Checkers and Rally’s: Leveraging Modular Development

Checkers is one of the largest double drive thru chains in the United States. Having served hamburgers, hotdogs, French fries and milkshakes since 1986, Checkers today is headquartered in Tampa, Florida and operates over 850 locations in 29 states. Rally’s, a similar concept out of Louisville, Kentucky, was purchased by Checkers in 1999. Since the acquisition, Rally’s has began adopting design from Checkers and the two concepts look virtually identical aside from the name on their signs.

Despite construction costs ticking up and some concepts pulling back on development, Checkers is pushing forward hard. Checkers is slated for a future 30 new locations in the D.C. area; a future 30 new locations in Houston; With over 60 locations around its headquarters in Tampa, even franchisees local to Tampa Bay are still growing.

What is enabling the company to pursue such aggressive expansion? A big factor seems to be the modular design they are using for their new construction. Modular construction involves an off-site process where buildings are constructed under a controlled environment. Although the same codes and standards employed under traditional construction are adhered to throughout the process, the construction can be completed in half the time. The buildings are built in sections, which are then put together like Legos, on site. Not only can the buildings be built in half the time, but modular buildings are typically stronger than conventional construction since each portion of the building is built with its own structural integrity to withstand the stress of travel. The process also includes a number of other benefits including safe and secure storage of construction materials, reducing site disruption from weather or pedestrian traffic, and reduced waste for a more sustainable construction process. With the new prototype designed by Checkers, building each modular location ends up being 20% cheaper in addition to being much faster. With the nimble flexibility of popping a location up faster to avoid “dead rent” periods and a cheaper upfront capital injection for new locations, it is allowing Checkers corporate and franchisees the opportunity to expand into denser, higher rent, competitive markets where barriers to entry are high. Another model includes Checkers re-using shipping containers for constructing their new prototype, which is also both cost effective and sustainable.

As a real estate investor, this can be good news if you are eyeing Checkers as an investment, which tends to have a higher cap rate when compared to other concepts in the QSR sector. It can build confidence around an investment into Checkers as a tenant, who appears to be making shifts in technology to take advantage of the evolving landscape, while also adapting in ways that are allowing them to expand the concept and capture more market share. Like anything else, investors should also be aware of the risks associated with these deals. The Checkers prototype can go as small as an 800 square foot building, while the average QSR concept operates in 2,800 square feet. This can present a potential metric of risk to watch. The average unit sales volume for Checkers was around $970,000 in 2016; about the same volume as the average KFC ($999,500), Captain D’s ($1.04MM), and Arby’s ($1.07MM), but operating with a building square footage almost 2,000 square feet smaller than the other above referenced concepts. This can equate to a higher rent per square foot paid by Checkers; a high rent per square foot in markets that are generally lower income areas where the Checkers concept thrives.

Why is this a potential pressure point?

The average rent per square foot paid by QSR concepts was $35 per square foot in 2016, while Checkers, on average, was paying $47 per square foot in rent with an average square footage in 2016 of 1,800 SF. That rent per square foot could be inflated even further with their 800-1,000 SF prototype design. I have seen investors purchase new construction Checkers locations and after a few years, Checkers had decided to vacate. While Checkers may still be paying their rent obligation in these scenarios, the realization may set in that replacing $40-$50 PSF in rent will be impossible in a market where the average rents may be as low as $10-$15 per square foot gross due to the demographics and household income capacity. Now, with the new smaller footprint and an aggressive campaign to secure urban locations by getting competitive with rent, some new Checkers leases are approaching $80-$100 per square foot in rent. These very well may be slam dunk locations and great investments, but it cannot be argued that these deals also bring exposure to risk in rent sustainability. Pair that risk with the fact that Checkers is one of the few concepts that can develop on 0.25 acres of land, which does not provide many future opportunities for redevelopment, and the risk in these deals must be weighed accordingly.

All in all, there are positive things happening for Checkers as a concept as they remain bullish on further expansion. Investors looking to take a dive into the concept should look at every deal on a case by case basis. If you have a deal you are currently looking at and determining how to underwrite the deal to hedge against risk, but also remain aggressive in securing the asset for purchase, I am happy to walk through the details of the deal with you and help you determine your best strategic move. As always, I’m available to help wherever it makes the most sense for you.

 

 

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