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Why is Sonic Thriving When McDonald's Is Not?

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General Views From A Sonic Drive-In Ahead Of Earns Reports
Daniel Acker/Bloomberg/Getty Images
Maybe it's not too late for McDonald's (MCD) to start serving chili cheese dogs and cherry limeades directly to cars by food runners on roller skates. Sonic (SONC) posted quarterly results after Monday's market close, proving once again that the "America's Drive-In" is holding up a lot better than McDonald's.

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 Boom

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.

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.

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5 Comments

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hislonv

McDonalds started as fast food. They precooked the items and got them to you quickly. They didn't sit out very long. If they weren't sold promptly, they were tossed and replaced with fresh product. They were successful.
Now they cook and complete to order. It takes way too long to get through the drive through and the food isn't as good tasting as most of their competition. They are slow, inaccurate in fulfilling orders and have become unsuccessful. To combat that, they have tried to reinvent themselves as a coffee shop, a gourmet burger joint, a play yard and numerous other ideas, all without success. If they went away tomorrow nobody in my town would miss them. We would trade them for Sonic or In and Out in a hearetbeat.

June 26 2014 at 7:30 PM Report abuse rate up rate down Reply
white41990

Mc Donalds is to concerned about their share holders and investors that they try to hard to cut costs and raise prices on the consumer, they care more about what's happening with there investors that they couldn't care less about the consumer that keeps them in business to begin with and now its starting to bite them in the ass, quit ripping your consumer off and give them what they pay for and pay your workers enough to give a **** and maybe you will see a turn around next quarter. Keep paying your labor close to minimum wage and I will continue to spend elsewhere, especially when you can as a business afford to pay more.

June 26 2014 at 2:09 PM Report abuse rate up rate down Reply
allbert

It's the guys in their ads! Sonic doesn't take themselves too seriously, except when it comes to their food...

June 25 2014 at 4:23 AM Report abuse rate up rate down Reply
jjpogues

Better burgers, fresh toppings, better fries, happy servers who care, no chemical tastes to their chicken, better shakes, better drinks, wide choice of items

June 24 2014 at 2:43 PM Report abuse rate up rate down Reply
Rick Allyn

PEOPLE ARE TIRED OF MCDONALDS CRAP...ALL THE BS . WHY DON'T THEYSIMPLY DUPLICATE IN AND OUT BURGER, IT IS JUST HAMBURGERS, NOT HARD TO PRODUCE. MCDONALDS CONSTANTLY WORKS ON MAKING THINGS CHEAP AND CRAPPY . THEY HAVE TO BE THE DUMBEST CORPORATE PEOPLE ON EARTH. THEY WOULD EAT AN AN IN AND OUT BURGER BEFORE THEIR OWN RESTAURANTS. THEY DESERVE TO FAIL BECAUSE OF THEIR ARROGANCE AND GREED. I HATE THEIR RESAURANTS...

June 24 2014 at 12:13 PM Report abuse rate up rate down Reply