Panera Bread Company (PNRA)

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	Panera opened 69 new bakery-cafes in 2009 - 30 company-owned and 39 franchise-operated – and is targeting approximately 80-90 new openings in 2010.<ref> [[http://www.panerabread.com/pdf/er-20100211.pdf]]</ref>		Panera opened 69 new bakery-cafes in 2009 - 30 company-owned and 39 franchise-operated – and is targeting approximately 80-90 new openings in 2010.<ref> [[http://www.panerabread.com/pdf/er-20100211.pdf]]</ref>
-	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.<ref> [[stock:Panera_Bread_Company_%28PNRA%29/Filing/10-K/2008/F5447468#001 | PNRA 10-K 2007, Item 1]]</ref>	+	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.<ref> [[stock:Panera_Bread_Company_%28PNRA%29/Filing/10-K/2008/F5447468#001 | PNRA 10-K 2007, Item 1]]</ref>
	===Business Model===		===Business Model===

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Revision as of 01:19, April 14, 2010

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. As of December 29, 2009, Panera had 1,380 bakery-cafes, spanning 38 states, as well as some locations in Canada. In 2009, Panera Bread's revenues reached $1.35 billion, a 4.1% increase over its 2008 revenues. Traditionally, companies like Panera have suffered in recessions, which decrease the frequency with which consumers eat out at restaurants.^[2] Panera’s CEO Ron Shaich commented that Panera’s strategy during the recession has been “to stay consistent and not to react to the recession”, keeping costs constant and offering new salads and sandwiches. ^[3] As it grew revenues in a year (2009) in which overall restaurant traffic decreased 3 %, analysts have pointed to Panera’s “fast casual” niche (between casual dining and fast food) as contributing to its relative success; this positining may allow it to avoid discounting wars and maintain its margins by attracting customers with a higher quality product perceived to be a good value for the money. Traffic in fine dining restaurants fell by 12% in 2009, while revenues increased by 4% in the fast casual category – some of which may be explained by customers “trading down” from more upscale restaurants. ^[4]

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.

In 2009, Panera Bread's revenues reached $1.35 billion, a 4.1% increase over its 2008 revenues, while net income rose 28% to $86 million. Operating margins have increased by over 1% for each of the last seven quarters, with 2009 operating margin reaching 10.4%.^[5] Comparable bakery-café sales growth increased by 0.5% overall in 2009 (dragged down by lower comp sales in stores opened in 2008, -3.8%, compared to comp sales in cafes open since 2007 or earlier, 2.4%). Comp sales picked up in Q4 2009, reaching 5.4%.^[6]

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.^[7] 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 opened 69 new bakery-cafes in 2009 - 30 company-owned and 39 franchise-operated – and is targeting approximately 80-90 new openings in 2010.^[8] 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.^[9]

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 2009, the company itself fully owned 585 restaurants, which generated $1,152 million in revenues (85.2% of total revenues).^[10] Furthermore, franchisee groups owned 795 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 $78 million in 2007 (5.8% of total revenues).^[11] 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 $121 million in sales to franchises in 2009 (9.0% of total revenues).^[12]

Product Niche

An important aspect of Panera Bread’s business is its product niche—artisan fast food, also termed “fast casual”. 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, as at other fast food restaurants, 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.^[13]. Indeed, the health care bill enacted in 2010 includes provisions that will require chain restaurants to publish the caloric content of their menu items, and Panera has gotten ahead of the crowd by becoming the first major restaurant chain to voluntarily publish its food items’ calorie counts; Panera’s lower-calorie fare may help it grab market share from fost food chains among health-conscious consumers. ^[14] Meanwhile, dine in restaurants are very susceptible to drops in consumer spending. Therefore, Panera’s cheaper items make it an attractive alternative to traditional eateries. However, this does not mean that Panera 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.^[15]

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.^[16]

Panera Bread's Geographic Distribution

Region	Percent of Total Restaurants
New England	6%[17]
Midatlantic	25%[18]
South	16%[19]
Southwest	2%[20]
Midwest	2%[21]
West	6%[22]

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%.^[23]

• 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.^[24]

• 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.^[25]

• 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.^[26]

• 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.^[27]

• 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.^[28]

Market Share

The fast food industry is highly fragmented. Total revenues are estimated to be around $120B.^[29]

References

1. ↑ PNRA 10-K 2007, Item 1
2. ↑ "Darden Execs Comment On 'Challenging, Volatile' Consumer Market" Seeking Alpha July 17th 2006
3. ↑ [1]
4. ↑ [2]
5. ↑ [[3]]
6. ↑ [[4]]
7. ↑ PNRA 10-K 2007, Item 1
8. ↑ [[5]]
9. ↑ PNRA 10-K 2007, Item 1
10. ↑ [[6]]
11. ↑ [[7]]
12. ↑ [[8]]
13. ↑ PNRA 10-K 2007, Item 1
14. ↑ [9]
15. ↑ PNRA 10-K 2007, Item 1
16. ↑ PNRA 10-K 2007, Item 1
17. ↑ PNRA 10-K 2007, Item 1
18. ↑ PNRA 10-K 2007, Item 1
19. ↑ PNRA 10-K 2007, Item 1
20. ↑ PNRA 10-K 2007, Item 1
21. ↑ PNRA 10-K 2007, Item 1
22. ↑ PNRA 10-K 2007, Item 1
23. ↑ PNRA 8-K 2007 Q4
24. ↑ "Why Fast Casual is Winning" Restaurants and Institutions September 1st 2007
25. ↑ MCD 10-K 2007
26. ↑ Subway's Corporate Website
27. ↑ SBUX 10-K 2007 Item 6
28. ↑ SBUX 10-K 2007 Item 6
29. ↑ Fast Food Industry Abstract

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