Sonic discounts price war, aims for sales boom with extra value
To jump-start flagging sales, Sonic Corp. is avoiding the aggressive discounting efforts of the segment's burger giants to focus on introducing more diverse menu items, value-oriented promotions and increased advertising expenditures to attract tightfisted customers to its drive-ins.
January 19, 2003
OKLAHOMA CITY (Jan. 20) - To jump-start flagging sales, Sonic Corp. is avoiding the aggressive discounting efforts of the segment's burger giants to focus on introducing more diverse menu items, value-oriented promotions and increased advertising expenditures to attract tightfisted customers to its drive-ins. Even as McDonald's continued to push its $1 menu and Burger King offered its Whopper for 99 cents for several weeks in January, Sonic executives said discounting activity at the chain would be flat on a year-over-year basis. As with many quick-service brands that currently are slogging through a difficult environment, Sonic's same-store sales slid into the negative zone in the company's most recent quarter. Systemwide comparable-store sales dipped 0.2 percent in the first quarter ended last Nov. 30, declining 0.3 percent at company-owned restaurants and 0.2 percent at franchised units. Sonic currently franchises and operates nearly 2,600 units. Instead, officials maintained they would continue to roll out the new, differentiated offerings and inventive variations on more-common items to their menu. They added that the company is emphasizing value more heavily in its promotions because of the tough operating conditions. "We've been through many price wars with our competitors," said Sonic president Pattye Moore. "And so while those will always remain a challenge, as they get deeper we have to pay attention to that. And we have to work hard to make sure that we're still providing value to our customers." Although same-store sales for the quarter fell below company targets, Sonic was able to generate solid top- and bottom-line growth. The company posted an 11-percent rise in net income for the first quarter ended Nov. 30, to $10.64 million, compared with $9.56 million in the year-ago period. Revenue rose 13 percent, to $98.59 million, from $87.33 million in the same period a year before. Guest traffic in the quarter was up in the low-to mid-single-digit range, but the average check was down by a couple of percentage points, company officials said during the company's first-quarter conference call with analysts. Sonic officials said bad weather conditions in late October and early November in many of the brand's markets played a big part in its disappointing same-store-sales performance. Despite the operational and marketing efforts, Sonic officials cautioned that there is a good chance the chain's second-quarter same-store sales could be flat, even though they did rebound to the company's targeted range of 1-percent to 3-percent growth in December. Sonic, in its ongoing aim to boost average unit volumes from $900,000 to its competitors' $1 million-plus range, is moving ahead with a follow-up rollout of its breakfast program this spring to a significant amount of additional stores. Sonic Corp. is focusing on introducing diverse menu items and value-oriented promotions to attract customers. The breakfast program, which officials said is a "key part of our future," currently is offered in about half of Sonic's 2,576 units, of which 2,116 are franchised. So far breakfast offerings have generated strong results in existing units, without cannibalizing sales in other dayparts, the officials said. In addition, the company said the program is profitable. Units that have offered the breakfast program over the past two or three years are generating 10 percent of sales from the morning daypart, "which is very much what our objective has been," said Clifford Hudson, Sonic's chairman and chief executive. Also, more than 30 percent of sales in the morning stem from beverages, which have high profit margins, Hudson added. "They have a lot higher frequency than the typical fast food because you're not going there just to grab a burger and fries," said Amy Greene, a restaurant industry equity analyst for Nashville, Tenn.-based Avondale Partners LLC. Citing Sonic's diverse menu and its strong brand equity with customers, Greene said she believes the brand has been shielded somewhat from the sales-erosion effects of the two largest burger players' discounting efforts. "I think they're kind of buffered from a lot of the discounting wars that everybody else is going through," Greene said. Pointing toward the chain's focus on more "niche" products and its made-to-order strategy, Greene said she considers Sonic a "bridge between the QSR and fast-casual groups." Drawing some of the qualities that are benefiting the fast-casual segment, Sonic also continues to test a number of items, including health-oriented wraps, Sonic's Moore said. But the chain also is striking a balance by introducing items that are more common to the quick-service segment. In a December promotion Sonic introduced jumbo popcorn chicken with specialty dipping sauces. Moore said the item, which varies in price from $1.99 to $8.99 depending on size, ranks with the most successful of the company's new-product introductions. As a result, Moore said, Sonic would continue to promote the item through March. "New products, in our view, remain a key tool in staying fresh and relevant in the eyes of customers," she said. Earlier this month Sonic deployed its "brown bag" promotion, which has been offered at the chain a number of times and consists of two burgers, two beverages and two orders of fries or tots for $5.99. As part of the brand's 50th-birthday celebration, Sonic also brought back its "Pickle-O's" fried pickles for $1.99. During the first quarter the company introduced such new products as a pecan pie shake and a Frito chili cheese wrap, which were designated as limited-time offerings. The company, according to Moore, also promoted such existing items as chicken wraps, extra-long cheese coneys and tater tots. The company also ran a 25-cent ice-cream-cone promotion in October. "There's a place for us to be more mindful of value, and you might see us do things like the 25-cent cone," Moore said. "More couponing, too, but it's for short bursts of time. But you won't see us take our signature items down to 99 cents." Moore, however, would not offer specific strategies the chain will take in shifting its promotional strategy. "Without getting too proprietary, we consider ourselves pretty flexible and nimble and continue to meet and evaluate conditions and adjust as need be," she said. Despite the tough economy Sonic still plans to expand this year with a total of almost 200 stores slated to open. The company opened 182 restaurants in fiscal 2002 — a year when unit openings "fell somewhat short, particularly on the franchise side," Hudson said. Accompanying the brand's continued growth is the ongoing strengthening of its marketing muscle. Sonic plans media expenditures in excess of $100 million for fiscal 2003. That figure compares with the chain's media expenditures of approximately $90 million in fiscal 2002 and $80 million in fiscal 2001.
