Company bullish on sales drivers
Hudson noted that Sonic expects to improve same-store sales further in 2013 — which in the long run ideally would pave the way for a virtuous circle of increased marketing spending, new-unit development and free cash flow — through national media initiatives, new products and the adoption of a new point-of-sale system.
Part of the sequential same-store sales improvement from March to May was the increased national ad spending in those months, which drove awareness, he said.
“If there’s greater opportunity for sales — people are out moving around in May versus March versus January — then we’re allocating dollars to help drive the business during those months,” Hudson said. “In a core market … when we get increased advertising, brand loyalty in promotional events really helps. In developing markets, it seems to help quite a bit fairly quickly.”
In calendar 2013, Sonic’s total ad spending would not increase significantly compared with 2012, Hudson said, but the allocation of those dollars would shift markedly toward national TV, at 67 percent of the budget, compared with 48 percent in 2012. Local TV and non-TV advertising each gave about 10 percent of their share of marketing dollars from 2012 to 2013, going from 35 percent of spending in 2012 to 26 percent for local TV, and from 17 percent to 7 percent for non-TV expenditures.
Sonic is not planning to ask for greater contributions to the national marketing fund from franchisees, Hudson added, though the total marketing budget is expected to increase due to higher same-store sales.
The new marketing program is driving not only sales of advertised products like half-price shakes after 8 p.m. and the Premium Asiago Chicken Caesar Club, but also franchisee confidence in opening new units, Hudson said. The greater brand awareness from national marketing is working well with more favorable unit economics from a smaller restaurant prototype, he said.
“So quite suddenly, not just the return on investment looks better than it looked two or three years ago, but the risk of opening a Sonic anywhere in the United States has now shifted because of that national marketing,” Hudson said. “We are beginning to get many more inquiries on a regular basis from potential operators looking at opening Sonic Drive-Ins, whether in our core markets, developed markets or new markets.”
New and existing units would implement a new point-of-sale system by the first half of fiscal 2014, chief financial officer Stephen Vaughan added.
“We will begin to get some benefit of that in the second half of [fiscal 2014], which is our seasonally stronger time of the year,” he said. “Fiscal 2015 will likely be the year that we see significant benefit from the POS. That is probably going to be our single biggest driver of margin improvement.”