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JAMESTOWN, Tenn.—Sonic (NASDAQ:SONC) has rolled out a prototype of a smaller version of its standard drive-in restaurant in an Appalachian hollow in Tennessee.
The prototype opened on June 24 in Jamestown, population 1,959. Instead of having a minimum of two parking rows from which to order menu items from car hops, the new restaurant has one and a third lines. The new design plan is expandable from 18 car stalls up to 40. The restaurant has installed a new point-of-sale system that it plans to roll out throughout the chain.
The trimmed-down Tennessee drive-in is actually the second of the company's new prototype. The first opened in Valliant, Oklahoma.
Sonic's CEO J. Clifford Hudson told stock analysts at the company's 2013 Investor Day event on June 27 that being able to go into small towns allows the brand to have prime locations with high brand recognition as opposed to being lost in the crowd. "This new building prototype allows us to begin looking at small towns that we were not looking at two and three years ago in our core market," stated Hudson.
Sonic has high hopes for this Tennessee town known for mining saltpeter as early as the War of 1812.
The edge of south central Appalachia is beautiful country. Some might say God's country. The land is surrounded by running knobs, covered in the summer by a lush green deciduous canopy. Its humbleness has produced greatness. Sergeant Alvin York, the most decorated hero of World War I, was born just up the road. The main north-south state thoroughfare, York Highway, which crosses Jamestown, commemorates him. A wooden souvenir shop near the bridge leading into town memorializes the famous veteran too.
There are not many national restaurant chains that thrive out here. There's a McDonald's and Subway, of course. A Dairy Queen, a Hardee's, a KFC, which is next to a Walmart Supercenter, and a new Little Caesars Pizza. According to city-data.com, the town of 1,959 had a median household income of $14,424 in 2009, which is some two-thirds lower than the state of Tennessee's $41,725.
National restaurant marketers might think if you can make it here, you can make it most anywhere.
At his New York City presentation, Hudson points out to stock analysts that this is a good place to test. The lawyer turned restaurant chain chief executive laments that Sonic should have down-sized its store layout and build-out years ago to open up small town markets.
"The ability to get the store opened for less than $1 million is very real," declares the CEO to a roomful of analysts at a New York City hotel. The non-land investment for the first prototype in Valliant, Oklahoma was $760,000. Tack onto that a land value that was slightly less than $100,000. "So the franchisee gets into the business for an amount much less than we had been looking at two or three years ago," states Hudson. The Oklahoma location, like the second company-owned prototype in Tennessee, is located near state roads, not major interstate highways.
The new unit is surviving and even thriving, says the CEO.
The trim prototype in Valliant, population 755, will have first-year sales of $1.25 million, according to Hudson. "Clearly, in terms of the sales, the capitalization ratio is much better than a one-to-one ratio [of the larger restaurants]" he calculates of the company's first small prototype.
The company has a need to try new things.
The chain of 3,526 stores as of 2013 has 24 fewer units than it did a year earlier. Franchisor Sonic's result for its third quarter was lackluster, to say the least. Same-store sales for franchises rose only +0.2 percent while company-owned stores actually decreased 1.1 percent. If all stores for the fiscal year's first nine months are included, same-store sales barely increased at just 0.1 percent compared to last year's 2.8 percent.
John Gordon, restaurant unit economic analyst for San Diego-based Pacific Management Consulting Group, says that the company's heart is in the right place in trying new things to enhance the bottom line of its franchisees. "Sonic is doing what it should by testing new store prototypes as company-operated models before releasing them to the franchisee community," he states.
The kinks are still being worked out of the Jamestown prototype. As customers order their meals at the separate drive-thru, through what seems like an ancient intercom system for a brand-new building, the order taker's voice crackles with electrical interference. It takes one woman in an old Pontiac five minutes for the restaurant worker to get her order right. Both parties struggle to understand their mother tongue through the speaker system. The drive-through backs up with cars.
In far away Oklahoma City, the franchisor has new hopes for selling its smaller drive-in franchises. Even equipped with their new $75,000 point-of-sale system, these stores are cheap enough to have the potential to open up new American markets for Sonic.
"The question is, will the sales for these new stores be high enough," says restaurant analyst Gordon. "Time will tell."
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