: 12.83 June: 13.17 July: 15.67 Aug.: 16.00 Sept.: 18.25 Three-for-two stock split Oct.: 17.74 Nov.: 20.50 Dec.: 17.38 *Competition Comparison All three drive-through, hamburgers-only restaurants have experienced huge growth, but Rally’s has 216 more stores than its nearest competitor.
1990 1991 1992 Rally’s Inc. 275 333 451 Checkers Drive-In 56 117 235 In-N-Out Burgers Inc. 64 65 83
*Corporate Profile: Rally’s Inc. * Headquarters: Louisville, Ky. * Founded: 1985, in Nashville, Tenn. * Corporate officer: Burt Sugarman, chairman * Founders: Wayne Altritton, Rally’s current president and chief operating officer; Jim Patterson, a co-founder of the Long John Silver chain * Nature of business: Fast-food hamburgers * Employees: 7,600, nationwide * 1992 sales: $120.6 million, for fiscal year ended Jan. 3, 1993 *Sources: Rally’s Inc., Technomic Inc., Bloomberg Business News Researched by DALLAS M. JACKSON, GREG JOHNSON AND SHEILA A KERN / Los Angeles Times