CASE 22
Sonic Restaurants: Does its Drive–In Business Model Limit Future
Growth Potential?
I. CASE ABSTRACT
Sonic is an iconic American drive–in fast–food chain with nearly
thousands of franchise establishments across the vast land of the United States
by 2014. As Sonic continued to expand, it ran into various hurdles. The most
daunting challenge was to enter urban environments, where space was too scarce
to make drive–in possible. At the same time, while the drive–in model was
Decision Date: 2015 FY Sales: $552 million
FY Net Loss: $47 million
II. CASE SUBJECTS AND ISSUES
Restaurant Operations Store Location
Strategy Formulation Competitive Advantage
III. STEPS COVERED IN STRATEGIC DECISION–MAKING PROCESS
IV. CASE OBJECTIVES
1. To discuss Sonic’s core competencies.
CASE 22
Sonic Restaurants: Does its Drive–In Business Model Limit Future
Growth Potential?
2. To discuss Sonic’s growth potential.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
1. This is an excellent case for instructor–led discussion.
2. This is an excellent case for an exam or written case analysis.
VI. DISCUSSION QUESTIONS
1. How important is the Drive–In model to Sonics success?
2. Do customers choose Sonic for its food; the drive–in experience; or
the store atmosphere?
VII. CASE AUTHOR’S TEACHING NOTE—not available
VIII. STUDENT STRATEGIC AUDIT
I. Current Situation
A. Current Performance
● History
○ In 1953 Troy Smith founded the Top Hat Drive-In in
Oklahoma, which later became Sonic Drive-In.
○ Goal: become America’s most-loved restaurant brand.
● Performance
○ ROI: they have highly liquid investments such as money
market accounts.
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Sonic Restaurants: Does its Drive–In Business Model Limit Future
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expansion. If it were to enter tough times in the future
it will have a difficult time repaying their debt.
B. Strategic Posture
1. Sonic’s mission, objectives, strategies, and policies are
2. Mission
a. Sonic’s mission is quick-service drive-in fast food. The
3. Objectives
a. Their initial objective was always growth and they
achieved this by franchising. They also wanted to become
“America’s most-loved restaurant brand.” They fulfilled
b. We believe that these objectives are consistent with
each other, the mission, the internal, and external
4. Strategies:
a. Sonic’s strategy for growth relies on maintaining
consistency. Consumer experience would be the same no
matter which Sonic a person went to. Sonic did this by
providing franchisee support services that included
employee training and seminars that reinforced both
Sonic’s core values and its operations to standardize
objectives, and internal and external environments.
5. Policies:
a. Concerned with keeping up with current technological
trends.
b. Focused on affordable and convenient food and service.
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Sonic Restaurants: Does its Drive–In Business Model Limit Future
Growth Potential?
6. Sonic has encountered issues expanding abroad because they do
not have a multi domestic strategy. Their main image is
II. Corporate Governance
A. The Board of Directors
1. CEO Sonic: Clifford Hudson
● COO GameStop Corporation: Tony Bartel
● Former CEO and President of Jos. A. Bank Clothiers: R. Neal
Black.
● Executive Vice President and CMO of Dick’s Sporting Goods:
Lauren Hobart.
● Former Executive Vice President and CMO of Dunkin’ Brands:
Kate Lavelle.
2. The board of directors owns a significant number of stocks.
3. Since 1991, Sonic has been a publicly traded company and their
common stock is traded on the NASDAQ stock market.
4. All of the board of directors come from different backgrounds and
have an array of skill sets that have contributed to the Sonic’s
success. For example, Tony Bartel’s experience in marketing and
5. Time on the board:
– CEO Sonic: Clifford Hudson—since 1993
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Sonic Restaurants: Does its Drive–In Business Model Limit Future
Growth Potential?
• Executive Vice President and CMO of Dick’s Sporting Goods: Lauren
Hobart—since 2014
• Former Executive Vice President and CMO of Dunkin’ Brands: Kate
Lavelle—since 2012
• Executive Chairman of the Board of Devon Energy Group: J. Larry
Nichols—since 2007
B. Top Management
1. CEO: Clifford Hudson
President and CMO: Todd Smith
Executive Vice President and CFO: Claudia San Pedro
2. Top management has more than enough knowledge, skills, and
background to be able to run the company. They have diverse work
experience from different industries such as marketing, management,
and finance.
3. Top management has been responsible for the corporation’s
performance. Everyone in the top management group has been at the
4. Before implementing any project, Sonic’s top management determines
5. Top management is highly involved in the strategic management
process.
6. Top management provides the direction while lower level managers
CASE 22
Sonic Restaurants: Does its Drive–In Business Model Limit Future
Growth Potential?
7. One of Sonic major underlying principles is their code of conduct
and ethics. They are constantly updating their principles and
making sure that they are followed throughout the entire
organization.
8. The CEO, CFO, CMO, CIO, chief of development and strategy are all
III. External Environment: Opportunities and Threats (SWOT)—(See Exhibit
1)
A. Societal Environment
1. a. Economic
i.Opportunities: enter new emerging markets.
ii. Threats: price competition and fluctuations.
b. Technological
i.Opportunities: new technology for their supply chain
c. Political-legal
i.Opportunities: political stability in major markets.
ii. Threats: increase in government regulations.
d. Sociocultural
i.Opportunities: more menu options that will attract
B. Task Environment (Industry)
a. Threat of new entry: Low
i. Large capital investment to enter the market.
–Permits, buildings (real estate), technology, supply
chain
b. Bargaining power of buyers: High
i. Low switching cost of changing from one restaurant to
another.
c. Threat of substitute products or services: High
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i. Lack of differentiation among fast food menu options.
d. Bargaining power of suppliers: Low
e. Rivalry among competing firms: High
f. Relative power of unions, government, special interest
groups, etc.:
2. What key factors in the immediate environment that (customers,
competitors, suppliers, creditors, labor unions, government, trade
associations, interest groups, local communities, and shareholders)
are currently affecting the corporation? Which are current or
future threats? Opportunities?
Competitors are currently affecting the corporation. This also
and want for healthy and pure food rises.
C. Summary of External Factors—(See Exhibit 1)
At present time, the most important for Sonic would be to expand by
IV. Internal Environment
A. Corporate Structure
1. Centralized management (S)
a. HQ in Oklahoma (twenty-five key personnel)
b. Franchise model
B. Company Culture
1. American nostalgic
2. Great/unique customer service (roller blade servicers).
3. Respect for everyone touched by the Sonic Brand.
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C. Corporate Resources
1. Marketing
a. Sonic’s marketing objectives:
i. Expand operations to all fifty U.S. states, primarily
through franchise development.
1. The goal of 1,000 new drive-ins by 2024.
b. Sonic’s performance, in terms of market position and marketing
mix.
i. Iconic drive-in style proved hard to duplicate: distinct
brand differentiation.
c. Competitors comparison
i. National advertising budget in excess of $100 million
annually—one of the top five burger or sandwich advertisers
in most major markets with memorable and recognizable
advertising.
ii. Compare to McDonalds and Burger King
2. Finance
a. Sonic’s financial objectives:
i. Positive same-store sales in the low to mid-single digits.
ii. Net profit margin in the range of 10 percent to 12
percent.
iii. Incremental royalty revenue growth from same-store sales
improvements, new unit development, and 900 drive-ins
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to work well in North America due to nostalgia. In addition, the sale
growth of low to mid-single digits is appropriate when Sonic focuses on
offering customers a fully customizable menu.
b. Sonic’s financial performance
*: Data is retrieved from MarketWatch.
**: Data is retrieved from Yahoo! Finance.
i. The current ratio decreased from 1.33 in 2012 to 1.20 in
2014.
1. Still significant greater than one—strong ability to
pay off short-term liabilities from short-term assets.
ii. Both gross profit and net profit margins were improved
over the period.
1. Primarily from a reduction in food and packaging
expenses and reduced payroll and other employee
benefits.
iii. Debt to asset ratio was stable throughout three years.
1. Debt was used for the strategic expansion across the
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Sonic Restaurants: Does its Drive–In Business Model Limit Future
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increased since 2012, and was almost four times in 2014—
reduce the risk.
c.Peers group comparison
(Data retrieved from S&P Capital IQ. Peers group included BJ’s
Restaurants, Inc., Bojangles’, Inc., Chipotle Mexican Grill, Inc.,
Denny’s Corporation, DineEquity, Inc., Dunkin’ Brands Group, Inc.,
Fiesta Restaurant Group, Inc., Noodles & Company, Panera Bread Company,
and The Wendy’s Company)
i. Profitability ratio: Sonic was more profitable than its
peers were, except 2012, in which the company was
3.Research and Development
a. Sonic’s R&D objective is to create the unique and extensive
variety of food and drink choices.
i. Invest in a state of the art facility to develop and test
4. Operations and Logistics
a. Sonic’s operation objectives:
i. Create the feeling of familiarity—highly recognizable
customer experience.
1. Same logo, store look and feel, food, and service.
ii. Distinguish itself from others by iconizing the nostalgic
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iii. Reinforce Sonic’s core values and operations to
standardize at each franchise by focusing on employee
training and development.
1. $100-200k of franchise’s fees is allocated for
employee training.
iv. Make the supply chain operations more efficient,
consistent, and profitable.
1. Incorporated a centralized data management system
with universal codes across all locations to address.
a. Increase the ability to forecast and anticipate
demand.
b. As of 2014, 3,500 Sonic Drive–Ins served guests every day, and
1000 more Drive-Ins would be added by 2024.
5. Human Resource Management
A. The HRM is clearly stated in the employee handbook.
1. Sonics HRM Objective:
a) Respect for everyone touched by the Sonic Brand.
2) Strategies:
a) Senior leadership works to establish and uphold its core
values, emphasizing top-notch relations with customers and
refining processes to best serve them.
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3) Performance:
a) Management: twenty-five
b) Employees: 11 Million (2014) domestically.
B. Competitive Advantage from HRM
1. Lots of promotion opportunities have given employees an incentive
to work to their best.
6. Information Systems
I. 2014 information system strategic focused on improving data
collection and data analyses.
D. Summary of Internal Factors—(See Exhibit 2)
Core competencies
● Research and development
○ Allow them to create customized foods and created a
competitive advantage over their competition.
Distinctive competencies
● Marketing
○ Iconic drive-in style proved hard to duplicate—distinct brand
differentiation.
V. Analysis Strategic Factors
A. Situational Analysis—(See Exhibit 3)
B. Review of Mission and Objectives:
1. Sonic’s main objective is to grow and expand and that is
appropriate for their key strategic factors. But, in order to
keep that objective, their mission will have to change.
2. We believe that Sonic should update their current mission. It
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focused on offering the drive-in experience in order to
differentiate themselves. In order for Sonic to grow and
expand not only in the urban areas of the United States but
internationally, they are going to have to shift to indoor
VI. Strategic Alternatives and Recommended Strategy
A. Strategic Alternatives
1. The objective of growth by franchising the drive-in concept can be
challenged when Sonic enters new areas, where the drive-in concept
is not applicable.
2. There are two alternative strategies.
a. Offer healthier options on their menu in order to keep up with
their competitors and appeal to a broader market.
i. Pro:
1. Leverage the Culinary Innovation Center.
2. Attract new customers, who want healthy food.
ii. Con:
1. Do not have competitive advantages in this new market.
i. Pro:
1. Enter urban areas, where the drive-in concept is difficult
to be applied.
2. Bring the indoor dining model overseas, where people are
not familiar with the drive-in concept.
ii. Con:
1. Lose the competitive advantages and areas of
B. Recommended Strategy
1. Expand into indoor dining and leverage the fully customizable menu.
a. Sonic should add a new indoor dining business level.
b. The new functional level also has to be included, but it will
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4. The iconic marketing style can be negatively affected since
customers are familiar with Sonic as drive-ins. However, the indoor
dining business can have a different name, such as “Indoor Sonic.”
VII. Implementation
A. New marketing programs should be developed for the indoor dining
business. The New business should take advantages, such as convenience
and takeaway, of the drive-in concept, and apply them into the indoor
dining.
For instance, Sonic can establish an indoor dining place close to the
parking lot of a mall. Customers can order through phone or mobile app,
and then they decide to either eat indoor or have their order delivered
to their vehicles, while they are still in the parking lot.
B. The program is financially feasible since the cost of establishing an
indoor dining place will not be much different from the cost of drive–
ins. Sonic has prepared to expand into all fifty states already, so the
new indoor dining business is appropriate for urban areas, like Boston,
MA.
C. No new standard operating procedures need to be developed. The
VIII. Evaluation and Control
A. Indoor dining business in urban areas would need more frequent
supplies at smaller amount due to smaller space. However, the
improvement on supply-chain-management technology at Sonic will be able
to accurately predict the demand. In addition, the information system
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B. As mentioned above, no new standards or controls need to be
developed. However, Sonic will need to modify some of them to be more
appropriate to indoor dining.
Exhibit 1—External Factors Analysis Summary (EFAS)
External Strategic
Factors
Weight
Rating
Weighted
Score
Comments
Opportunities:
Enter New Emerging
Markets
New Technology for
Supply Chain
management
0.15
0.03
1
5
0.15
0.15
Only have presence in
the US market while
competition is abroad.
Will help with data
collection and
analysis.
Threats:
Competition
Price Fluctuations
Increase in
Government
0.15
0.05
0.1
5
4
3
0.75
0.2
0.3
Many more stores and
international
presence.
Suppliers often raise
prices.
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Low Entry Barriers
other places.
Total Scores
1.00
3.15
Exhibit 2—Internal Factors Analysis Summary (IFAS)
Internal Strategic
Factors
Weight
Rating
Weighted
Score
Comments
Strengths:
Brand—Drive-in
Dining
Information System
0.15
0.1
.15
5
3
3
.45
.3
.45
Weakness
Restricted to
Suburbs Areas
Improper
Representation of
the Brand
.15
.10
.10
5
4
2
.75
.4
.2
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Total Scores
1.00
3.25
CASE 22
Sonic Restaurants: Does its Drive–In Business Model Limit Future
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Exhibit 3 Strategic Factors Analysis Summary (IFAS
Key
Strategic
Factors
Weighted
Rating
Weighted
Scored
Short
Medium
Long
Comments
People
looking
for
healthier
food
Improper
representa
tion of
the brand
.2
.3
.1
4
5
2
.8
1.5
.2
X
X
X
X
X
X
X
Total
Score
1
3.7
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Exhibit 4: Financial Rations
Financial Ratios
2014
2013
2012
Current Ratio
1.2
1.93
1.33
Quick Ratio
1.16
1.88
1.29
Cash Ratio
0.62
1.23
0.78
Gross Margin TTM
Net Margin TTM
9.20%
7.80%
6.50%
Return on Equity
EPS
0.85
0.64
0.61
Inventory Turnover
164.9
147.5
165.3
Receivables Turnover
15.9
14.7
20.1
Asset Turnover
0.85
0.82
0.8
740.40%
866.60%
Payout Rate
0.0%
0.0%
0.0%
P/E TTM
25.13
22.17
15.36
Dividend Yield
0.0%
0.0%
0.0%