Why Sonic is Ready to Change the Convenience Game

Sonic Corp. CEO Cliff Hudson believes the chain is on the verge of “changing the convenience game.” During a second-quarter review Tuesday afternoon, one where the 3,587-unit chain reported same-store sales declines of 2.9 percent and revenue of $88.1 million, Hudson provided an update into Sonic’s ongoing mobile order rollout. While this technology is not fresh in limited service by any stretch, Sonic’s version is. The chain launched the company’s first full-market test of the platform in March, with more coming in April, and national penetration expected later this year.

“The biggest part of our focus on a digital strategy is on the order-ahead process and the differentiation of the Sonic experience versus our competition, because it's our viewpoint that we have the opportunity to really change the definition of convenience in the industry,” Hudson said, “which has historically relied almost completely on a real estate framework, and the question of physical locations across a market in order to provide the most convenient access for consumers.”

Sonic’s order-ahead technology allows customers to decide when and where to order in a way they typically cannot. Guests use the app to customize, pay, and then select which Drive-In to go and pick up their food. They can also choose the time most convenient to them. “So everything is in their hand quite literally to drive that entire process rather than having to come to a physical location,” Hudson says.

Sonic tested this in isolated stores before the 27-store March market rollout. It’s been just about three weeks and Hudson said the results have returned positive. Service times to customers are averaging just less than two minutes from the guest’s arrival at the restaurant until they receive their food. And more often than not, they’re getting food in less than 90 seconds “a speed that, from our standpoint, is going to redefine convenience for our guests and put us in consideration for a completely different occasion with consumers,” Hudson said.

"From our viewpoint, [in a] convenience piece historically dominated by physical presence and efficient market penetration, we're changing the convenience game.” — Cliff Hudson, Sonic Corp. CEO.

Operationally, orders placed via mobile show up on the kitchen display at the time the customer has selected. Once guests check into the stalls, Sonic employees bring the food out. This differs from the competition logistically since the typical order-ahead diner gets in line at the drive thru or walks into the restaurant, either to a dedicated pick-up area or not, or they park in a curbside area. At Sonic, the guest can pick where to go and wait less than two minutes to have their meal carried to the window.

“From our viewpoint, [in a] convenience piece historically dominated by physical presence and efficient market penetration, we're changing the convenience game,” Hudson said. “And what we've got to do is get the customer to see that experience. And then when they have it, we're confident we'll get them to utilize our app and our brand more than they would have otherwise.”

This technology highlighted a quarter dragged down by weather for Sonic. Hudson said, excluding the impact of weather, which was particularly troublesome in January and February, same-store sales were flat for the quarter.

To get an idea of how drastic Mother Nature’s impact was, about 87 percent of Sonic’s system sales are in the central and Eastern Time zones. Sonic’s business tends to show more seasonal than competitors, with the second fiscal quarter of winter typically representing only 18 percent of system sales for the year. The company’s product mix, which relies heavily on ice cream and beverages, takes a hit when snow, ice, and frigid temperatures sweep Sonic’s footprint.

Excluding weather and the impact of weather in March, Hudson said Sonic is operating in the 0–2 percent positive comps range. This led Sonic to forecast same-store sales of negative 1 to positive 1 percent for fiscal 2018, year-over-year.

Wall Street didn’t react favorably to the news initially. Sonic’s shares fell close to 5 percent in after-hours trading Tuesday and were flat to start Wednesday at $25.34.

Sonic also said it plans to open 55–65 new franchise units for the total fiscal 2018 year, which is a lowered outlook from the original forecast of 70–80. Claudia San Pedro, who was promoted to the president role in February, said development got off to a slow start this year and the company does “not anticipate being able to accelerate development in the back half to make up the difference.”

In fact, Sonic anticipates elevated closures this year as the company brings its POPS point-of-sale installation to a close and some franchisees elect to shutter moderate performing units rather than make the investment. “Going forward, we expect to remain at near a 1 percent net growth rate as we focus on maximizing our own four-wall returns,” she says.

Another key change unfurling at Sonic involves the continued reduction and simplification of its menu. San Pedro said Sonic plans to follow up spring menu reductions with another round in the fall “focusing on lower velocity items that have a tendency to create bottlenecks in the restaurant or have resulted in inconsistent execution.” The company is also aggressively simplifying its drive-thru menu to push diners toward Sonic’s core items that can be prepared efficiently in the kitchen.

San Pedro uses ice cream as an example. Sonic, in the past few years, added different tiers—shakes and master shakes, Blasts, and Master Blasts.

“What we were seeing from a consumer standpoint is they really want the option to know that they can personalize it and they need to know what their options are. We don't have to curate that for them in such an intentional way to the point where we may have 16 different flavors for those two categories,” she said. “Instead, what we can do is offer a base of six different flavors that have a series of add-ins where they can then personalize it and come up with their own combination of items.”

Sonic will eliminate some of those categories, like Master Blasts, while retaining some of the candy add-ins. All in all, about a 20 percent reduction in actual menu items, San Pedro said.

The operational simplification is a key element of this as well. “Not only if we can achieve what we need to from a consumer perspective but then how can we make sure that we set up our operators so they're in a position where they can execute, on a more consistent basis, a superior customer service experience,” she said. … “Going forward, we're looking at again just experimenting and testing both from a consumer and operator perspective, both moderate and aggressive menu reductions. And we'll see what those yield over the next 4 to 6 months.”