Growth | August 2011 | By Daniel P. Smith

A Sonic Rebound

After decades of growth, the recession halted No. 10 Sonic’s long-lasting positive vibes. Today, CEO Clifford Hudson says momentum is back on the drive-in chain’s side.

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Sonic chairman and CEO Clifford Hudson knows the numbers, and although he may cringe, he certainly does not cower from the realities or the challenge.

After 22 consecutive years of same-store sales growth, Sonic’s systemwide sales numbers declined in both fiscal years 2009 and 2010. The falling figures sobered Sonic’s successful streak and invincible attitude, reminding the corporate office and the system at large that growth was not guaranteed.

“Twenty-two years is a long time to go before you max out,” Hudson says, pointing to the recession, as well as Sonic’s own missteps, as reason for the slide.

While the Oklahoma-based drive-in chain had consistently focused on the core elements spurring its 22-year upswing—namely service and product differentiation—it struggled in 2009–2010 with strategic standing and value messaging, a particularly critical element as consumers yanked back on discretionary spending given growing financial woes.

In a sincere Midwestern voice, Hudson admits No. 10 Sonic got caught flat-footed at the onset of the economic downturn. Teamed with years of competitors improving their own customer service and food quality models, the brand found itself in the unfortunate, and rare, position of playing from behind.

Sonic needed to react. And quickly.

“If you aren’t on top of your game all of the time, then you’ll pay for it,” Hudson says of the quick-service landscape and, more specifically, the ultra-competitive burger segment.

As a result of its falling fortunes, including a sales decline of more than $200 million from 2009 to 2010, Hudson redoubled the company’s efforts on strengthening the brand.

First, Sonic heightened food quality and the diversity of its offerings. The chain introduced new items such as the footlong Quarter Pound Coney, built a better burger with a bigger patty and bun coverage, and altered its ice cream specifications with increased butter fats and milk solids to create “real” ice cream. Then the company broadcast the changes, shouting to a national audience that it had the unique food to match the unique experience.

Next, the brand focused on customer service, new product roll outs—such as a line of six-inch hot dogs and loaded burgers—and refined its marketing with the hiring of a new CMO (former PepsiCo vice president of marketing Danielle Vona), a new advertising agency (San Francisco–based Goodby, Silverstein & Partners), and a new media buy partner (New York City–based Zenith Media).

In 2011, Hudson assures, the brand is poised for a rebound and the beginnings of a new streak.

America’s Drive-In

Founded in 1953 by Troy Smith, Sonic began as the Top Hat Drive-In, an adjacent afterthought to Smith’s Shawnee, Oklahoma, steakhouse. Yet Top Hat immediately proved to be the more lucrative operation and Smith pursued the drive-in business. In 1959, he adopted the name Sonic and a fitting restaurant mantra: “Service with the speed of sound.”

Providing the quick-service staples of hamburgers, hot dogs, fries, and milkshakes, Sonic sprouted from its Oklahoman roots over the next four decades to become a major regional player with about 1,500 stores spread south of the Mason-Dixon Line. Today, Sonic, by far the nation’s largest chain of drive-in restaurants, operates in 43 states and serves about three million customers each day.

Not bad for a one-time afterthought.

Throughout its history, Sonic has utilized the drive-in concept as its primary point of differentiation in a segment blanketed by heavy hitters like McDonald’s, Burger King, and Wendy’s, as well as recent up-and-comers, such as Five Guys and Smashburger. Many Sonic staffs still embrace the company’s roller-skating food delivery roots, a defining characteristic that lends an entertainment value to Sonic, unmatched by any of the major players. Sonic is, as the tagline suggests, “America’s Drive-In.”

Capitalizing on nostalgia and happier times, a presumed antidote to recessionary plight, Sonic’s drive-ins also appease customers’ desires for convenience and control. Never rushed and with low fuss, customers order, pay, and eat in their car.

“Nothing occurs until that customer touches the button and begins their personalized service,” Hudson says. “That’s a different experience from the competition.”

In fact, differentiation has been central to Sonic’s success and messaging, both with customers and prospective franchisees.

Once labeling its points of differentiation like the carhop service, distinct menu options, and made-to-order items as treasures, Sonic has elevated itself from a crowded field. Rather than mimicking the traditional fast food dine-in experience, Sonic carved its own niche with classic style on the back of the automobile. Rather than marketing burgers and fries, Sonic promoted its tater tots, cherry limeade, and Coneys.

Franchisees, meanwhile, have flocked to the system in robust numbers.

In 2008, QSR asked franchisees which concept they would most want to join if money was no obstacle. While McDonald’s headed the list, Sonic was No. 2, topping the likes of Chipotle, Panera, and Chick-fil-A. Operators have generally cited the brand’s drive-in format as the top draw, a concept that offers a competitive point of differentiation but also lower build-out costs.

“The longstanding success of our growth and the differentiation of the brand over time gave us elements of uniqueness over the competition,” Hudson says of prospective franchisees’ interest. “Plus, there’s a record of growth and profitability over time and our franchisees experience solid ROI.”

Leading the Sonic Brand

For nearly half of the company’s 58-year history, Hudson has been a member of the Sonic team, including the last 17 years as the company’s chief executive.

He arrived at Sonic in 1984, a 29-year-old lawyer with just four years’ experience at a private business law practice. Over time, Hudson ascended the Sonic ranks, serving in the roles of general counsel, CFO, and COO before being named CEO and president in April 1995. Five years later, he inherited the chairman’s title as well.

Under Hudson’s watch, Sonic shifted its focus to brand building, leaning heavily on operator engagement to understand the restaurant’s strengths, weaknesses, and opportunities. The winds of change gradually swept across the Sonic brand, but never at the risk of diminishing those well-guarded treasures.

Hudson pledged to lead the company’s development from regional player to national name, “The Sonic Boom” as it was once called.

And lead he has.

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.