Sonic 2004 Annual Report Download - page 14

• Growth in brand awareness through increased media spending and greater use of
network cable advertising;
• Strong promotions and new product news focused on quality and expanded choices
for our customers; and
• Continued growth of our business in non-traditional day parts including the
morning day part, which increased significantly during the year as a percentage
of sales.
During fiscal year 2004, our total system-wide media expenditures were in excess of
$110 million as compared to $100 million in fiscal year 2003, which we believe continues
to increase overall brand awareness and strengthen our share of voice relative to our
competitors. We have also shifted more of our marketing dollars to our system-wide
marketing fund,which is largely used for network cable television advertising,growing this
area of our advertising from just under $20 million in fiscal year 2003 to $32 million in fiscal
year 2004. We believe this provides several benefits including the ability to target specific
consumer groups more effectively and better reach the network cable audience, which
has now surpassed broadcast networks in terms of viewership. In addition, national cable
advertising also allows us to bring additional depth to our marketing by expanding our
media messages beyond a single monthly promotion. Looking forward, we expect
system-wide media expenditures to be in excess of $120 million in fiscal 2005, including
doubling the amount spent for network cable television advertising to $60 million.
We continue to use our monthly promotions to highlight our distinctive food
offerings and to feature new products. We also use our promotions and product news to
create a strong emotional link with consumers and to align closely with consumer trends
for fresh ingredients, customization, menu variety and choice. During the past year, our
new product offerings showcased the breadth of our menu and emphasized the
opportunity for choice at Sonic. We featured items ranging from large, higher-priced
sandwiches like the Smoky SuperSONICTM Cheeseburger to better-for-you items such as
the Grilled Chicken Wrap with the option of a carb-friendly tortilla and Fresh TastesTM
Salads as well as our frozen and fountain favorites such as our new Diet Cherry Limeade,
frozen PowerAde® Slush, and Hershey’s® S’mores Blast. We will continue to have new
product news in the coming months spanning the entire breadth of our product line and
all designed to meet customers’ evolving taste preferences including the growing desire
for fresh, quality product offerings and more healthy alternatives.
We continue to be pleased with our progress towards penetrating the morning day
part through our breakfast program, which began in the summer of 2000. We expanded
the program, which features unique breakfast items as well as our entire menu all day
long, to the remaining 50% of our drive-ins during the spring of 2003. As a result, sales
during the morning day part have grown to over 11% of total sales. Our experience to
this point continues to lead us to believe that breakfast is a gradual build requiring two
to three years to achieve a desired level. We also continue to view breakfast as
instrumental in helping us grow our average unit volumes to well over $1.0 million, more
in the range of our larger competitors.
In addition to growth during the morning day part, we also experienced sales
increases in every other day part during fiscal year 2004, including dinner and evening
business. These day parts were the weakest during fiscal year 2003 as a result of both a
disproportionate impact of weaker economic and industry conditions as well as a
conscious shift in media dollars to support the breakfast day part. Our evening business
rose significantly this summer as we brought back our Sonic Nights program, which
featured an “Open ‘Til at Least Midnight” message supported by national cable
advertising as well as an emphasis on our Frozen Favorites® and new products such as the
Hershey’s® S’mores Blast and the Junior Banana Split.
One of the more positive developments over the last several months has been the
performance of developing markets. System-wide same-store sales in developing markets
outpaced same-store sales in core markets increasing 6.8% during fiscal year 2004
compared to a decline of 1.2% in fiscal year 2003. We believe that this was due to increased
spending on national cable, which seems to have benefited all of our markets, and
particularly our developing markets. From an average unit volume standpoint, developing
markets, which represent roughly 29% of the store base, increased 7.3% reversing the
downward trend of the last year and slightly ahead of what we saw in core markets.
New drive-in openings by franchisees reached a record level during the past year and
were accompanied by ongoing improvement in our franchise development pipeline,
which we believe has a direct correlation to the growth in average unit profitability. The
combination of increased new store openings by franchisees and strong same-store sales
performance translated into higher franchising income for the year, which was a large
factor in our earnings growth since this incremental income has relatively lower
associated cost. We also continued to benefit from other positive aspects of our “multi-
layered” financial model including leverage of our corporate-level expenses and positive
operating cash flow.
At our Partner Drive-Ins, we have put in place long-term initiatives designed to help
us close the $100,000 plus sales gap in average unit volumes between Partner Drive-Ins
and Franchise Drive-Ins. To a large degree, this effort is modeled on the best practices of
our top-volume Partner and Franchise Drive-Ins. Our intent is to complement the strong
profit motive created through our partnership program with strong incentives focused
on top-line growth. Initial results from these efforts are encouraging, as same-store sales
growth at Partner Drive-Ins exceeded same-store sales at Franchise Drive-Ins during each
of the last three quarters.
Over the past several years, we have completed the acquisition of several Franchise
Drive-Ins in various markets including the acquisition of 51 drive-ins located in the San
Antonio, Texas market in May 2003 and the acquisition of 22 drive-ins located in the
Denver and Colorado Springs, Colorado markets in July 2004. These acquisitions have
Management's Discussion and Analysis of Financial Condition and Results of Operations
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