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WIKI ANALYSIS
Panera Bread Co. (NASDAQ: PNRA) operates the signature restaurant chain Panera Bread, selling hand-crafted breads, sandwiches, salads, and drinks. Panera Bread bakery-cafes are often associated with the concept of “fast casual”, a mixture between fast food and more upsale casual dining. Customers still pay for their food at the counter, like a traditional fast food restaurant, but Panera is more upscale, arranging tables and chairs to be conducive to group meetings and spending over $1MM per store on furnishings.[1]
Most Panera Bread restaurants are located in suburban strip malls and regional malls. At the end of 2007, there were 1167 Panera Bread and Saint Louis bakery-cafes, spanning 38 states, as well as some locations in Canada. In 2007, Panera Bread's revenues reached $1.1B, a 29% increase from 2006 revenues. Despite this growth, the company’s operating income actually decreased by 2.2%.[2] This inconsistency can be attributed to rising costs of production, such as increases in wheat and fresh dough prices , as well as rising labor and rent costs. Traditionally, companies like Panera have suffered in recessions, which decrease the frequency with which consumers eat out at restaurants.[3] Panera CEO, Ron Shaich, stated that Panera prices will not fall with the recession, as Panera will continue to focus on "the 90 percent [of customers] that are still employed."[4] As such, the company will continue to focus on improving quality with initiative such as baking bread later in the day. The company’s brand name will continue to play an important role in its business, as consumers tend to limit their choice of restaurants to the brands they feel most loyal to during times of recession.
Business Financials
Over the past three years, Panera Bread's revenues have increased steadily, driven mainly by growth in the number of new restaurants. However, operating income has wavered, primarily the result of increased commodities prices.
Panera reported a net income increase of 38% in Q3 (ended September 29, 2009), growing from $13.7 million in Q3 2008 to $18.9 million in Q3 2009. Total revenue grew 6% from $315 million to $335 million, for with operating margins growing from 7.2% to 9.5%. Over the third quarter, Panera opened 19 new bakery-cafes in Q3, increasing its total to 1,362 total stores in operation by the end of Q3. At the same time, comparable bakery-café sales growth increased by 2.8% over Q3 2008 – growth Panera attributes to the introduction of new products, successful marketing, and growth in its catering business. For the first 27 days of the fourth quarter, Panera reported a sales increase of 6.9% for company-owned stores and 6.3% for franchised stores.[5]
Panera plans to open 80-90 new stores in 2010, with more than half to be company-owned.
Business Overview
Panera Bread offers handcrafted, fresh-baked, artisan items such as breads, bagels, muffins, scones, rolls and sandwiches, as well as soups, salads, and specialty coffee drinks. The restaurant chain distinguishes its products by emphasizing nutritional value and quality (such as antibiotic free chicken and whole grain bread), especially when compared to hamburger-based fast food restaurants such as McDonald's, Burger King, and Wendy's, which focus on affordable pricing.[6] Panera also differs from traditional fast food in its focus on providing longer dining experiences to its customer - for example, by offering free Internet access in its buildings.
Panera Bread opened 148 new restaurants in 2007, of which 79 were company-owned and 69 franchised. The company’s growth strategy is two-fold. First, management seeks to expand into new markets, such as the Western states and Canada. Second, Panera wants to open open bakery-cafes in existing markets. Although this strategy could increase Panera Bread’s penetration, market saturation may limit gains.[7]
Business Model
The company generates revenue through sales from company-operated stores, fees and royalties from franchisees, and sales from fresh dough facilities. At the end of 2007, the company itself fully owned 532 restaurants, which generated $894.4M in revenues (81% of total revenues).[8] Furthermore, 39 franchisee groups owned 666 additional, franchised restaurants. Franchise-operated restaurants are required to pay the company franchising fees and royalties based on the percentage of sales, the two of which amounted to $67.2M in 2007 (6% of total revenues).[9] The franchises themselves grossed $1376.4M in sales. Although its franchises only generate a small percentage of the Panera Bread’s total revenue, they are important to the company’s brand name recognition. In addition to restaurants, the company operates 23 fresh dough facilities that supply dough to both company-operated restaurants and franchises. The 23 facilities generated $104.6M in 2007 (9.5% of total revenues).[10]
Product Niche
An important aspect of Panera Bread’s business is its product niche—artisan fast food. This niche protects the company from ``direct`` competition in the fast food industry as well as the casual dine-in industry. It targets consumers who seek meals of higher quality than those offered by traditional fast food chains, yet do not have the time to dine in or have a sit-down meal in a restaurant. Although there are many restaurants that also offer this mixture, these restaurants tend to be local, and therefore do not benefit from a national brand name and a large advertising budget, which become increasingly important during times of recession. On the average, each individual Panera Bread bakery-cafe expends $1M on furnishings and decorations, arranging tables and chairs to be conducive to group meetings (as opposed to most fast food restaurants, which are oriented around quick, in and out dining). Yet, in concordance with other fast food chains, customers pay before they receive their food, giving them the freedom to finish their meal and leave without having to ask for the bill and pay gratuity.
Panera Bread's product niche gives it the tools to cope more effectively with the challenges facing the fast food industry as well as the challenges facing the dine in industry. Fast food restaurants chains are often criticized for offering unhealthy food, but the higher nutritional value found in Panera Bread’s products makes it less prone to nutrition campaigns that have hurt chains such as McDonald’s.[11]. Meanwhile, dine in restaurants are very susceptible to drops in consumer spending. Therefore, Panera Bread's cheaper items make it an attractive alternative to traditional eateries. However, this does not mean that Panera Bread is immune to these challenges. The company must achieve a balance between quality food and competitive pricing.
Nevertheless, Panera’s product niche does give it flexibility in raising menu prices because consumers perceive its products as having high quality, especially in comparison to traditional fast food restaurants. In 2007, the company’s management introduced a 2.5% increase in Panera’s prices, and reported no significant decrease in the total number of sales. This tool becomes important when production costs increase.
The company markets its brand name to associate it with the concept of fast casual dining - an alternative to traditional fast food. The company invests 2.6% of its total revenues in marketing campaigns. Each individual restaurant is required to give 0.7% of its sales to the national advertising fund, and spend 2% of its sales on local advertising. The company’s marketing strategies focus on product merchandising (such as the promotion of new menu items), instead of product prices. It also frequently sponsors charitable events as a marketing tool. Most Panera Bread restaurants donate their leftover breads and other foods to local charities at the end of each day.[12]
Geographic Distribution
Panera Bread currently operates in 36 states. The chain is not very well established in the West and Southwest regions, which means that these two regions are attractive markets for expansion. Furthermore, the company's management has indicated that it intends to expand into Canada (Toronto and locations in Ontario) through franchising agreements.[13] Panera Bread plans to take advantage of a weak US real estate market by opening 70-90 new stores in 2009. With a debt-free balance sheet, the company plans to better position itself for the end of the financial crisis.[14]
| Region | Percent of Total Restaurants |
|---|---|
| New England | 6%[15] |
| Midatlantic | 25%[16] |
| South | 16%[17] |
| Southwest | 2%[18] |
| Midwest | 2%[19] |
| West | 6%[20] |
Key Trends and Forces
- Rising production costs have placed downward pressure on Panera Bread's operating margins: Higher wheat prices, fresh dough prices, labor costs, rent, and other input costs have made it more expensive for Panera Bread to continue its operations. For example, Panera purchased wheat at $5.80 per bushel in 2007, but is locked in at $14 per bushel for 2008, making it far more costly for the company to produce its bread-based products. Inflationary trends, combined with drops in consumer spending (which pressures management to decrease prices), have created a challenging consumer environment for the company - if the company raises its prices to counter inflation, it might suffer a drop in sales. The effects of rising costs can be seen in the company's fourth quarter, when revenues jumped 29% from the previous year, but net income decreased by 5.6%.[21]
- Fast food chains and dine in restaurants are responding to the rise of fast casual eateries, leading to greater competition in the industry: Both traditional fast food and dine in restaurants are beginning to respond to the success of fast casual. Fast food chains such as McDonald's and Burger King are beginning to offer premium salads and sandwiches, and have created campaigns that emphasize the nutritional value of their food. Meanwhile, dine in restaurants have instituted carryout programs, fast-lunch guarantees, and lower prices, all measures to counter the concept of fast casual. If these trends continue, Panera Bread can no longer enjoy the safety of the product niche that it has occupied, and will face greater competition in terms of pricing and food quality.[22]
- Food safety issues could hurt Panera Bread’s reputation as a provider of quality food: Panera Bread’s relatively nutritious menu does not make it completely immune to problems faced by other fast food restaurants (see Natural & Organic Foods Consumption and Health & Wellness). The company’s menu is still filled with foods high in carbohydrates, making the business susceptible to changes in consumer preferences towards healthier alternatives. Furthermore, problems with the food supply, such as an avian flu outbreak, also pose a significant threat to Panera Bread’s business. Even the perceived risk of illness could detract from consumers’ willingness to eat at the company’s restaurants.
- Restaurants are affected by recessions: Traditionally, in an economic recession, casual dining businesses have suffered as consumers look to cut costs and eat in more often. Conversely, fast food restaurants have often done well during recessions, as they are perceived as cheaper alternatives to sit-down restaurants. Panera, as a hybrid of these two models, could go either way - consumer perception may be that Panera is a cheaper, healthy alternative and boost its numbers while the economy recedes, or like other casual dining restaurants its sales may suffer as consumers cut their food budgets.
Competition
Panera Bread must still compete with traditional fast food chains, as well as specialty food cafes, casual dine in restaurants, street vendors, pizza parlors, bakeries, and national, regional and locally-owned restaurants. Many of the company’s competitors have greater financial resources, which translate into greater advertising capacity. These competitors include:
- McDonald's—is the biggest player in the fast food industry, with a presence in most US markets and many international markets. Recently, the company has introduced salads and premium sandwiches that compete directly with Panera Bread’s offerings.[23]
- Doctor’s Associates—operates the Subway sandwiches chain. Subway, which also emphasizes nutritional value and freshness in its foods, offers sandwiches that directly compete with those of Panera Bread. Subway has penetrated many US markets and has established an international presence.[24]
- Starbucks—is one of the biggest players in specialty beverages. Its products compete with the drinks offered by Panera Bread. More importantly, Starbucks’ outlets are used by many consumers as gathering places, making Starbucks a serious rival to Panera Bread's efforts to establish restaurants that are good locations for meetings.[25]
- COSI—is another fast casual restaurant chain, with many locations in New England, Florida and California. Its revenue is much smaller than that of Panera Bread. As Panera Bread expands further into Western and New England states, it will face stiffer competition from COSI.[26]
Market Share
The fast food industry is highly fragmented. Total revenues are estimated to be around $120B.[27]
References
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ "Darden Execs Comment On 'Challenging, Volatile' Consumer Market" Seeking Alpha July 17th 2006
- ↑ Panera bucking the discount trend
- ↑ Panera Bread Reports Q3 EPS
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ Panera Bread Chief to Open 70 to 90 Stores in 2009.
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 10-K 2007, Item 1
- ↑ PNRA 8-K 2007 Q4
- ↑ "Why Fast Casual is Winning" Restaurants and Institutions September 1st 2007
- ↑ MCD 10-K 2007
- ↑ Subway's Corporate Website
- ↑ SBUX 10-K 2007 Item 6
- ↑ SBUX 10-K 2007 Item 6
- ↑ Fast Food Industry Abstract
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