Will Sonic's New Menu Strategy Work?

Sonic (SONC) is an interesting company to watch—it has (had) one of the highest EBITDA margins in the restaurant sector, stable management, expanding, locations in a lot of middle America markets. But like others in the restaurant sector, it ran into trouble in 2008, and now isn’t making the sales gains or earnings projections.

Earlier this week, we listened to Management lay out its plans for the rest of the year. Properly, it rolled out a broader based value menu—value and price is critical right now. The value menu seems to be broader based than the earlier, narrow daypart focused “Happy Hour” promotion—covering breakfast, lunch and snack dayparts. The value menu seems to be off to a good start according to Management.

Management stated the new menu could deteriorate margins about 50 basis points, but that it hoped to make it up on new volume. The company then said something confusing, that the value meal was priced higher than its overall weighted average check. That seems a bit odd.

One of Sonic’s problem is that its average check has eroded, as its chart below shows:

The average check is down, despite two price increases and a weighted pure price effect of about 2.5%. If the company can’t get its new average check up, it’s hard to cover food and labor cost inflation, which were 260 basis points worse quarter to quarter, and a real problem.

Listening to the Ruby Tuesday (RT) earnings call the same day, it was interesting that the company clearly identified its weak markets—rural Southern markets. We’ve heard additional other reports about rural retail activity falling off big time—if so, that could be influencing Sonic as well. Of course, Sonic and Ruby Tuesday are in different restaurant sub-sectors.

The solution? We all have to hang in there and make sure the business is as tight as possible. And realize that one-size-fits-all marketing campaigns might not work.

Disclosure: Pacific Management Consulting Group is an analytically focused restaurant consultancy, and has no stock positions in restaurant companies.