Value vs. Margins - Earlier in 3Q08, SONC was heavily promoting its Happy Hour program in order to drive traffic. These increased transactions came at the cost of lower than average checks. In order to once again drive profitable transaction growth, the company began in May to promote its value message along with a product at a higher price point, such as a premium sandwich like the Island Fire Burger and a $0.99 shake.
Labor cost pressures. Sonic responded to last year's minimum wage increase by raising prices by 4%. Looking back, the company thinks that the magnitude of the price increase may have hurt transaction growth so the company will not use a blanket price increase this July to offset the minimum wage increase. Instead, Sonic will be more price-sensitive and focus its increases to specific trade areas.
The company also mentioned that its restaurant margins in the first half of the year improved primarily as a result of favorability on the labor line, which may have come at the expense of the customer experience. The company recognizes that this type of trade-off will hurt its brand so there could be more pressure on restaurant margins going forward as the company focuses more on providing better customer service and feels more pressure from the minimum wage increase relative to last year.
Franchisee development. Drive-thru openings are increasing this year, but management stated that it is seeing a slowdown in new store development (still highlighted a strong development pipeline). Franchisees are continuing to invest in the system, however, by putting more money into retrofits and rebuilds.