SONIC Drive-in Could Solve McDonald’s Problem

SONIC Drive-in could solve McDonald’s problem.

Apr 24, 2014 at 11:00AM

Did you know that McDonald's (NYSE:MCD) started out as McDonald's Bar-B-Que with a carhop style just like that of SONIC Drive-in (NASDAQ:SONC)? The menu back then had twenty-five items, which were mostly barbequed, but the founding McDonalds brothers decided to cut it down to mostly just burgers and ditch the drive-in in order to give customers speedy service. Now the tables may have turned.

Source:  Wikimedia Commons

Enter the drive through
In 1948 the chain began operating under its current name of McDonald's and started its assembly line quick service. It wasn't until 1975 though that the company would add its first drive-through window. Keeping with the philosophy of fast speed, the company had a goal of providing service in 50 seconds or less.

Since that time, drive-through windows have appeared at McDonald's everywhere. Sales at the windows grew from zero in 1975 all the way to 60% of total sales by 2010. Currently, 70% of McDonald's sales come from the intercom. The drive-through continues to be so popular that McDonald's is adding a third window at some locations.l

Falling asleep at the wheel
Part of the reason for the backlog isn't just business. In a recent study, McDonald's reported its longest average wait time in 15 years, which was as far back as the study went, at 190 seconds. This is 280% longer than the original vision of 50 seconds.

Part of the problem stems from the vast menu McDonald's has these days and the longer prep time for some of the new items. When one person is waiting, everybody behind him or her also has to wait. Of course McDonald's hopes to alleviate this with the third window but there are only so many locations where this will even be practical. McDonald's has a capacity problem.

Back in January, Tim Fenton, McDonald's COO, stated, "The capacity on the prep table allows us really to have more capacity during our peak hours where we haven't been able to particularly in some of our drive-through restaurants. [We haven't be able to] service quickly and fulfill the capacity that we wanted so fewer products [are] better." A lack of capacity means that hungry guests are forced to go elsewhere. McDonald's realizes that the overwhelming menu is slowing it down.


Source: SONIC Drive-in Drive-in

SONIC Drive-in to the rescue
As the nation's largest chain of drive-through restaurants, SONIC Drive-in is sticking to its roots. While many of its locations offer a drive-through option, with the vast availability of its drive-in stations these locations often don't even need a "third window" as the locations often have dozens of spots available. Modern technology has been catching up with the chain and speeding things along to the point where the carhop spots act like dozens of mini drive-through windows.

With consumers eating in their cars more often than ever, SONIC Drive-in offers no-pressure ordering with the push of a button. On SONIC Drive-in's most recent conference call, CEO J. Clifford Hudson stated:

This POPS screen it involves an interactive screen. It's in the middle of a new menu housing, that the acronym POPS is what it is Point of Personalized Service, but it also pops out in the lot, particularly in the evening. It's a beautiful thing and it's attracting traffic, but it also growing check. 

Eye candy. More traffic. More sales. The ordering experience is becoming more enjoyable at SONIC Drive-in instead of painfully dull like it is at McDonald's. The "car lines" at McDonald's are getting longer while the wait is getting shorter at SONIC Drive-in.

Drive-in is back and working
On April 8, SONIC Drive-in announced that market research organization Temkin Group had crowned SONIC Drive-in the top burger chain and fifth overall brand in consumer experience, ranking it higher than McDonald's. In response to all the success it's seeing, SONIC Drive-in also announced that it plans to open 1,000 new locations over the next ten years, citing pent-up demand from its franchisees. It targets 300 of them in California alone by the year 2020.

Based on estimated earnings per share of $5.81 for the fiscal year which ends in December 2014, McDonald's trades at a forward P/E of 17. This falls below SONIC's forward P/E of 21, assuming estimated EPS of $0.98 for its fiscal year which ends in August 2015. However, SONIC Drive-in deserves a closer look from Fools due to its superior expected growth rate. 

SONIC Drive-in is relaxing. There is money in relaxation.
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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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