The Franchise Factor

Nearly one year ago, on October 1, 2009, the U.S. stock market tumbled for eight consecutive trading days. By October 10, the Dow Jones had plunged 22.1 percentage points and the market had officially crashed. The months that followed carried reports of layoffs and Chapter 11 filings, as company after company was battered by the protracted credit crunch, investor panic and consumer spending lock-down.

While some companies were pulling up stakes in the recession that has followed, others were pulling up boot straps and strategizing a way forward. In September of 2008, as a part of its migration from regional to national brand and in response to an already weakened economy, Sonic, America's Drive-In announced a re-franchising initiative that would convert under-performing partner drive-ins (those where the company owns majority interest) into successful franchise-owned locations.

Owners make better operators
It's long been the stance of the Oklahoma City-based drive-in restaurant chain that "owners make better operators." The re-franchising initiative would support that position, taking the already heavily franchised operation (then at 3,400 locations total, with 80% franchisee) to a goal of 92% to 94% franchised over a four-year period. This conversion of underperforming partner drive-ins into franchisees was intended to help the company improve sales and operations for remaining partner drive-ins, while focusing on new store development and promotions to drive sales for the entire system.

At the time of the announcement, for the fiscal year that ended August 31, 2008, franchisees had clearly out-performed corporate partner drive-ins. Estimated system-wide same-store sales were positive, with estimated franchise drive-in same-store sales slightly below the targeted range of 2% to 4%, and partner drive-in sales three to four percentage points below franchise drive-in performance.

At the close of the third fiscal quarter of 2009 (which ended on May 31), Sonic has re-franchised 194 drive-ins; total locations have grown to 3,500 and franchisees now account for 86% of the total portfolio. Although same-store-sales show the impact of the recession, with a system-wide decrease of 4.3% for the first nine months of FY2009, franchised locations continue to out-perform corporate partner locations.

"The speed with which we have been able to implement our re-franchising initiative, along with the solid pace of our development in spite of current pressures on the credit markets, reflects the ongoing confidence our franchisees have in our brand," Clifford Hudson, chairman and chief executive officer said in the company's Q3 earnings statement.

That confidence goes both ways. More than just better and more profitable operators, Sonic's franchisees have also become an integral part of the company's decision-making and innovation processes.

Fostering innovation
"Our approach to innovation boils down to three basic areas," explains Brad Sheriff, vice president of brand technology at Sonic Corp. The first is customer-facing technology, which helps the brand stay relevant with guests and includes Sonic's online presence. "These are also the things that create interaction with the brand when you're not on-lot. They're high fun, high touch, whimsical and exciting," says Sheriff. The second area of innovation focuses on operator tools, addressing the applications and processes that Sonic is making available to franchisees so they can better run their businesses. Third is corporate infrastructure, those tools that, on a macro-basis, create intelligence and visibility for Sonic corporate across the brand.

Sheriff leads a team of implementation and support professionals who are responsible for maintaining technology processes and infrastructure across the entire Sonic portfolio. For him, the franchise community plays a pivotal role in the innovation and ideation process, and in particular in the development of customer-facing and operator tools. "Successful brand-changing innovation always includes the operator," says Sheriff. "You must ensure that you have a communication vehicle to bring operator feedback in and capture ideas. The corporate world doesn't always have all the answers. A lot of what we find to focus on are things that our franchise partners bring to our attention."

Sonic employs several tools to open rich communication channels with its franchisees. The company has a franchise advisory council made up of a representative group of 75-100 owners. "During the course of quarterly meetings, we review and discuss everything from ideal food costs, to BI, to data warehousing...and we get rich debate and interaction." Within the council, there are subgroups that are further tasked with tackling different initiatives: technology, the customer experience, menu offerings, etc. Membership in the council rotates, with terms of service lasting two years, and everyone in the council serves on one of the subgroups.

"This is not a stale group," explains Angela Owen, supervising partner for Atwood Group, a Sonic franchisee with eight locations in Oklahoma and Virginia. "When you get this group of people together, there's a lot of exposure to amazing brains. It gives you a great opportunity to pull from all of that talent." For Owen, who grew up in the business and today has vast and varying responsibilities across operations, marketing and customer service, the council is a great opportunity to pool resources and learn from some of the larger franchisees.

Staying connected
Reaching beyond the advisory council, Sonic stays connected to each member of its franchise community through Sonic PartnerNet, a web-based, centralized portal for e-learning, reporting and communication. "We share everything from technical observations to recipes on PartnerNet," says Sheriff. Insights from the advisory council are also part of the content and thus shared with the entire corporate and franchise community.

The portal also helps Sheriff and his team monitor the success of new technology rollouts, such as LED outdoor menu boards in drive-thru lanes. The idea for the LED signs came directly from the brand's largest franchise group, which then ran the test pilots and reported results to the entire community via PartnerNet. While Sheriff fully supports this type of innovation from the franchise community, he's also conscientious to mitigate their risk. "In most cases, if there's a technical risk, such as with payment technology, we test it first in our corporate stores. As a corporate entity, if we're not willing to get behind it, how do we expect our franchisees to do it?"

For Owen, it's Sonic's aggressive information seeking that has strengthened the corporate-franchisee relationship. From webinars to conference calls, there's a constant question and answer process going on. "The corporate employees are working in the drive-ins sometimes to see what we see. I've seen the relationship change, and it has to do with Sonic's desire, from the top down, to provide service."

With its re-franchising initiative under way, the pool of talent for innovation will continue to grow over the coming three years. Sonic will undoubtedly strengthen ties with these and new franchisees to create dialogue for change. If there's any concern that opening up the communication channels this wide can also open up the floodgates to unnecessary, protracted debate, Sheriff says bring it on. "Find the hardest to work with and most unsavory characters you can muster. You can be sure that a well-developed idea will be better after the scrutiny of both technical and non technical operators. Don't be a victim of group think."
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