3 Reasons Sonic Corp. is Eating McDonald's Corp.'s Lunch

By Daniel B. KlineFool.com

When you examine recentMcDonald's financial results and compare them against competitors Chipotle and Panera Bread it's easy to say the two fast-casual brands are succeeding because they offer consumers food with higher perceived health value. That same argument cannot be used when you compare McDonald's continuing sales declines in the United States toSonic's fairly explosive growth.

Both McDonald's and Sonic sell burgers, fried chicken, sugary drinks, and other typical fast-food items. You could even argue that Sonic, which also features an array of ice cream offerings, has less healthy fare. That did not stop the company that bills itself as "America's Drive-In" from posting same-store sales increases of 8.5% at franchised locations and 7.9% at company-owned stores for the quarter ending Nov. 30.

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For its most recent reportedquarter, which ended on Sept. 30, McDonald's same-store sales fell by 3.3% in the United States. The results were no better in October, when U.S. sales dropped by 1%, or November, when they fell by a staggering 4.6%.

Most Sonic locations do not offer in-restaurant dining. Source: Sonic.

Sonic is about indulgenceMcDonald's has in some ways been victimized by its own success. To grow sales the company had to become more than a quick place for burgers, fries, and fried chicken nuggets, all washed down with a soda or a shake. Now, McDonald's offers healthier options including salads, grilled chicken, and even yogurt parfaits.

Sonic has pretty much ignored the pressure to focus on healthier fare. It does have a grilled chicken sandwich on its "Sonic Smart" menu of items that contain450 calories or less, but the majority of the lower-calorie choices are simply smaller portions or kids' meals. (A small order of Chili Cheese Tots has only 330 calories, but that's only a "smart" choice in relation to the rest of the menu, not food overall.)

While McDonald's is trying to serve everyone, Sonic knows it is offering an affordable indulgence, and it hits every niche of that market. Sonic has indulgent burger-based meals, ice cream treats for dessert, and even slushies and a wide variety of drinks for treating yourself when it's not precisely mealtime.

"I think Sonic understands their core customer more than the big guys do," Stephens analyst Will Slabaugh told CNN Money."You're typically going out to indulge. You're watching that waistline a little less and your wallet a little bit more."

Sonic is still new to manySonic has about 3,500 locations, all in the United States. McDonald's closed 2013 with 35,000 restaurants in over 100 countries, with roughly 14,000 U.S. locations (the company does not report specifically on its number of stores by country). That'sone McDonald's for every 22,174 Americans, according to Eater.com.

That level of penetration leaves it awfully hard for McDonald's to make a new store opening feel special. Sonic, on the other hand, has national ads but has not saturated much of the country. The brand has been concentrated in the South but has spread nationally in the last few years. In some locales, people have seen the company's commercials well in advance of actually getting a Sonic near where they live. That builds expectation and makes each new restaurant opening an event.

Without that advantage, McDonald's must rely on new product development to reignite customer interest. However, recent menu innovations including Mighty Wings chicken wings and the McCafe beverage line have struggled or failed outright.

A perception of qualityWhile McDonald's has run the Our Food, Your Questions ad campaign to address consumer concerns over whether its meat is actually meat, Sonic has created a brand perception of offering decent quality at a fair price. The company has staked out a niche in which its customers view its menu items as better than fast-food quality, but feel like the lack of a sit-down environment creates pricing value.

"It's resonating with consumers trying to feed a family of four who don't want to pay for traditional sit downs, but also don't want to eat traditional fast food that's questionable in its quality,"Robert Derrington, an analyst at Wunderlich Securities, toldCNN Money.

McDonald's is making changesMcDonald's has not grown to 35,000 restaurants by being unableto make changes when things are not going well. To alter its course and fix its U.S. sales, the company is testing a simplified menu. It detailed what that entails in a statement on its website:

"The tests are designed to determine what works and what doesn't within our restaurants by considering the operational experience, customer response, price points and other important information which may inform future decisions," according to the statement.

That alone might not be enough to help the Golden Arches tap into some of the demand pushing Sonic, but it's bound to be better than launching another variation of a chicken wing or a slightly new take on a burger.

The article 3 Reasons Sonic Corp. is Eating McDonald's Corp.'s Lunch originally appeared on Fool.com.

Daniel Kline has no position in any stocks mentioned. He almost never eats at either McDonald's or Sonic. The Motley Fool recommends Chipotle Mexican Grill, McDonald's, and Panera Bread. The Motley Fool owns shares of Chipotle Mexican Grill and Panera Bread. 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.

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