Strategic Analysis of Sonic Corp

Executive Summary

Sonic is the largest drive-in chain in the United States. Under the slogan "America's Drive-In," a Sonic features fast service by roller-skating carhops and unique menu items that cannot be found at McDonald's, Burger King, or Wendy's. Sonic restaurants operate in 27 states so it is smaller than leading fast food chains however it is still a significant competitor. Founded by Troy Smith and Charlie Pappe in 1953, Sonic went from a single root beer stand to a popular franchise. In 1973, Sonic restructured as a franchise company and later became Sonic Corporation. The company experienced financial decline due to the lack of consistency from its franchisees so they were bought out by Sonic Corporation and restructured. In 1995, Sonic introduced "Sonic 2000," an aggressive multi-layered strategy to further unify the company in terms of a consistent menu, brand identity, products, packaging, and service. The campaign was successful and Sonic's brand recognition increased. Strengths include a strong competitive nature, flexible strategies, and employee/franchisor relationships. Weaknesses include lack of communication and domestic expansion. Threats in the external environment include company size, employee turnover, weak economy, rivals in similar industries, overseas expansion, and slow growth markets. Sonic can overcome these threats with opportunities such as global expansion, increase in the number of quick service consumers, and appealing investment opportunities. Alternative strategies and recommendations suggest that Sonic should concentrate on a low cost strategy and focusing on niches such as the health food market.

History and Strategy of Sonic Corporation

Sonic Corp. franchises and operates the United States' largest chain of drive-in restaurants and the fifth largest hamburger chain. As of August 31, 2000 there were 2,172 Sonic restaurants, of which 1,860 were owned and operated by independent franchisees; the remainder were majority-owned by Sonic Corp. Company-owned restaurants averaged $702,000 a year in 1999; franchised restaurants took in about $842,000 each. Under the slogan "America's Drive-In," a Sonic restaurant features fast service by roller-skating carhops and a limited yet diversified menu of cooked-to-order items, including hamburgers, hot dogs, French fries, tater tots, and onion rings, and a wide variety of soft drinks and frozen desserts. Sonic restaurants operate in 27 states in the Bible Belt and Sun Belt.

Founded by Troy Smith in 1953 and partnered with Charlie Pappe in 1956, Sonic went from a single root beer stand formerly known as the "Top Hat" to a popular franchise. This franchise became an instant success with unique features such as car canopies, homemade intercom speakers, and carhops who delivered directly to customer's vehicles. The partners soon received requests from other entrepreneurs to open their own Sonic Drive-ins. In 1973, Sonic restructured as a franchise company under the name Sonic Industries, Inc., which was a company composed of ten key franchise owners who served as officers and directors of the new company.

Cliff Hudson, the current CEO, joined Sonic in 1984. At that time Sonic had problems with loose franchise leadership and inconsistency. In order to turn around Sonic's poor financial problems, a successful leveraged buyout from the franchisees in 1986 for $10 million to make the company private. Calling franchisees "partners," Lynn was able to increase chain wide cooperation, forming advertising groups focused on key markets. Sonic put together a low-cost remodeling package, initially priced at $20,000, to encourage older restaurants to revitalize their image. At the same time, the new structure price was set at around $140,000. Lynn also moved to fix the Sonic menu to a limited number of basic items and regional specialties. Soon, Sonic was once again growing. In 1987 it built its 1,000th restaurant.

Sonic's growth continued into the 1990s. It went public again in 1991, raising $52 million in its initial public offering. Personnel were recruited from competitors and sought to reduce costs and increase efficiencies in the organization. System wide sales rose from $454.6 million to $776.3 million; same-store sales rose from $446,000 to $585,000; and company revenues grew from $45.8 million to $99.7 million. In 1993, Sonic's market value was estimated at $200 million. Sonic had grown to the fifth largest hamburger chain in the United States and the top drive-in chain.

Sonic's growth remained relatively flat after 1992. After reaching a high of $33, its stock price slipped to around $23 per share in 1995. Per-store sales seemed stagnated between $515,000 and $585,000. Sonic, which traditionally owned its rural and suburban Southern markets, was facing increasing competition from drive-through chains such as Checkers and Rally's (these two would merge in 1999), while the giants of the industry--McDonald's and Burger King--with their ability to discount, began to invade its territory. Meanwhile, despite discussion of acquiring a Northern-based partner, Sonic clung to its traditional market, making few inroads outside of the warm-weather Southern areas. The company faced additional trouble in 1994 when it was forced to take a $3.9 million write down charge for discontinuing its five company-owned properties, including two closed restaurants in South Florida that had suffered as a result of the hurricane that devastated the area in 1992.

In 1995, Sonic introduced "Sonic 2000," an aggressive multi-layered strategy to further unify the company in terms of a consistent menu, brand identity, products, packaging, and service. The company began to develop the Sonic brand as never before. Its new advertising focused on the signature carhops and food offerings that differentiated Sonic from other national fast food chains, items such as hot dogs, tater tots, and cherry limeades. Sonic 2000 new standardized menu reduced operational costs. Through its Sonic 2000 retrofit program, Sonic began to remodel their restaurants with a new look that featured "futuristic red pylons with fiber-optic lights, oval roofs, and a new logo." This new design help increase profits by 8% despite the $55,000 to $75,000 remodeling price tag. Soon, Sonic was leading all other fast food restaurants, including McDonald's, in customer frequency rates--between eight and nine visits a month. Consumers started recognizing Sonic's brand and business boomed. Seasonal offerings like the Chocolate Cream Pie Shake, complete with graham cracker crumbs or Sonic "Summer Nights" which offered different types of frozen drinks and deserts kept repeat

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