FDD Talk 2021: 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 2021 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 2021 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 2018, 2019, and 2020, based on Item 20 of the company’s 2021 FDD

• Section V – Presentation and analysis of Sonic Drive-In’s financial performance representations, based on Item 19 of the company’s 2021 FDD, including information on the:

• 2017, 2018, 2019, and 2020 average gross sales for the company Sonic Drive-Ins, franchise Sonic Drive-Ins, and all Sonic Drive-Ins (company and franchise) that were open and operating for the entire year

• 2020 average gross sales for traditional company Sonic Drive-Ins, traditional franchise Sonic Drive-Ins, and all traditional Sonic Drive-Ins (company and franchise) that were open and operating for the entire 2020 fiscal year

• 2020 average gross sales for traditional Sonic Drive-Ins (company and franchise) that were open and operating for the entire 2020 fiscal year, by gross sales level (top third, middle third, and bottom third)

• 2020 average gross sales for traditional Sonic Drive-Ins (company and franchise) that were open and operating for the entire 2020 fiscal year, by geographic region (Midwest, Northeast, South, and West)

• 2020 average gross sales for traditional franchise Sonic Drive-Ins at convenience store locations that were open and operating for the entire 2020 fiscal year, by gross sales level (top third, middle third, and bottom third)

• 2020 average gross sales for non-traditional franchise Sonic restaurants that were open and operating as of the end of the 2020 fiscal year, and for non-traditional franchise Sonic restaurants that were open and operating for the entire 2020 fiscal year

• 2019 and 2020 average gross sales; cost of sales; wages; payroll; unit controllable expenses; advertising; property tax, insurance, and royalties; and drive-in EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent) for all company Sonic Drive-Ins that operated at some point during that year

Section I – Background Information

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

Launches Restaurant Redesign

1.  In spring 2020, Sonic introduced a new advertising campaign and brand identity. Called “This Is How We Sonic,” it shifted away from the “2 Guys” focus to spotlight real families throughout a typical day (the “2 Guys” aren’t going away for good, however). The new spots centered on spontaneous drive-thru moments, with a nod to menu items.

2.  Sonic launched limited-edition swag boxes, too, and a Reese’s Overload Waffle Cone. SONIC changed ad agencies in 2019 from Goodby Silverstein & Partners to Mother. It worked with the first for eight years.

3.  In July 2020, Sonic unveiled its new restaurant design, “Delight.” Sonic tapped agency ChangeUp to help create the brand look and fresh prototype, something that “winks at the brand’s equity and creates new space for Sonic to become a little oasis in your daily routine,” said ChangeUp on its website.

4.  Claudia San Pedro, brand president of SONIC, said, “Over the past few months, Sonic has delighted millions of Americans, and we’re excited to visually bring that feeling to life with our new drive-in design. Whether our guests are trying the latest craveable innovation in our drive-in stalls, sharing some Tots with friends on our patio, or getting their Sonic fix at the drive-thru, we want to create an atmosphere that sparks moments of delightful possibility.”

5.  Ryan Brazelton, executive creative director at ChangeUp, added, “There’s an incredible amount of parody in the [quick-service restaurant] industry. No part of this design is a copycat, from the patio options to drive-in docks and the optimized drive-thru to the kitchen unit. Every element of the design is unique to Sonic.”

6.  The first redesigned restaurant is located in Tahlequah, Oklahoma, and features 18 docks, a drive-thru, and a covered outdoor patio where guests can dine under string lights and enjoy lawn games. The layout has fewer and wider car docks than normal that don’t cross over the drive-thru lane. The patio signals “a treat for your day,” and is a newer element for most Sonic locations. There are now three to four different layout options to plug in depending on what’s right for the franchisee, Brazelton said.

7.  The exterior reflects Sonic’s updated brand identity. It pops with red, blue, and a bit of yellow, intended to remind guests that “summertime is a feeling, not just a season.” With the lenticular stripe detail, the building itself moves with you as it changes colors as you drive around the building. It also features a blue glass tower with a brightly lit cherry atop to pay homage to the 9-million-plus Cherry Limeades served each year. Brazelton said the feature stands out at night and allows “for a look inside the building to get a peek at the kitchen’s hustle and bustle.”

8.  Inside, Sonic built a new kitchen layout that enables teams to operate more efficiently (the company’s original slogan is “service at the speed of sound”). Sonic didn’t provide further details on what the kitchen change entails. It did note, however, that the updated design translates to previous formats and footprints. Already, the company said, “several franchisees” are building or remodeling locations to the new look.

9.  Brazelton added, “A modern visual system might be the secret sauce. The bold new logo has a charm and quirkiness that’s all its own and a punched-up color palette, food and lifestyle photography, iconography, app design, and collateral such as the classic roller skates that carhops are permitted to wear.”

Partners with Mobivity to Help with Mobile Messaging

10.  In late April 2020, Mobivity Holdings Corp., a global provider of personalized customer engagement solutions that drive customer frequency and spend, announced the results of Sonic Drive-In’s pilot campaign using Google’s RCS Business Messaging. Using Mobivity’s Mobile Messaging, the Sonic pilot broadcasted interactive and engaging messaging through RCS about its restaurant app, targeting customers across more than 3,500 locations.

11.  The record-setting results with RCS did not leverage offers, discounts, or other incentives and:

• Resulted in five times as many app downloads versus previous MMS mobile messaging;
• Demonstrated a three times higher app registration rate versus typical downloads from MMS recipients; and
• Showed a 50 percent purchase rate from people who registered on the app.

12.  Kim Lewis, vice president of digital strategies for Sonic Drive-In, said, “Our initial results with Mobivity’s program were impressive, especially since we were using a new technology and no offers or incentives. We look forward to expanding this digital approach with Mobivity to further drive customer engagement and frequency within our digital channels.”

13.  As the next generation of SMS, providing rich media features found in apps, Google’s RCS Business Messaging delivers the simplicity of messaging while allowing customers to find the nearest restaurant, get special offers, order and pay via mobile. Mobivity joined Google’s Early Access Program in 2017 and works with QSRs to implement RCS programs that deliver richer customer experiences.

14.  Dennis Becker, chairman and CEO of Mobivity, added, “Sonic’s success proves the power and effectiveness of RCS in driving customer engagement and tangible results. The pilot’s results are really remarkable considering none of the offers or incentives typically used within the quick-service restaurant category were used. With RCS integrated into our Recurrency platform, we’re looking forward to new opportunities with Sonic.”

Donates $1 Million to Public School Teachers

15.  At the end of September 2020, Sonic announced the return of its annual Limeades for Learning Fall Voting Campaign in partnership with DonorsChoose, the non-profit crowdfunding platform created to help public school teachers with necessary teaching resources. Now in its 12th year, the campaign gives guests the opportunity to vote on how Sonic’s annual $1 million donation is distributed among winning teachers’ requests on LimeadesforLearning.com.

16.  Additionally, as an added incentive during the first week of voting, Sonic offered a free large drink or slush with purchase for orders placed in the Sonic App with promo code TEACHERS.

17.  Christi Woodworth, vice president of public relations for Sonic, said, “During this time of uncertainty, teachers are going above and beyond to create safe and welcoming learning environments, whether in-person or virtually. The Limeades for Learning Fall Voting Campaign is an opportunity for our guests to be a part of this great cause and see firsthand how teachers are flexing their creative muscles and inspiring their students.”

18.  Guests received one automatic vote daily for a teacher’s resource request, upon signing up with a valid email address, but could earn extra votes throughout the campaign through the following options:

• Visit a nearby Sonic Drive-In to receive a bag sticker code worth two votes;
• Vote 10 times and receive an email of three bonus votes to be used on the website.

19.  According to Charles Best, founder of DonorsChoose, “Teachers are now using DonorsChoose to request resources in the wake of the COVID-19 pandemic, and we’re heartened to see how educators are working to give students a sense of normalcy. We’re particularly grateful for this year’s annual Fall Voting Campaign in partnership with Sonic as we strive to make important teacher requests a reality.”

20.  Customers could vote once a day, through Oct. 25, 2020, with a valid email address. At the end of each week, the teachers’ request with the greatest number of votes received a portion of Sonic’s weekly donation of $250,000, totaling $1 million at the close of the campaign.

Company History

21.  Sonic Drive-In was founded in 1953 by Troy Smith in Shawnee, Oklahoma. After returning home following World War II, Smith began working in the food industry and eventually bought a parcel of land that had a log cabin and root beer stand. The log cabin was converted into a steak house, but Smith continued to also operate the root beer stand called the Top Hat.

22.  After realizing that the stand was averaging $700 a week in the sale of root beer, hamburgers, and hot dogs, Smith decided to focus on the more profitable root beer stand. Originally, Top Hat customers parked their cars anywhere in the parking lot and walked up to the stand, but Smith installed speakers for ordering after seeing this method in a drive-in. Smith also had carhops deliver the food straight to customers. After implementing these changes, sales tripled.

23.  Entrepreneur Charles Woodrow Pappe was impressed by Smith’s operation and convinced Smith to let him open the first franchise location in 1956 with just a handshake. Smith and Pappe worked so well together that they opened a few more locations and launched national franchising in 1958. Since the name Top Hat was already trademarked, Smith and Pappe changed the company’s name to Sonic, which went well with its slogan, “Service with the Speed of Sound.”

24.  Although Smith and Pappe were technically franchising the Sonic concept, there initially wasn’t any real royalty plan and they only charged an extra penny for each Sonic-label hamburger bag it sold. The first franchise contracts under this plan were drawn up, but still no joint marketing plan, standardized menu, or detailed operating requirements were in place.

25.  Sonic continued to grow and in the 1970s, a proper franchise system was finally put in place. Over the next few decades, Sonic began to grow beyond the few states that it was operating in and by the early 2000s, there were over 3,500 restaurants around the United States. In 2018, Sonic was acquired by Atlanta-based Inspire Brands, owner of Arby’s and Buffalo Wild Wings. Today, Sonic is one of the largest fast food chains in the U.S.

Entrepreneur’s Franchise 500

26.  Sonic Drive-In ranked No. 28 on Entrepreneur’s 2021 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 2021 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 2021 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

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

2020

• Outlets at the Start of the Year:  3,329
• Outlets at the End of the Year:  3,251
• Net Change:  -78

Company-Owned

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

2020

• Outlets at the Start of the Year:  197
• Outlets at the End of the Year:  271
• Net Change:  +74

Section V – Financial Performance Representations (Item 19, 2021 FDD) and Analysis

• This Item 19 includes financial information from Sonic’s 2020 fiscal year, which is the period from December 30, 2019 until January 3, 2021, and from the 2017, 2018 and 2019 calendar years (from January 1 until December 31 of each year).

• This Item 19 contains the actual, historical (a) average gross sales of certain Sonic restaurants for Sonic’s 2020 fiscal year and 2017 through 2019; (b) average gross sales for certain Sonic restaurants for the 2020 fiscal year by gross sales level, type, and certain geographic location; (c) average gross sales and certain expenses for certain affiliate-owned Sonic restaurants for the 2020 fiscal year and 2019; and (d) EBITDAR (earnings before interest, taxes, depreciation, amortization, and rent) for certain affiliate-owned Sonic restaurants for the 2020 fiscal year and 2019.

Types of Sonic Drive-Ins

• 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 are freestanding buildings and include a drive-thru lane and a patio and frequently, also an enclosed patio or indoor seating.

• Some Traditional Sonic Drive-Ins are located at convenience stores or travel plazas (“C-stores”).

• Traditional Drive-Ins are located across the country and in a variety of urban, suburban, and rural locations.

• Traditional Sonic Drive-Ins (other than C-stores) without inside seating 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 typically 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.

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

• Non-Traditional Sonics typically range in size from 800 to 1,500 square feet, although there are some atypical Non-Traditional Sonics whose size falls outside this range.

• “Company Drive-Ins” are Sonic restaurants that SRI, the franchisor’s affiliate, owns and operates, or that a partnership or limited liability company in which SRI owns a majority interest owns and operates.

• “Franchise Drive-Ins” are Sonic restaurants that Sonic’s franchisees own and operate.

• Sonic’s affiliate periodically buys Sonic restaurants from and sells Sonic restaurants to various franchisees. For transactions during its 2020 fiscal year, Sonic includes the restaurants as Company Drive-Ins if its affiliate owned and operated the restaurants for the majority of the year. If a franchisee operated the restaurants for the majority of the 2020 fiscal year then Sonic includes the restaurants as Franchise Drive-Ins.

• For the financial performance representations covering 2017 through 2019, Sonic included any Sonic restaurant that its affiliate bought from or sold to any franchisee during the year as a Franchise Drive-In, regardless of when that purchase or sale happened during the year.

• Sonic calculated the figures in this Item 19 using information that its affiliates and franchisees provided. Sonic derived the gross sales of Franchise Drive-Ins from unaudited monthly financial reports that franchisees submitted to compute royalty fees. Sonic used gross sales data that it collected from franchisees’ POS systems to cover any monthly financial reports that franchisees failed to submit.

• Sonic’s 2020 fiscal year contained 53 weeks, so for the financial performance representations in this Item 19 covering only average gross sales for its 2020 fiscal year, Sonic has removed the 53rd week in order to show an accurate year-over-year comparison.

Part 1 – Average Gross Sales for 2017-2020

2020 Fiscal Year – Average Gross Sales

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