FDD Talk 2020: Sonic Drive-In Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the Sonic Drive-In franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Sonic Drive-In franchise, based on Item 7 of the company’s 2020 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Sonic Drive-In franchise, based on Items 5 and 6 of the company’s 2020 FDD

• Section IV – Number of franchised and company-owned Sonic Drive-In outlets at the start of the year and the end of the year for 2017, 2018, and 2019, based on Item 20 of the company’s 2020 FDD

• Section V – Presentation and analysis of Sonic Drive-In’s financial performance representations, based on Item 19 of the company’s 2020 FDD, including information on the:

• 2019 average, median, high, and low gross sales for the 169 company drive-ins, 3,154 franchise drive-ins, and 3,323 total of company drive-ins and franchise drive-ins (traditional Sonic Drive-Ins and non-traditional Sonics) that were open and operated for the entire 12-month period ended December 31, 2019

• 2019 average gross sales, cost of sales, wages, payroll, unit controllable expense, advertising, property tax, insurance, royalties, and restaurant EBITDAR (earnings before interest, taxes, depreciation, amortization, and rent) for the 169 traditional company drive-ins that were open and operated for the entire 12-month period ended December 31, 2019

• 2019 average and median gross sales and EBITDAR for the 169 traditional company drive-ins, 3,135 traditional franchise drive-ins, and 3,304 total of traditional company drive-ins and traditional franchise drive-ins that were open and operated for at least 15 months as of December 31, 2019

Section I – Background Information

19 Things You Need to Know About the Sonic Drive-In Franchise

Continued Strong Summer Growth with Multiple New Openings

1.  In early September 2019, Sonic announced that it was continuing its strong coast-to-coast summer growth with several new Sonic franchise locations opening across the country. The new locations were set to open in the following markets: Darlington, South Carolina; Dubuque, Iowa; Plainfield, Indiana; and Richmond, Virginia.

2.  One of the reasons why Sonic is so successful at entering new markets is because of its incredible brand awareness. Because of Sonic’s ongoing marketing efforts – including one of the most successful television commercials in franchise advertising history – millions of people, including in areas where Sonic has yet to enter, are on a first-name basis with Sonic.

3.  Sonic is capitalizing on this brand recognition by having a restaurant model perfect for any market. For instance, Sonic’s first location in Alaska is an indoor dining restaurant, while its traditional drive-in model is perfect for new restaurants in the American South. Other non-traditional models allow entrepreneurs to bring Sonic to new markets with ease, while providing an exceptional experience for the communities they serve.

4.  Claudia San Pedro, president of Sonic, said, “When you’re an entrepreneur, and you’re looking for a franchise business model to affiliate with, the first thing that you want to ask is, ‘which brand can consistently deliver traffic to my door?’ You won’t find another brand like Sonic that has such tremendous brand awareness across the country, yet still has so much room to grow.”

Testing AI-Powered Menu Kiosks

5.  In mid-May 2019, Venture Beat reported that Sonic was planning on testing AI-powered menu kiosks at select locations later in the year. The news came out in an announcement made by Mastercard, which stated that it had launched a partnership with Zivelo, a provider of self-service kiosks, to deploy what it describes as an “ordering experience” for quick-service restaurants featuring a bespoke voice assistant, Zivelo’s OakOS software, and a personalized dynamic menu.

6.  According to Jon Dorch, Sonic’s vice president of integrated customer engagement, “We see facets of our brand, our restaurants, and AI technology converging in a way that makes for a special customer experience. Sonic is known for a fun environment and a full menu with extensive customization options that allows guests to personalize every meal. Voice AI promises to provide carefree conversational ordering that complements the overall experience. We anticipate AI integration will also provide opportunities to streamline repeat orders, personalize suggestions based on data, and offer rewards that are truly relevant.”

7.  After walking up to a kiosk, customers will be prompted to order using a Siri-like voice assistant that’ll integrate with the menu display. Said menu display will automatically update using an algorithm developed by Mastercard’s Labs division, which will enable it to tailor its layout and recommendations either to individual people or for “external factors” like weather, time of day, seasonality, and location.

8.  Sonic is the first of many partners to come – additional unnamed restaurant chains will also pilot the tech later this year. Mastercard notes that its off-the-shelf AI engine can be quickly adapted to new menus, and Zivelo – which claims to have installed tens of thousands of kiosks in restaurants to date – says it’s committed to supporting the needs of other merchant partners.

9.  Healey Cypher, CEO of Zivelo, said, “Drive-thru accounts for 70% of QSR transactions, yet the experience has remained more or less untouched by innovation. As customer expectation continues to move towards faster, personalized, and contextual experiences, we are excited to partner with Mastercard to bring this transformative solution to market and hopefully exceed those expectations.”

New Limited-Time Menu Items

10.  At the beginning of December 2019, Sonic introduced the Biggie Cheese, a new cheeseburger piled high with double the beef and triple the cheese to prove that size does matter when it come to satisfying those savory cravings. Available for just $4.99, the Biggie Cheese is made with two juicy 100% pure beef patties, covered with three slices of melty American cheese and stacked with grilled onions, crisp pickles, and tangy Hickory BBQ sauce double-decker-style on a bakery-soft brioche bun. The Biggie Cheese was available until February 2 of this year.

11.  According to Scott Uehlein, vice president of product innovation and development for Sonic, “With a whopping three slices of melty cheese and two juicy beef patties, we not only made our classically delicious cheeseburger bigger, we also loaded it up with all the fixings to create a unique Sonic masterpiece. When big hunger calls, the Biggie Cheese answers to the call to satisfy our guests’ cravings.”

12.  To kick off Summer 2019, Sonic released a trio of Mocktail Slushes at the beginning of July. The new Mocktail Slushes were available in three flavors  – Strawberry Daiquiri, Piña Colada, and Reaper Spicy Margarita. The star of the show is the Reaper Spicy Margarita. This classic margarita flavor, infused with the flavor of one of the world’s hottest chili peppers – the Carolina Reaper – in icy, slush form, will test even the highest of heat tolerances. To cool things off, the Strawberry Daiquiri is a refreshing combination of real strawberries and sweet coconut flavor, while the Piña Colada is a tropical blend of sweet coconut flavor and pineapple flavor.

13.  Uehlein said, “With Mocktail Slushes, we captured that summertime mocktail state of mind, combining tropical flavors with our icy, cold Slush so you can enjoy vacation vibes from the comfort of your car. Now, if you think you can handle the heat, take your taste buds on a different kind of trip with the Reaper Spicy Margarita – if you dare.”

Company History

14.  Sonic was founded in 1953 by Troy Smith in Shawnee, Oklahoma as the Top Hat Drive-In. Initially, Smith was also running a steak restaurant, but noticed that his stand selling root beer, hot dogs, and hamburgers, was turning a larger profit. Smith decided to focus on the food stand. Originally, customers would park their cars and walk up to the stand to place their orders, but Smith installed speakers for ordering after seeing them at another drive-in. Smith also hired carhops to deliver the food directly to customers’ cars.

15.  Smith continued to successfully run the Top Hat Drive-In for the next few years, when entrepreneur Charles Woodrow Pappe visited the drive-in and was impressed by what he saw. After negotiating with Smith, Pappe secured the first franchise location in Woodward, Oklahoma in 1956 based on nothing more than a handshake. Smith and Pappe opened two more locations in 1958 and decided it was time to start national franchising.

16.  After learning that the Top Hat name was already trademarked, Smith and Pappe changed the business’s name to Sonic in 1959. The new name paired perfectly with the existing slogan, “Service with the Speed of Sound.”

17.  Although Smith and Pappe were franchising the business, there was no real franchise system. Instead, Smith and Pappe decided to have their paper company charge an extra penny for each Sonic-label hamburger bag it sold. The proceeds would then be split between Smith and Pappe. Despite not having a real franchise system in place, Sonic continued to grow over the next few decades.

18.  Finally, in 1983, Sonic’s board of directors hired C. Stephen Lynn as CEO and he set out to unify the company. Under Lynn, Sonic prospered and national growth increased exponentially. Since then, Sonic has grown into one of the largest drive-in fast food chains in the United States. In late 2018, Sonic was acquired by Atlanta-based Inspire Brands, owner of Arby’s and Buffalo Wild Wings.

Entrepreneur’s Franchise 500

19.  Sonic ranked No. 4 on Entrepreneur’s 2020 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Sonic Drive-In franchise costs, based on Item 7 of the company’s 2020 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on Sonic Drive-In’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2020 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2017

• Outlets at the Start of the Year:  3,291
• Outlets at the End of the Year:  3,360
• Net Change:  +69

2018

• Outlets at the Start of the Year:  3,360
• Outlets at the End of the Year:  3,424
• Net Change:  +64

2019

• Outlets at the Start of the Year:  3,424
• Outlets at the End of the Year:  3,329
• Net Change:  -95

Company-Owned

2017

• Outlets at the Start of the Year:  267
• Outlets at the End of the Year:  228
• Net Change:  -39

2018

• Outlets at the Start of the Year:  228
• Outlets at the End of the Year:  176
• Net Change:  -52

2019

• Outlets at the Start of the Year:  176
• Outlets at the End of the Year:  197
• Net Change:  +21

Section V – Financial Performance Representations (Item 19, 2020 FDD) and Analysis

• In this Item 19, “Average Gross Sales” consists of the average of reported Gross Sales for the applicable Sonic restaurants for the designated time periods and groups. “Median Gross Sales” is the middle value of the sequence of reported Gross Sales arranged in value order.

• “Gross Sales” include all sales from the Sonic restaurants, excluding sales tax and discounts, and has the same definition as “Gross Sales” as defined in the License Agreement.

• The performance results included in this Item relate to historical results.

• A typical “Traditional Sonic Drive-In” is a Sonic Drive-In where a customer parks in a covered drive-in space and orders through an intercom speaker system. A carhop then delivers the customer’s food directly to the customer’s vehicle. Most Traditional Sonic Drive-Ins include a drive-thru lane and a patio and frequently, also an enclosed patio or indoor seating. Certain Traditional Sonic Drive-Ins are also located at convenience stores or travel plazas (“C-stores”).

• A “Non-Traditional Sonic” is generally a location such as a food court at a football stadium, mall, or military base.

• Company Drive-Ins are those restaurants owned and operated by SRI, an affiliate of the franchisor, or by a general partnership or limited liability company in which SRI owns a majority interest. Company Drive-Ins operated in as many as 10 states during the relevant time period. Of the 197 Company Drive-Ins open on December 31, 2019, all were Traditional Sonic Drive-Ins, none of which were C-stores.

• Franchise Drive-Ins are Sonic Drive-Ins owned and operated by franchisees. Franchise Drive-Ins operated in as many as 46 states during the relevant time period. Of the 3,329 Franchise Drive-Ins open on December 31, 2019, 3,316 were Traditional Sonic Drive-Ins and 13 were Non-Traditional Sonics, with 46 Franchise Drive-Ins operating as C-stores.

• Traditional Sonic Drive-Ins (other than C-stores) typically range in size from 1,100 to 1,700 square feet, including stalls and drive thru, although there are some atypical Traditional Sonic Drive-Ins whose size falls outside this range. Traditional Sonic Drive-Ins (other than C-stores) with inside seating range from 2,000 to 4,000 square feet. The size of Traditional Sonic Drive-Ins that are C-store locations varies with the type of location and ranges from 1,000 to 3,000 square feet.

• 2,248 of the Traditional Sonic Drive-Ins operate with drive-thru windows and the remaining 1,265 Traditional Sonic Drive-Ins do not.

• The Traditional Sonic Drive-Ins have operated for an average of 23 years (includes Traditional C-store locations that have operated for an average of 9 years). The Traditional Sonic Drive-Ins all offer essentially the same products and services, face the same kinds of competitive challenges, and receive the same level of support from the franchisor that it expects new licensees will experience. The Traditional Sonic Drive-Ins are located in various markets across the United States.

• Non-Traditional Sonic Drive-Ins typically range in size from 800 to 1,500 square feet, although there are some atypical Non-Traditional Sonic Drive-Ins whose size falls outside this range. The Non-Traditional Sonic Drive-Ins have operated for an average of 15 years. The Non-Traditional Sonic Drive-Ins all offer essentially the same products and services, face the same kinds of competitive challenges, and receive the same level of support from the franchisor that it expects new licensees will experience. The Non-Traditional Sonic Drive-Ins are located in various markets across the United States.

• The Gross Sales of Franchise Drive-Ins used in this Item 19 were derived from unaudited financial reports submitted by franchisees for the purpose of computing royalty fees. Sonic compiled the Gross Sales of Company Drive-Ins on the basis of generally accepted accounting principles, consistently applied.

Part 1 – Statement of Average Gross Sales and Median Gross Sales for the 12-Month Period Ended December 31, 2019 (Traditional Sonic Drive-Ins and Non-Traditional Sonics) ($ in thousands)

Company Drive-Ins