Growth | August 2011 | By Daniel P. Smith

A Sonic Rebound

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In Hudson’s 17 years at the helm, average drive-in sales have increased by 65 percent (to more than $1 million) and systemwide sales have grown from $880 million to $3.6 billion. The company’s enterprise value has surged from about $200 million to more than $1 billion.

In fact, when Hudson arrived in 1995, Sonic shares traded near $2. After steadily escalating throughout the early 21st century, shares reached a high close of $24.78 in September 2007. Although shares plunged about two-thirds during the recession, the company has recovered from its $7.67 low in July 2010. As of June 1, 2011, the company was back on the upswing and approaching $11.50.

Sonic has expanded into markets north, south, east, and west, frequently adapting the company’s standard drive-in format by adding indoor seating or larger covered patios as needed. In 1999, the company opened its 2,000th store; six years later, Sonic welcomed its 3,000th store, a restaurant located just two miles from the chain’s original unit. Sonic’s store count is now approaching 3,600.

A decade ago, Hudson says, he’d travel to Boston and New York City and few would know the name Sonic; these days, residents in those same urban markets inquire about the brand’s expansion efforts, many eager to see more units in their area.

Strengths and Opportunities

In the late 1990s, Sonic began leveraging its frozen fountain favorites, grabbing an increasing chunk of the afternoon and evening business. These days, beverages across dayparts continue to propel the drive-in chain’s sales. Guests remain wowed by the ability to customize every drink order, adding any number of mix-ins, such as flavored syrups, fresh fruit, and candy additions to the tune of nearly 399,000 possible combinations.

As a result of its entrenchment in the beverage space, Sonic has fashioned a reputation as a premier drink stop, positioning that has advanced the brand’s cult following. Additionally, that customization drives daypart extension as well as profitability, thanks to the higher margins inherent in beverage sales.

Even more, Hudson says, the beverage possibilities are “a basis for customers to come back more regularly.”

In 2007, Sonic further touted its beverage offerings with a national campaign introducing an afternoon happy hour with half-priced drinks. The promotion was one of the company’s earliest responses to the economic downturn and a saving grace as sales numbers dropped in 2009 and 2010.

“Through the recession, that was one of the biggest growers of our business,” Hudson says of the happy-hour promotion, which continues attracting customers.

Go back 15 years, Hudson says, and burgers and fries dominated sales at Sonic restaurants. Now, those once-staple items are less than 25 percent of Sonic’s revenue. Beverages now outpace burgers, accounting for 29 percent of Sonic’s business. Add in ice cream and the cornerstone side items of beverages and they represent about 40 percent of Sonic’s $3.6 billion in 2010 sales.

“It’s a different approach than many of our competitors [in the burger space],” Hudson says of the focus on side items.

Indeed, the brand has consistently worked to highlight its strengths and pursue market openings.

In 2003, Sonic introduced a breakfast menu; the morning crowd now represents about 13 percent of Sonic’s business, sparked in large part by (what else?) beverages. From 2003 to 2005, Sonic also began introducing payment systems many competitors were not yet utilizing. As a result, credit card sales jumped from 6 percent of transactions to 43 percent of Sonic’s sales today.

“That was a subtle, but significant transition,” says Hudson, aware that consumers frequently spend more with plastic than cash.

Sonic has also not shied away from touting its family friendly concept, a winning formula with women, who represent 58 percent of Sonic’s overall customer base and, more remarkably, 75 percent of the restaurant’s afternoon customers. The company now spends about $175 million a year in advertising, seven times the investment the brand put forth when Hudson arrived in the CEO chair.

Competing in the Burger Segment

Hudson is well aware of the competition and the critical importance of moving with consumers, particularly as he aims to resurrect Sonic’s growth.

As one of the longest-serving CEOs among the QSR 50 chains, Hudson has witnessed the quick-service industry’s evolution over the last two decades.

Sonic and its competitors have each been forced to innovate and adapt or risk being bypassed by both consumers and other brands.

In the 1980s and 1990s, Hudson recalls money flowing into the restaurant industry as companies sought national expansion. Subsequently, he says, the quick-service landscape is more saturated than a generation ago, compelling competitors to get more sophisticated in both reaching consumers and product development.

“This translates into a battle for market share rather than growing market share,” Hudson says.

The burger segment became further competitive at the turn of the century when McDonald’s, which Hudson-terms “800-pound gorilla in the room,” better aligned its strategies.

“Now, all of us in the burger business have a tougher challenge [to grab market share],” Hudson says.

Even so, Hudson and Sonic remain committed to thriving, eager to avoid stagnation and a third consecutive year of falling numbers.

For so long—22 years, in fact—Sonic evaded challenges big and small to maintain its positive momentum. Then the recession hit and the company, as much by necessity as competitive force, had to retreat and examine where it could retool.

For Hudson and his cohorts, the decision was a simple, even familiar tune: Re-emphasize the brand’s distinctive qualities, namely its made-to-order food, drive-in format, and service differentiation with the skating carhops.

On the heels of two consecutive quarters of growth (late 2010 and early 2011), Hudson says Sonic is back in a positive upswing and is confident the brand will remain a top-10 quick-service company beyond 2011.

“We’ve got more momentum now than a year ago,” Hudson says.