Sonic Corporation

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Sonic Corporation

101 Park Avenue
Oklahoma City, Oklahoma 73102
U.S.A.
(405) 280-7654
Fax: (405) 280-7696

Public Company
Incorporated: 1959
Employees: 168
Sales: $123.75 million
Stock Exchanges: NASDAQ
SICs: 5812 Eating Places; 6794 Patent Owners & Lessors

Sonic Corporation franchises and operates the United States’ largest chain of drive-in restaurants. At year-end 1995 there were 1470 Sonic restaurants, of which 1286 were owned and operated by independent franchisees—the remainder were majority-owned by Sonic Corp. Under the slogan “America’s Drive-in,” a Sonic restaurant features fast service and a limited menu of cooked-to-order items, including hot dogs, soft drinks, shakes, french fries, tater tots, and onion rings, with hamburgers accounting for 30 percent of sales. Sonic restaurants operate in 27 states, primarily in the Bible Belt and Sunbelt states and in small towns and communities with a population of less than 50,000.

The Sonic concept originated in Shawnee, Oklahoma in the early 1950s. Troy Smith, a veteran of World War II, operated a small diner called the Cottage Cafe, which, with only four booths and twelve counter seats, could not support him and his family. Smith sold the diner and opened a larger restaurant, called Troy’s Panful of Chicken. But his attempts to expand into multiple locations were not successful, and by 1953 Smith’s chicken restaurants had failed.

Smith next dreamed of running an upscale steakhouse. In 1953 he purchased land on the edge of Shawnee, a five-acre property that held a log cabin and included a root beer stand called the “Top Hat.” Smith’s original intent was to operate his steak-house in the log cabin and to tear down the root beer stand to make more room for parking. In the meantime, the root beer stand, which sold hot dogs and hamburgers, contributed average sales of $700 in cash per week. Customers would park, walk up to the stand to get food, and eat in their cars.

The postwar boom in automobile purchases created an increasingly mobile public, and businesses developed to serve this new population. Fast-food restaurants began to appear across the country; in California, many operated as “drive-ins,” with covered parking spaces and a wait staff that rollerskated to customers’ cars. The drive-in concept soon spread across the country, particularly in the warm-weather states. While traveling in Louisiana, Smith stopped at one of these new restaurants. It had an intercom system with homemade speakers that allowed customers to remain in their cars while they placed their order. Smith contacted the inventor of that system and ordered intercoms for his Top Hat root beer stand. Smith also constructed parking canopies, which allowed him to control parking in the root beer stand’s lot, and hired carhops to serve his customers. Sales at the stand jumped to $1,750 in the first week after the intercom system was installed, and Smith quickly lost interest in his steakhouse.

The Shawnee restaurant remained the sole Top Hat until 1956. In that year, Smith met Charles Pappe, a manager of a Safeway supermarket in the Oklahoma town of Woodward who was interested in starting his own restaurant. Pappe, visiting Shawnee, met Smith, and, as the two discussed Pappe’s restaurant plans, Smith convinced him to dub his drive-in a Top Hat as well. They began to operate their restaurants under the slogan “Service at the Speed of Sound,” and developed paper goods with the Top Hat name. By 1958 two more Top Hats opened, in Enid and Stillwater, Oklahoma.

Smith and Pappe made plans to step up their franchise business. They soon discovered, however, that the name Top Hat had already been copyrighted. The pair consulted the dictionary, where they found the word “sonic.” The term fit neatly with their slogan. New signs and paper goods were developed, and in 1959 the Stillwater restaurant became the first to adopt the Sonic name.

The partners soon received requests from other entrepreneurs to open their own Sonic Drive-ins. Smith and Pappe assisted these new owner-operators with choosing locations and designing the restaurant layout and operations. Formal franchise agreements were drawn up for the new restaurants. The new owners paid a royalty fee of one penny per sandwich bag, purchased through a central supplier. These franchise agreements contained no provisions for advertising, territorial rights, or fixed menus. Instead, Smith and Pappe’s business operated mostly on handshake deals. Sonic operators were still most likely to be local businessmen, owning in part or in full their restaurants, and restaurants were often family-run.

Sonic grew modestly through the 1960s. By 1967, the year of Charles Pappe’s death, there were 41 Sonics in operation. Smith brought in two long-time Sonic restaurant franchisees, Matt Kinslow and Marvin Jirous, to run Sonic Supply, the company’s supply and distribution division, while Smith continued to develop the company’s franchise operations. Franchises appeared in Texas and Kansas, and, by 1972, there were 165 Sonic Drive-ins.

The company had grown too large for Smith, Kinslow, and Jirous to run alone. So, in 1973, Sonic restructured as a franchise company under the name Sonic Systems of America. Shortly thereafter it became Sonic Industries, Inc., which was a company comprised of ten key franchise owners that served as officers and directors of the new company. Smith became chairman of the board and Jirous was named president. Sonic purchased the rights to the name, logo, trademark, and slogan from Smith, and the supply company from Kinslow and Jirous. Each owner was also offered 1250 shares at $1 per share, and the volume of shares pushed the company to become an over-the-counter, publicly traded company. By year-end 1973, there were 200 Sonic Drive-ins. An additional 75 opened in 1974, and by 1975 Sonic was operating in 13 states.

The 1970s saw a dramatic growth in the number of Sonic restaurants. This growth was attributable to Sonic’s second generation of owner-operators. Employees, many the sons and daughters of the original franchisees, were encouraged to become managers and supervisors and to open stores of their own. The company’s franchise structure became increasingly complex. As former CEO and president C. Steven Lynn related to Restaurant Business, “[Troy Smith] would perhaps sell a one-unit franchise to a small town man. That man might train his high school buddy.... When he knew the business, another franchisee might recruit him to manage a second unit. All three might own a piece of the unit.... Nearly all of our franchisees own pieces of each others’ stores, which were often structured as general partnerships.”

Between 1973 and 1978 more than 800 new restaurants opened—during one two-year period, more than one new Sonic Drive-in opened each day. But the rapid expansion of the chain created a shortfall in the number of trained managers. Despite the establishment of a Sonic School manager training program in the mid-1970s, a number of restaurants began to fail. Rising inflation rates and higher gasoline prices as a result of the Oil Crisis of 1973 also placed pressure on the drive-in restaurant business. In addition, the company lacked a system wide advertising program through most of the 1970s.

To boost advertising, the company established the Sonic Advertising Trust, requesting drive-ins to contribute 1.5 percent of their gross. Participation, however, was voluntary, and the first Sonic television commercials did not appear until 1977. By 1979 profits began to fall. A new advertising campaign, budgeted at only $5 million, could not reverse the decline, and by 1980 the company posted a net loss of almost $300,000. Overall revenues and per-store sales were down. In that year, 28 company-owned stores were closed, and by 1981 300 stores were had closed.

Jirous, Kinslow, and other original directors and officers left the company to focus on their own franchises. A new president was hired in 1981 but was replaced by Troy Smith in 1982. The following year, C. Stephen Lynn, formerly with Kentucky Fried Chicken and Century 21, took over the leadership of the company. Lynn identified a number of problems facing the company. Its licensing agreements—there were as many as 20 different agreements throughout the chain—did not bring in the revenue the company needed in order to provide support services across a system that had spread through 19 states. And many of the drive-ins were two decades old and had become shabby. Furthermore, many of the company’s restaurants were losing money. Most importantly, the Sonic restaurants continued to operate more or less independently, with little cooperative purchasing and advertising.

Lynn worked to unify the company. By promising to cut food costs by three percent and to increase sales by 15 percent, he convinced 200 restaurants to consolidate their purchasing and to contribute one percent of sales to an advertising program. A new franchise agreement in 1984, adopted by nearly 90 percent of the franchisees, provided the company with ascending royalties, beginning at one percent of gross sales and rising to three percent, depending on store volume. By 1986, more than one-third of the stores in the chain were working cooperating. Per-store sales grew to an average of $350,000 per year, with new stores averaging up to $550,000.

In 1986, Lynn, along with a group of investors, performed a leveraged buyout for approximately $10 million and took the company private. Calling franchisees “partners,” Lynn was able to increase chain-wide cooperation, forming advertising groups focused on key markets. Sonic put together a low-cost remodeling package, initially priced at $20,000, to encourage older restaurants to revitalize their image. At the same time, the new structure price was set at around $140,000. Lynn also moved to fix the Sonic menu to a limited number of basic items and regional specialties. Soon, Sonic was once again growing. In 1987 it built its 1000th restaurant.

Sonic’s growth continued into the 1990s. It went public again in 1991, raising $52 million in its initial public offering. Lynn had increased cooperative advertising participation to 93 percent of the restaurants, which by then contributed an average of 2.25 percent of gross sales. Between 1990 and 1994 Sonic added nearly 400 new restaurants, tagging on more than 120 in 1994 alone. Systemwide sales rose from $454.6 million to $776.3 million, same-store sales rose from $446,000 to $585,000, and company revenues grew from $45.8 million to $99.7 million. In 1993, Sonic’s market value was estimated at $200 million. Sonic had grown to the fifth-largest hamburger chain in the United States and was the top drive-in chain.

Sonic’s growth remained relatively flat after 1992. After reaching a high of $33, its stock price slipped to around $23 per share in 1995. Per-store sales seemed stagnated between $515,000 and $585,000. Sonic, which traditionally owned its rural and suburban Southern markets, was facing increasing competition from drive-through chains such as Checkers and Rally’s, while the giants of the industry—McDonald’s and Burger King— with their ability to discount, began to invade the territory. Meanwhile, despite discussion of acquiring a northern-based partner, Sonic clung to its traditional market, making few inroads outside of the warm-weather Southern areas. The company faced additional trouble in 1994 when it was forced to take a $3.9 million writedown charge for discontinuing its five company-owned properties, including two closed restaurants in South Florida that had suffered as a result of the hurricane that devastated the area in 1992.

In 1994, after more than a year of often bitter talks with franchisees, Sonic renegotiated its franchising contracts. The new contract, good for twenty years with a ten-year option to renew, raised graduated royalties to four percent and increased advertising contributions to a fixed 2.5 percent while granting Sonic control over a systemwide advertising program. It also fixed a sole soft drink supplier. Sonic also collected conversion fees from franchisees signing new contracts. In return, the company agreed to give up its first right of refusal for franchisees wishing to turn over restaurants to their heirs or partners, and agreed to fewer audits of franchisees’ books. Franchisees also gained wider territorial protection guarantees, with a protected trade radius of 1.5 miles in larger cities, and up to three miles in rural areas. About two-thirds of Sonic franchisees accepted the new contract.

The terms gave Sonic increases of $5 million in royalties and conversions, and allowed it to raise its advertising budget to $20 million. With the discontinuation of its Florida operations, Sonic saw its total revenues rise by 24 percent, to $123.75 million in 1995. At the beginning of that year, Lynn, who owned approximately 12 percent of the company, named Clifford Hudson, former executive vice-president and COO, to take over as president of the company. When Lynn left Sonic to become chief executive officer and president of the beleaguered Shoney’s restaurant chain, Hudson was appointed chief executive officer as well.

The typical Sonic restaurant in 1996 remained true to the 1950s-style carhop concept: customers drove up to one of an average of 24 covered parking spaces, placed orders through an intercom, and were served at their car. Restaurants also offered drive-through service, with some restaurants operating as drivethroughs only. The absence of indoor dining allowed the company to maintain one of the highest margin restaurant operations in the country, with a new construction package costing less than $515,000 per unit and first-year sales of over $700,000. Average per-store sales were around $585,000 per year in 1995.

The company owned and operated, often through various franchise and partner agreements, 178 restaurants going into 1995. Company restaurants, together with franchise royalties and conversion fees, generated $123.75 million in revenues. Growth in the number of units was averaging 26 percent for franchised restaurants and 106 percent for company-owned restaurants over the five years from 1990 to 1994. Approximately two-thirds of franchisees were represented by the National Association of Sonic Drive-in Franchisees, which operated entirely separately from the company. Sonic entered the Iste 1990s with a new executive team, including former executives from Coca-Cola Co., Taco Bell, McDonald’s, and Wendy’s, and plans for 125 new franchised and company-owned restaurants in 1996.