Sonic Case Study

Executive Summary

Beginning with one restaurant, Sonic has become the largest drive-in chain in the United States. While they are smaller than their competitors, they are still leading in sales growth, customer loyalty and customer satisfaction. Sonic restaurants saturate the southern U.S. This gives them the opportunity to expand to other area. However, Sonic is reluctant due to the colder climates and their basis as a drive-in restaurant. Sonic should look at adding or combining capabilities to it's restaurants to increase competitiveness and make it easier for them to expand into other areas without limiting themselves.

Situational Analysis

In 1953, Troy Smith, the founder of SONIC and World War II veteran, was living in Shawnee, Oklahoma. Troy dreamed of owning his own restaurant business. In fact, he had already tried twice.

Troy first owned a small diner called the Cottage Cafй. The income he received was barely enough to make a living for himself and his family. Troy sold the Cottage Cafй and bought a bigger restaurant. His next business, the Panful of Chicken, was so successful that he tried opening more. Unfortunately, fried chicken didn't do well in early 1950s Oklahoma and Troy closed his Panful of Chicken restaurant.

Troy then owned a steak house that had a root beer stand attached. This root beer stand, called The Top Hat proved more profitable and eventually outlasted the steak house.

While traveling to Louisiana, Troy saw some homemade intercom speakers in use at a local hamburger stand. He contacted the innovator in Louisiana and asked him to make an intercom for the Top Hat. He then hired some local electronics wizards to install the system. He then added a canopy for cars to park under and servers to deliver the food right to customers' cars. During the first week after the intercom was installed, the Top Hat took in $1750.

With his new partner, Charlie Pappe, four more Top Hats were opened. However, their lawyers informed them that the Top Hat name was copyrighted. They changed the name to Sonic to go along with the restaurant slogan of "Service With the Speed of SoundSM."1

In 1973, a group of ten principal franchise owners became the officers of the company. Shares were offered to each store owner. Because of the amount of stock offered, Sonic became a publicly traded company with 165 stores in the chain.

Between 1973 and 1978, Sonic grew tremendously. 800 new stores were opened and a Sonic School that formally trained new managers was established. Sonic's first television advertising campaign was launched also.

When Cliff Hudson joined the legal department in 1984, Sonic had a loose collection of around 1000 independent restaurants in 19 states. There was no national advertising program, accounting was done manually, and packaging was inconsistent, and even the menu varied from store to store. He realized that changes had to be made to turn Sonic's poor financial performance around. After he led a successful buyout in 1986, Hudson was instrumental in the resurrection of Sonic.

Hudson headed two different stock offering in 1991 and 1995. These offerings raised enough capital to pay off the company debt and add to working capital. He also had the franchises purchasing together, which resulted in cost savings, consistency and quality.5

In 1991, Sonic was the 5th largest in the fast-food industry. Today they call themselves the largest chain of drive-ins in the country. They have to compete with McDonalds, Burger King, Wendy's and Hardee's. Sonic relies heavily on the opening of new restaurants to maintain their expansion. However, Sonic has shown a reluctance to enter new geographic regions.

Problem Statement

One of the main things that sets Sonic apart from the rest is it's drive-in service. However, this service is not ideal in northern climates. Sonic would have to depart from it's traditional format to a non-traditional format. Hence, Sonic would not be unique in the competing area.

Data collection and analysis section

Net income for Sonic increased 21% in 2004 while total revenues rose 20%. The key factor for growth last years was because of expansion. Franchisees opened 167 new drive-ins with partner drive-ins numbering 21. Sonic now has 2,885 restaurants.

Looking at the ratios, there is a signal that Sonic is using financing for expansion. They are currently using $14.1 million of a $125 million line of credit that expires July 2006. Sonic also has long-term debt of $38.1 million and $22.2 million that matures in 2005 and 2006 respectively. They plan to refinance $30 Million of that debt using the line of credit. To confirm the ratios, Sonic plans to use the line of credit to finance new drive-ins, acquisitions, purchase of common stock and other purposes, as needed.1

Consolidated Statements of Income 2

Year ended August 31, 2004

(In thousands, except per share data)

Revenues:

Partner Drive-In sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 449,585

Franchise DriveIns:

Franchise royalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,518

Franchise fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,958

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,385

536,446

Costs and expenses:

Partner DriveIns:

Food and packaging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,073

Payroll and other employee benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,880

Minority interest in earnings of Partner Drive-Ins . . . . . . . . . . . . . . . . . . . .

19,947