Panera Bread Company’s Growth Strategy Case Analysis Among the crowded field of casual, quick-service restaurants in America, the distinctive blend of genuine artisan bread and a warm, comfortable atmosphere has given Panera Bread Company a golden opportunity to capture market share and reward shareholders through well-planned growth.
With the objective of opening approximately 1,000 more bakery-cafes in the next three years, Panera Bread Company must make prudent strategy decisions about new store locations, supply-chain management and expanded offerings, all the while continuing its above-average earnings per share growth of at least 25 percent per year. With 170 stores in the development pipeline in 2007 and several hundred more to reach its goal, Panera Bread Company faces a task many companies have failed at time and time again, resulting in massive debt, contraction and contributing to the flame-out of a once promising brand and stock investment.
The decisions surrounding how to expand should be based on analysis and evaluation of the successful operations and financial performance thus far. Specifically, the plausible proposition of growing franchisee-owned stores in contrast to company-owned stores is a driver and key success factor for Panera Bread Company. We discuss these trends and recommend expansion at a sensible pace by encouraging franchisee stores in untapped markets, and continuing the success of product offerings and the focus on quality control through wise supply-chain management.
This company thrives on first-time customers and word of mouth to continue its growth. “The company’s marketing research indicated that 57 percent of consumers who have “ever tried” dining at Panera Bread had been customers in the past 30 days” (C-169). Panera Bread has accomplished a distinctive position in the restaurant industry, making it possible to market to a growing customer pool that desire better quality foods. The growth potential for Panera Bread in the next three years is in the domestic urban and dense suburban markets.
According to management’s own research, it is possible to have a successful bakery-cafe with a customer pool of 160,000 people. This seems to be consistent with the experience of Applebee’s, one of Panera Bread’s chief rivals. As well, management is properly focused on adding offerings, such as baked goods, or presenting existing offerings as options for any-time dining. Their preference is to avoid in-your-face or hard-selling marketing approaches. They’d rather allow their current customer base to “gently collide” with the brand and let them “discover” Panera Bread.
Therefore they [customers] convert themselves into loyal customers (C169-170). Above all, Panera Bread Company’s sustainable competitive advantage is the quality of its dough-making and baked breads for sandwiches and an array of tasty fare. The bread is prepared and mixed with all natural ingredients in which no chemicals or preservatives are added. In addition to this, their process does not involve freezing or partial cooking before distribution to the stores. Panera Bread has strategically located the production and distribution of their fresh dough through temperature-controlled vehicles within 300 miles of a group of stores. Panera has invested about $52 million in a network of 17 regional fresh dough facilities (16 company-owned and one franchise-operated) to supply fresh dough daily to both company-owned and franchised bakery-cafes” (C-172). This process ensures the freshness and enhances the quality of their products for consumers. As a retailer, you would not expect Panera Bread to manufacture its own bread dough, but this unusual twist — as in, backward vertical integration – differentiates the company from other bakery-cafes in the quick-service sector of the restaurant industry.
Furthermore, the dough plants are a means to reduce operating costs to stores which would otherwise have to purchase dough from independent suppliers, and act as a profit center for the company in the form of a separate operating unit with revenues from a growing captive market – its own bakery-cafes. Financial Analysis Panera Bread quadrupled revenues from $282,225,000 to $828,971,000 by 2006. Most of the revenue has come from their bakery-cafe sales. They also generate revenue from the sale of dough to their franchise locations as well as the franchise fees they charge to their franchisees.
Panera Bread has been very profitable in part because they have avoided taking on large marketing endeavors and employ a long supply chain to get supplies from one franchise to another. Plus, with bulk or pooled purchasing of certain supplies, Panera Bread exercises bargaining power over suppliers. Their operating profit margin denotes the success they had in the early years of the operation such as in 2004. However, that margin slightly shrank over the next two years, 2005 and 2006. |2004 |2005 |2006 | |Operating Profit Margin | | | | | |12. 91% |12. 67% |10. 95% | | | | | | |Net Profit Margin |8. 2% |8. 15% |7. 10% | | | | | | |Return on Total Assets |11. 84% |11. 92% |10. 85% | | | | | | |Return on Stockholder’s Equity |15. 92% |16. 6% |14. 80% | | | | | | |Current Ratio |1. 05% |1. 18% |1. 16% | One of the challenges of an aggressive growth strategy is declining operating margin. If their OPM percentage continues to shrink, it might indicate that the company is not running its operations efficiently since taking on more locations.
Production capacity must be monitored and track simultaneously with existing store demand and new locations. Also cutting heavily into these profits is the amount of their labor costs. In 2002, they had only $63,172,000 in labor expenses. As of 2006, this grew significantly to $204,956,000. However, it is expected that increased expenses will come with growth. Considering that the average weekly sales at a franchised Panera Bread bakery-cafe exceeded that of its company-owned counterpart by approximately $2,000 in 2006 (and in some earlier years, by as much as $3,000 to $4,000), the revenue benefit is a ounting reason to encourage franchise development. This may not seem significant enough to propel a key part of its growth strategy; but it is when the company has to invest almost $1 million per store location in asset costs, and these stores then do not outperform the franchise cafes. [pic] Panera Bread: Store Revenues (in thousands) Despite turning lower profits in recent years, they are keeping a very respectable balance sheet. The total liabilities indicate that even though they have taken on a certain amount of debt to finance their expansion, it’s a relatively low amount in comparison to the amount of the assets they’re carrying.
While they have relatively low cash on hand, their other assets consist mainly of the patented bread recipes, franchise contracts, equipment, and supplies. Effectively using this more short-term form of debt (keeping current liabilities low) has translated well for stockholder equity. Investors see a nice return because Panera is able to report higher asset turnover and profits. Charting a Course for Growth: Location, (Location, Location), Markets, Competition Unlike other restaurant companies, Panera doesn’t choose franchisees to open just one bakery-cafe.
They require the franchise developer to open a number of units — on average 15 bakery-cafes in a period of six years. The Panera Bread franchise is not for those seeking to invest in a low-cost franchise. Candidates must meet stiff criteria, which include possessing a net worth of $7. 5 million, liquid assets of $3 million and successful experience as a multi-unit restaurant operator. In addition, Panera Bread Company asks that they present a cultural fit and are passionate in the production of fresh bread. One way that Panera Bread can penetrate key regions is through their franchise development strategy.
St. Louis-based Panera Bread was evaluating the former Atlanta Bread Co. ’s space in the Germantown Collections development in the greater Philadelphia area. In the process of this transition, a franchisee did sign a lease for 4,010 square feet and remodeled. Anchored by a Kroger store, Germantown Collection has 55,297 square feet of retail space and is 90% occupied. Analysts posit that people might not be dining out as much, but they must still frequent grocery stores on a regular basis, which helps traffic for the rest of the center. The Germantown submarket has 3. million square feet of shopping center space and 490,320 square feet of free-standing retail space. Panera Bread can benefit from this exposure. Also, Germantown has lower property taxes, which can keep the common area maintenance fees in line with other locations where competitors may operate. This example illustrates the importance of painstaking trade area, real estate and site selection analysis and developing a store prototype that will appeal to customers, franchisees and shopping center developers interested in adding Panera Bread to the tenant mix.
When the franchises incur the debt for development rather than company-owned stores, Panera Bread Company realizes the financial gain through cost shifting. For example, the company only had to contribute about $4 million in assets for the franchise operations in 2006, but spent $374 million on company bakery-cafe operations. Likewise, the company expended $15 million for capital expenditures in dough operations, but to build or remodel cafes, it spent $87 million in 2006. [pic] Panera Bread: Segment Assets (Excludes Other Assets)(in thousands) pic] Panera Bread: Capital Expenditures (in thousands) We want the company to stay lean and maximize shareholder return on investment by letting franchisees pay the bulk of new-store development costs as a chief means for company financial growth. Although steadily declining as a portion of total revenues, the franchise fees and royalties represent meaningful income and reflect the intrinsic value in the brand. [pic] Panera Bread is also positioned to benefit from the fragmented nature of the larger restaurant industry. The only other rival to Panera Bread apart from Applebee’s is Chili’s Grill and Bar.
It’s important to note that both these competitors focus heavily on dinner offerings and generate at least 10 percent of revenues from the sale of alcoholic beverages. This does not fit the character of Panera Bread Company. In addition, several small niche operators do not have the reach or possess the competitive advantage in quality food that Panera does and will have as it expands. From a strategic group map standpoint, Panera Bread is becoming the dominant player in the markets it serves as its sales already exceed that of the top four competitors combined (C-174-176). Recommendations
Panera Bread’s recent target audience has been suburbia; however, their next target markets should be cities that have huge numbers of business professionals, who want affordability with a touch of style, convenience, and fresh, unique foods, if they want to reach their goal of having nearly 2,000 stores by end of 2010. While we caution against such an ambitious goal in such a short period of time, the milestone is worth concentrated efforts. In the next several years, our team believes 2,000 locations are feasible and we define the focus on the next markets for the company.
The supply chain for dough must adapt to these locations, especially if new dough plants are required to supply the cafes with dough. The raw materials for making dough have to be reasonably available in the geographic region and reasonably priced. These cities would be the next best markets given Panera Bread’s name recognition, proximity to and ‘in-fill’ potential between existing markets, menu appeal in those geographic areas and the areas’ ability to support growth for a franchisee who needs to open 15 stores in 6 years.
For these reasons, our team recommends New York City, Toronto and Atlantic City for franchisee development as all are untapped markets which form a network with existing store and dough plant locations in the Northeast. The exact locations need to be carefully considered due to the importance of their bakery cafe supply chain. Panera Bread can maintain a balance between not over-saturating any one market, while keeping up demand at the dough plants to optimize efficiency, capacity and economies of scale. Panera Bread has also engaged in catering sales at work places, schools and for parties and gatherings held in countless homes.
Panera Bread noticed that there could be opportunities in the catering business which would target the consumers that wanted breakfast, lunch, day time snacks or desserts for after lunch or to take home, and snacks for organizational events. “By the end of 2005, catering was generating an additional $80 million in sales for Panera Bread” (C169). This is an area that has an excellent growth potential within any existing or new market. Building on its success with vertical integration, we recommend that Panera Bread evaluate the feasibility of retrofitting its dough plants to add a soup production line.
Their passion for bread can be translated to recipe research into soups. Of course, their proven approach of using test kitchens and test runs at select stores, as well as quality control and healthy ingredients, can result in further lower costs for stores and rave reviews by customers eager to buy fresh soup stock. The Panera Bread Company has a choice to expand in one of two ways: either through company-owned store development or through a franchise network with direct investment from qualified franchisees.
With franchises, the capital expenditures and debt are off the corporate balance sheet, which makes the company stronger and better resourced to achieve more strategic goals. With the main strategic goal for Panera Bread Company of reaching 2,000 bakery-cafes, our team recommends that the company grow through more franchise stores in big markets and prudent additions to its dough-making capacity, while perpetuating best-in-class quality and a home-spun soup offering. Work Cited Thompson, Arthur A. , A. J. Strickland III, and John E. Gamble. Crafting and Executing Strategy. 17th ed. New York: McGraw-Hill/Irwin, 2010.
