In 1953 Sonic Corporation was founded by Tony Smith in Shawnee, Oklahoma under a different
name of the Top Hat. Tony Smith started the company as a drive-in restaurant featuring
hot dogs, hamburgers, and french-fried onion rings. In the mid-50s Smith was asked by
Charles Pappe for assistance in establishing a similar restaurant in a rural town also
located in Oklahoma. This was the beginning of a partnership between the two men .
CURRENT INFORMATION
In 1991 Sonic Corporation was the fifth largest chain in the fast-food industry,
servicing in the hamburger segment, behind McDonald's, Burger King, Hardee's, and
Wendy's. Sonic has and is still carrying the tradition of being a high-quality
franchise-based organization in the Sunbelt states. The following case will be broke
down into five different stages beginning with early strategies,
problems, new strategies, a ratio analysis, and a recommendation.
EARLY STRATEGIES
UNDER TONY SMITH
Tony Smith introduced the Top Hat as a drive-in restaurant that reduced start up cost by
not having eat-in space. This new restaurant featured drive-in stalls for automobiles,
that were equipped with a two-way intercom enabling customers to order as soon as they
drove in, opposed to conventional practices of waiting for a carhop to take an order.
Delivery of the fresh fast-quality products was do to the unique design of the kitchen,
and the use of carhops.
Sonic Corporation preferred to do things as easy as possible and avoid sophistication.
Another strategy Smith implemented was a collection of franchise royalties. This was
done in a way such that Sonic franchise holders were required to purchase printed bags at
an additional fee that Smith arranged through a paper-goods supplier.
Pyramid-type selling arrangements were formed by franchisees in money making efforts by
starting other franchises through friends. This lead to original store managers having a
percentage of their own store earnings and a portion of the new operation of the
recruited friend manager. This idea further developed to multi-ownership of almost all
Sonic operations as store managers were also part owners. This concept of pyramid-type
selling carried Sonic forward with rapid growth.
PROBLEMS
RAPID GROWTH
In the later-70's almost one new Sonic store opened per day. The rapid expansion of
Sonic was growing at an uncontrollable rate. With such rapid growth some stores failed.
In these cases Sonic assumed control over failed franchise units, driving the number of
company owned restaurants from 3 in 1974 to 149 in 1979. This rapid expansion of Sonic
was a short lived frenzy which resulted in numerous failures do to lack of planning,
market analysis, and requirements for unit managers. The company was forced to operate
the failed franchise as company units in most cases, to protect the franchise name and
reputation. A loss was posted in 1980 as Sonic began closing some operations.
POOR MANAGEMENT
Reason's for the closings were that the board tighten its control which created an
operation that left no services being provided to the franchise holders, including no
advertising cooperation's, no management training services, and no accounting services.
In 1983 Smith decided to go outside the companies parameters and appointed a professional
manager that had no ties to Sonic Corporation in any shape, form, or know how.
Stephen Lynn was introduced to Sonic Corporation as president and chief executive
officer. The new comer, Lynn, was granted the decision to form his own management team.
This team was formed and implemented by mid 1984. By implementing his own management
team Lynn could begin to take problems head on, after ridding the board members and
franchise holders that had significant conflicting interests that clouded the better
judgement of Sonic.
NEW STRATEGIES
TURNING IT AROUND
In an attempt to turn the organization around, Lynn and his newly formed management team
set forth on a strategy that had three key factors: "(1) attack problems concerning
franchise attitude and Sonic's image; (2) improve purchasing; and (3) improve
communications." Marketing was the key to nipping the attitude problem in the butt. To
be successful three main issues had to be encountered: "(1) the franchise owners and
corporate owners had to buy-in to it; (2) the plan had to be simple enough to be
executed; and (3) it had to provide visible evidence of working by improving profit for
the owners."
MARKET STUDIES
To get this marketing program under way the team identified several marketing studies:
(1) Sonic customers were of high frequency visiting on average twice a week; (2) there
was a trend moving more and more to take-out orders opposed to eat-in orders; (3) Sonic
had fresh high-quality products after the customer ordered; (4) the unique use of carhops
set Sonic aside from the competition since most competitors served over the counter or
through drive-by windows.
REACHING OUT
A co-op program along with advertising also helped improve communication and relations
between franchise owners. The company's strategies also reached out further as it
offered annual conventions, provided training for managers, and training facilities with
a test kitchen. The company went even further to offer help in areas of franchisees
location sites and construction support to sales and profit improvement counseling.
ENHANCING IMAGE
Another strategy was to upgrade the stores appearances and improve energy efficiency.
Most franchise owners purchased a "retrofit" package that offered the mentioned upgrade
features. These new designs generated an average of 20 percent increase in unit sales in
addition to the overhead savings.
TAKING CONTROL
As these mentioned strategies paid off as it was reflected by profits increasing and
operating units stabilizing. Lynn still had conflicting interests between board members
that stood in the way of sound business decisions. This lead to the first leveraged
buyout (LBO) as Lynn put his job on the line. The board rejected his first offer and
came up with a counter offer, and Lynn accepted. With an option from the first LBO to
purchase the shares of a joining party in the first LBO Sonic management decided to
exercise that right. The total debt of the transaction was approximately $25 million,
while the company was valued at a strong $35 million. However, do to deterioration
between partnership and risk associated with the LBO, Sonic decided to go public on March
7, 1991, at an initial public offering price of $12.50 per share.
ANALYSIS
RATIO'S
PROFITABILITY
Operating profit margin (return on sales) has risen from .170 in 1990 to .220 in 1991.
The major factor contributing to this increase is that sales in 1991 increased at
greater percentage of profit's before taxes and before interest as compared to the 1990
figures. Another profitability ratio is return on stockholder's equity or return on net
worth. This computation came out to be (.181) and .128 in 1990 and 1991 respectively.
The reason for the big difference in numbers is do to the total stockholder's equity
being negative in 1990. Also profit after taxes in 1991 were significantly higher than
in the past years. In the past years Sonic Corporation had extremely high negative
interest income numbers which were probably caused from loans at high interest rates.
The reason for choosing these two ratio's were to show the before and after tax affects.
LIQUIDITY
The current ratio for 1991 was substantially higher than in 1990, 3.185 and 1.263
respectively. Two major contributions must be noted: (1) the current liabilities were
lower in 1991 due to less short term debt; and (2) current assets were significantly
higher by millions of dollars in 1991, because of an abundance of cash in marketable
securities. This ratio indicates that Sonic has 3.185 times the amount of current
assets to every 1 of current liabilities in 1991.
LEVERAGE
The debt-to-assets ratio shows the extent of borrowed funds have been used to finance
the firm's operations. In 1991 Sonic Corporation had a ratio of .306 compared to 1.164
in 1990. This indicates that Sonic has lowered its total debt and increased its total
assets over the past year. This ratio also measures the risk that a company has in
financing its debt.
RESEARCH IN 1992
Research in 1992 shows that Sonics typical customer is female between the age of 18-24
with an average income between $10,000-$15,000. Forty-six percent of Sonics business was
done during lunch hours, and 44 percent done during supper. Sonic's average meal price
was $2.25.
CONCLUSION AND RECOMMENDATION
Sonic Corporation is an ever improving company that is striving for efficiency,
freshness, and quality. Over the life of the company management has always been trying
to increase profits and taking steps into the future. Sonic Corporation also learned
that in maximizing profits one must incorporate all the ingredients from attitudes of the
mangers and owners to the products they offer their customers.
In looking at the ratio's Sonic Corporation is looking stronger every year. I would
recommend to keep management minds striving to new and better innovations that could
again revolutionize the company as it had under the leadership of Mr. Lynn. In doing so
the company assure itself and ever lasting life in the fast-food drive-in industry.
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