INTRODUCTION
BACKGROUND
INFORMATION
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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