Sonic: What's Up with the Company Units?

Sonic (SONC) released full year earnings on October 17th and is working forward on its fix-it plan. For the year, profits were down $4M or 6%.

While it’s been difficult times for all restaurants, I was intrigued by the sales softness of the company operated “partner” drive ins. (They are called partner since unit management has a bonus stake in them.) The company was boasting about the good relative performance of the company stores as recently as the January 4, 2008, earnings call.

Company stores trends weakened versus franchisee stores in Quarters 2-4. 2008. For the full SONC fiscal year, company stores comps were down 6%, while franchisee store comps were about flat, to prior year.

The weaknesses coincided also with the implementation of its “Happy Hour” promotion, an off peak hours (2-4pm) half price promotion of drinks. The company has reacted to this by changing operations management, and even working to refranchise (sell) company stores to franchisees. In these market and economic conditions, there are many moving pieces to pull that off properly.

The company is also increasing marketing spend ($190M to $200M) and rolling out a tip credit program, which will (legally) effectively lower new hire car hops' wages to depend more on tips. The company properly tracked its service and service time scores and found the company stores slipped relative to the franchisees.

Apparently, the company service times were 30 to 45 seconds slower than the franchisees. Did that cause the sales weakness?

Maybe the problem is the marketing plan, and what was promoted, the Happy Hour. Consider the following supplementary chart from the company’s earnings release. The 2008 average check fell and customer traffic didn’t go up enough to offset the difference to get sales to grow. It’s a common marketing promotion problem. Seems to me that Analyst Joe Buckley hit the nail on the head in the January 4, 2008, earnings call, when he asked about potential margin loss.

Several other restaurant companies have reported weak results from marketing events this week (EAT for one, on October 21). Maybe, during a recession, you’ve got to advertise and provide broad value, of your core business, perhaps that the Happy Hour did not. Maybe that’s the fix.

About us: Author John A. Gordon and Pacific Management Consulting Group is an analytically focused management consultancy that does not own or advocate stock positions.