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Sonic focuses on new menu items, smaller prototype

Drive-in chain executives discuss new developments at the Bank of America Consumer and Retail Conference

Sonic Corp. is upsizing its new-product pipeline and downsizing its prototype size, company officials say.

Executives of the Oklahoma City-based drive-in operator, who recently presented at the Bank of America Consumer and Retail Conference, said the 3,500-unit, 88-percent franchised chain has been working with operators to streamline its business model.

“If you look at it historically — why Sonic has been successful — it's really been through distinctive, unique, new flavor news, new product news that appeals across different dayparts,” Claudia San Pedro, vice president of investor relations and communications, said at the conference, a transcript of which was provided by Seeking Alpha.

Sonic, she said, is currently promoting spicy Jumbo Popcorn Chicken, which straddles the entrée and snack categories, as well as Sweet Potato Tots and Molten Lava Cake Sundays.

The new items are meant to build on prior limited-time offers, Bob Derrington, managing director at Northcoast Research, said in an analyst note Monday. Those other LTOs include Sonic’s Footlong Coney 'n Tots, for $3.99, and an Ultimate Grilled Cheese Sandwich.

“These craveable, differentiated and typically margin-friendly LTOs are designed to run for shorter durations this year,” Derrington wrote, “and build on management's plan to keep new product news front-and-center through fiscal 2013, supporting its low-single digits annual [same-store sales] target.”

The promotions and product pipeline, Derrington added, have “the company well-positioned for solid sales and [earnings-per-share] growth both this year and next.”

Sonic is also continuing with its prototype redesign and new point-of-sale system initiatives, according to Stephen C. Vaughan, Sonic’s chief financial officer and executive vice president.

The move to a smaller prototype began about two years ago with an analysis by an outside consultant, Vaughan told the investment conference attendees. “We were trying to take some cost out of our existing building,” he said, adding that Sonic hadn’t made a significant change to its layout in about two decades.

The new layout removed an interior wall and moved the grill to an outside wall, Vaughan said. That allowed for a double-sided dresser station, he said, which is being tested in six or seven units. “There was kind of a bottleneck at our dresser station when you're trying to dress the hamburgers and hotdogs,” Vaughan said. “Now they can actually kind of have double the throughput on a dresser station.”

The reconfigured restaurants save between $150,000 to $200,000 on the construction of a new Sonic drive-in, he said. “That's made a big difference from a franchisee's willingness to invest, in particular in small towns,” he explained. “We're kind of going back in — through some of our core markets and identifying some small towns that maybe wouldn't have supported the Sonic that required a $1.1 million, $1.2 million investment. So we think that this is a huge opportunity.”

Vaughan added that the new drive-in prototype, “has the capability of doing over $2 million in sales, and so we think there's really a lot of opportunity with that area.”

Sonic is also testing a new point-of-sale system in one location, Vaughan said.

“Our supplier basically told us, Sonic is actually a snowflake,” he explained. “So we're a little unique because we have 25 to 30 ordering stations. It's been a little more challenging from a POS perspective to basically make that technology work.” Besides the drive-thru in many locations, the stall-ordering and carhop-delivery format allows for many points of ordering.

“We anticipate during 2013 that we'll start rolling that out through our company drive-ins,” Vaughan said. “When we have an initiative that requires a capital investment, we usually try to do that on a company store side first, prove that it works to our franchisees and then show them the results. And they typically — if those work well — they will adopt that.”

Sonic has drive-ins in 43 states.

Contact Ron Ruggless at [email protected] [6].
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