Sonic Corporation Essay Research Paper Sonic CorporationINTRODUCTIONBACKGROUND

Sonic Corporation Essay, Research Paper

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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