Sonic Hopes More Ads Will Do The Trick
Few restaurant stocks performed as well last year as did Oklahoma City-based drive-in chain Sonic, which seemed to recover from a lengthy slump that had taken it down from a lofty perch as a darling of the franchise restaurant world. Now the company hopes that an even bigger emphasis on national ads can help it maintain that success.
The company said on its quarterly conference call this afternoon that it plans to shift more spending to national cable ads this year—from half of all spending to two-thirds. Cliff Hudson, the chain’s CEO, said that the change will increase the number of times consumers will see the company’s ads, which center around two people, usually two guys, eating out of their car in a Sonic Drive-in.
Sonic had reported two decades of same-store sales growth before the recession in part because its national cable ads built interest in the chain even before it entered new markets. The company hopes that the additional national ads will result in even better sales performance. “Historically, the allocation of media spending has been an important component in driving same-store sales and new store development,” Hudson said.
Sonic needs some consistent sales growth to get back in franchisees’ good graces. Many operators slowed their development, or even stopped, amid the chain’s lengthy slump. The company’s sales improved the past two years, and its stock price last year rose by nearly 55 percent. Yet the company acknowledged that economic uncertainty this year could keep sales growth to a minimum—it’s forecasting low-single-digit comp sales growth this year. Many operators won’t build new units until the company can improve same-store sales, which improves their own margins.
Sonic has been using royalty incentives to encourage operators to build new units. It now hopes a smaller store design will get do the trick—the chain’s smaller store design saves 15 to 20 percent on building costs. Scott McClain, Sonic’s president, said that franchisees should build more stores this year, but the company expects development to accelerate in 2014. “Their appetite for development is … growing,” he said.
Nevertheless, the company is also moving forward with a plan to shift franchisees to a more expensive royalty rate. Sonic has an odd tiered royalty system, with several different license types, each with a royalty range as low as 1 percent and as high as 5 percent. Most operators pay between 1 and 5 percent and average 4.1-percent royalties. But 600 pay a rate of 1-4 percent (3.3 percent average) and another 600 pay 1-4.5 percent (3.7 percent average). Nine hundred of these operators are expected to convert their agreements to the more common (1-5 percent) version by the end of 2014. Sonic said the conversion to the higher rates could earn the company $5 million a year in additional royalty payments.