Why is Sonic Thriving When McDonald's Is Not?
The secret to Sonic's success can't be the expanding menu of cheap eats because that's a strategy that's not working for McDonald's. Is it the retro charm that's fueling growth at the chain of 3,500 fast food restaurants? Is it the unique menu? Is it the memory-making dine-in experience that's rare to find elsewhere these days? Whatever it is, it's working for Sonic.
Sonic had another blowout quarter, fueled by a same-store sales spike of 5.3 percent for the three months ending in May. Just to frame this achievement in perspective, McDonald's has posted negative same-store sales for three consecutive quarters at its domestic locations. The two burger chains operate on different fiscal calendars, but for an apples-to-apples comparison, consider that McDonald's stateside comps during March, April and May would have been collectively negative.
Sales growth is just part of a strong quarter. Investors need to make sure that a company isn't padding sales by selling expensive food on the cheap. Sales growth has to bleed down to the bottom line, and Sonic's operating profit and earnings climbed 6 percent and 13 percent, respectively. Just so we're clear on the cheerleading, McDonald's posted declines on both fronts in its latest quarter.
Sonic posted better than expected results on Monday. McDonald's fell short of Wall Street profit targets in its most recent report.
Dine and Dash
On the surface, it would seem that McDonald's is trying to be more like Sonic. A wide array of drink choices has been a hallmark of the Sonic experience, and that's been happening at McDonald's since the McCafe introduced smoothies and fancy coffee beverages.
%VIRTUAL-article-sponsoredlinks%Sonic explains that its success was driven by its "innovative product news, layered day-part promotional strategy and increased media efficiency." That's great, but McDonald's has been doing the same thing. It's been trying to innovate with new sandwiches. It has responded to Taco Bell's arrival in the breakfast market by rolling out ads playing up the nostalgic allure of the Egg McMuffin. McDonald's also isn't skimping on TV and Internet campaigns promoting its latest items. However, what's working for Sonic isn't clicking with McDonald's.
It's not the only way where the two are cutting different paths with the same intention. Sonic is bragging about its new point-of-sale system improving efficiency, while McDonald's is struggling with its operational improvements that find automated drink dispensers populating its stores and deeper prep tables that can hold more ingredients. The rub here is that Sonic has always had a wide menu. McDonald's is expanding its offerings, seemingly at the expense of a spike in customer complaints about longer waits and incorrect orders.
Sonic also doesn't have protesters striking for higher wages. McDonald's has been the hub for activists arguing that the iconic fast food eatery should pay more. It's difficult to quantify the fallout that McDonald's has suffered as a result of the protests, but it clearly isn't a positive.
Practice Makes Perfect
Sonic is doing things right, and its outlook calls for positive comps on improving margins for the entire fiscal year. This comes at a time when McDonald's is likely about to wrap up its latest financial period this month with its fourth straight quarter of negative same-store sales for its domestic restaurants.
Sonic is succeeding because it's doing what it's been doing for decades. It's just doing it better. McDonald's is faltering because it's trying to change at a time when consumer perception is turning against the fast food giant. It's hard to succeed under that scenario no matter how hard you seem to be copying what's working for somebody else.
Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any Motley Fool newsletter service free for 30 days.