Essay/Term paper: Sonic corporation

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Sonic Corporation

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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