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.

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.


Hudson has outlived his usefulness. He rode in on the coattails of the likes of Troy Smith, Steve Lynn and a robust economy (Lynn is really who moved the chain) and gobbled up the credit. Certainly some positives through his tenure, but so was there for most restaurants during the 90's and much of the 2000's.Every wrong decision over last 5 years made by Sonic was spearheaded by Hudson. Wasted many years trying to re-brand the company to the point of marginalizing the brand. This at a time when Sonic was trying to penetrate a national market, trying to create new core markets. Two more years of Hudson at the helm and Sonic will shrink back to a regional market. The beginnings of that are happening now.He rode the economic wave successfully but offers little in the way of fresh ideas needed to capture past sales and profit figures. Instead, Hudson spent his time packing the BOD, purging those from he ranks who added value, and trying to work his way into favor with Clinton and Obama administrations. This article gives way too much credit to Hudson for the positive and not enough for the negative.

I've been begging sonic to open up one in Erie, Pennsylvania -- which is right in the middle of three states: ohio, NY and PA and we don't have a burger place like sonic. Even in Buffalo, NY we do not have one.

"Coat Tail Cliff" hasn't had an original thought since he joined the company. He and his executive staff have driven long term franchisee's from the system with heavy handed mandates and ruined the ROI of the company. Reaction to our business challenges has been painfully slow if any at all. It is a puzzle why the board has kept him but myself and many fellow franchisee's say it time he goes.

As an individual that was excited about Sonic and there way of business in the 90's. I am not surprised. We have watched the franchise as well as the franchisor make one bad leadership decision after the other. Then proceed to play the blame game. Many of the programs that lead to Sonic not being ready for tough times were voted on by the entire system. As my mom used to tell me "come home from the dance with the girl you take." One of the founding principles of the original Sonic Drive In was ownership. Taking pride in something you own is what built Sonic to a major player. The franchisor has convinced the franchise (it did not take much arm twisting) that ownership is not important. When they voted to begin making all decisions by the BOARD the slide began. Greed and arrogance

Mr. Hudson is a wonderful example of the Peter Principle, he has been elevated to his level of incompetence! You speak with the franchisees, other than the Executive Franchise Advisory Counsel, or company employees, with garantees of non disclosure and you will see the true disatisfaction of his leadership!

The Sonic culture once fun and spirited has been driven to ruin by Cliff and his team. Once a proud brand, Cliff has removed all that brought understanding and insight from the management team.Sonic franchisees have closed many Driveins over the past year, yet this upcoming winter will be the worst of all, dozens and dozens will close. This, all to the mystery of the frnchise community that has tried to reach out to the Board of Directors, begging for understanding and change.Cliff Hudson is fan of history, in the 70's and 80's Sonic closed many units, later building back larger....these are different days, why repeat history? Marketing and media can be easily used to drive awareness and excitement for the brand, but history will be repeated, if not from help from the Board of Director, then a Hot Dog with Bar-B-Que Sauce and Onion petals!Sonic continues to market to the fewest number of viable customers! Come on Board!! Help Sonic succeed!

It looks like Sonic Industries bought article space and had Mr. Hudson's PR staff write the piece. Why not investigate first before publishing such a shallow and inaccurate piece on the man who is killing an incredible brand. The franchise community owns over 85% of the chain and the strong majority feel that we need a change in leadership. Why not ask the franchise community if Mr Hudson is what we need to survive, and possible event get back to prosperity. All but the owned Executive FAC would agree. Sonic is so special but we will die under Mr. Hudson's lack of leadership.

Ive been a Sonic manager for well over 20 years. We carried the brand when I started. We were told by our partners that we were the most important link in the chain. That was because we went to work every day, promoted our brand, and managed to squeeze out a profit with nothing but local advertising and neighborhood marketing. Now were told that its ridiculous for a manager to own a portion of the business. Were told that the corporate people are the ones who built the business into the success it was before Cliff started destroying it. We are blamed for everything negative and no longer given credit for anything positive. At one time corporate at least pretended to be there to support us. They have now created a bureaucracy that basically does nothing but harass the managers and operators who are trying to run a business and make money in spite of them. Years ago, operators looked forward to a visit from a field marketing rep. Now we just wonder if well be stabbed from the front or the back. At one time Sonic was a business that a young person felt he could build and eventually make a good living. Weve now peaked with the good living and are all making less each year. What is Cliffs idea to turn this around? More harassment, audits, and ops assessments frequently done by corporate people who are more interested in justifying their position than actually doing anything to improve the brand. Each Sonic needs an employee who is responsible for nothing but taking care of the useless paperwork and time wasting tasks that accomplish absolutely nothing except for feeding more bureaucracy. If you want to know the truth about Sonic you need to speak confidentially with the people who actually run one every day. I guarantee that what youll hear more often than anything else is, Running a Sonic used to be fun. Theres no doubt that Cliff needs to go but when he does there is quite a crowd that needs to go with him.

Okay, you hit a homer with the new hot dogs, but then you struck out.Do not think that the public will forgive your reducing the hot dogs toapproximately 65% of their size at their introduction.This says that you believe that we are stupid. You will learn that wehave long memories and everlasting resentment.Most of us would not object to a price increase. We realize that prices go up and down with supply and demand. Remember that as you studyyour bottom line in the months to come.Epw

From Thousands Of Alaskans:I like thousands of people who travel to the lower 48 states, visit and very much enjoy eating at your Sonic Drive-Ins. I make it a point to stop in every time I leave to visit my family in Utah. We finally had a Dairy Queen built here a few years ago and we waited in line for over 3 hours.... I personally would treat my family of 5 on a regular basis... Please think about it and dont let the snow and weather scare you, it's not as bad as they make it out to be.... ANCHORAGE< WASILLA <fairbanks!!!!!!!!! thank="" you="" for="" reading="" this="" and="" have="" a="" wonderful="" day.="">

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