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Executive Summary
The Panera Bread Company is starting 2007 with unfinished goals and missed targets previously set and a review of their strategy is in order to continue their ongoing success. The company has grown substantially since its inception in the competitive restaurant industry; however, an aggressive target of 2,000 Panera Bread bakery-cafes will require a focused strategic plan. The company has a strong base with loyal customers who appreciate Paneras unique dining atmosphere with a focus on quality products at a reasonable price. Panera will need to continue its market research and focus on environmental issues, which are an important core value. The opportunity for growth in the competitive market is still available, as noted in the analysis section of the report, but the most risk lies with the competitions ability to adapt and change along with Panera to gain their own increases in market share. With this in mind, the recommendation is to continue the expansion process through the franchise offerings while maintaining the differentiation qualities Panera already possesses. The strategy must also acknowledge the potential for a market decline due to potential economic downturns and must act accordingly by keeping a close eye on stores which are profitable and stores which may be struggling. It is important to keep the brand image high to ensure a consistent quality and profitability for investor confidence. Panera has the potential to be the recognized leader in not just the specialty bread segment of the bakery-caf restaurants business but across multiple dimensions challenging Applebees as a national brand.
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Table of Contents
Introduction .................................................................................................................................................... 3 Problem Statement ......................................................................................................................................... 3 Analysis and evaluation ................................................................................................................................. 3 SWOT Analysis ............................................................................................................................................. 4 Strengths .................................................................................................................................................... 4 Weaknesses ................................................................................................................................................ 4 Opportunities.............................................................................................................................................. 4 Threats........................................................................................................................................................ 4 Financial Analysis.......................................................................................................................................... 5 Segment Profitability Analysis: ..................................................................................................................... 6 Key Success Factors ...................................................................................................................................... 6 Competitor Analysis ...................................................................................................................................... 7 Five Forces Analysis ...................................................................................................................................... 8 Alternatives and Discussion ........................................................................................................................... 9 Alternative 1 Back to Basics ................................................................................................................... 9 Alternative 2 Expand Fresh Dough Operations .................................................................................... 10 Alternative 3 Review Existing Locations ............................................................................................. 10 Alternative 4 Expansion Through Franchise Operations ...................................................................... 11 Alternative 5 Expand Catering Segment ............................................................................................... 12 Recommendations and Action Plans............................................................................................................ 12 Recommendations .................................................................................................................................... 12 Action Plans ................................................................................................................................................. 13 Contingency Plan ......................................................................................................................................... 14 Attachments ................................................................................................................................................. 14 Exhibit 1 ................................................................................................................................................... 14 Exhibit 2 ....................................................................................................................................................... 15 Exhibit 3 ....................................................................................................................................................... 17 Exhibit 4 ....................................................................................................................................................... 17
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Introduction
The Panera Bread Company grew out of many years and commitment to the bakery-caf concept of Louis Lane and Ron Shaich. Their original company, Au Bon Pain, utilized the idea of a market for consumers which lay between a typical fast food restaurant, such as McDonalds, and a regular seated and served restaurant. This was achieved by offering better quality foods and a quick dining experience in a friendly, cozy atmosphere. The Au Bon Pain Company started servicing the American East coast focusing in malls, shopping centres and airports and successful operations during the 1980s and 1990s led to the acquisition of Saint Louis Breads, where all locations outside Saint Louis would be renamed The Panera Bread Company. In 1998, Ron Shaich convinced the Board of Directors to focus exclusively on the Panera Bread brand where the fresh-dough, unique dining experience with quality light foods and soups could be a national, winning concept. The Board agreed and all Au Bon cafes where sold for $73 Million dollars. The resulting profits left the new Panera Company in an enviable, debt-free position to start the next phase of the venture. The company aggressively started new caf openings and franchise opportunities for strongly committed applicants who had to might eight stringent criteria such as a $7.5 M net worth and cultural match in philosophies. Panera is now recognized as a leading player in the competitive restaurant industry and continues to ensure their cafes remain current with health and environmental concerns, while offering quality food following their commitment to Product, Environment and Quality Service (PEGS).
Problem Statement
Panera Bread Company is at a crossroads of how to meet its target expansion goal of 2,000 restaurants by the end of 2010, and become a nationally- recognized brand name in their segment. In addition, Panera needs to improve sustainable profitability in order to meet its 25% EPS annual growth target that it missed in 2006. Paneras current goals and strategies need to be evaluated and adjusted to its current reality to ensure its future success and growth in a highly competitive market.
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SWOT Analysis
Strengths Panera Bread is widely recognized as the nationwide leader in the specialty bread segment The company has a high level of customer loyalty and customer satisfaction In 2005, the company was rated among the best of 121 competitors in the Sandlemen & Associates national customer satisfaction survey and has also won best of awards in nearly every market across 36 states in 2005 Uses ingredients that are free of preservatives or chemicals The bakers are well trained Wide menu selections to provide target customers with products built on the companys bakery expertise Menu offerings are reviewed and revised regularly to ensure customer preferences are met The companys fresh-dough-making capability provides a competitive advantage Strong management and marketing team leading the companys expansion by opening more locations annually Weaknesses Some ingredients used at the fresh dough facilities were sourced from a single supplier which may cause supply problems in the future if the relationship with the supplier sours or is terminated Alcohol beverages are not part of the companys menu selection and could be a competitive disadvantage Opportunities Consumers are prone to give newly opened eating establishments a trial and would return if they experience good service Growth expansion through company-owned cafes and franchising is promising Expansion of Paneras catering business may be a way of boosting revenues
Threats The nature of the restaurant industry is fiercely competitive The restaurant business is labor-intensive, capital intensive and risky The life span for some restaurants can be very short depending on fads
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Financial Analysis
Panera Bread Company followed an aggressive growth strategy set to capitalize on market potential by opening company-operated and franchised stores as fast as was prudent. This is evident from the increase in the number of cafs from 262 in 2000 to 1027 in 2006 (Exhibit 3) a massive increase of 392% over the last seven years. During that period, expansion of company-operated stores amounted to 434% (from 90 to 391 stores) while the number of franchised stores increased by 370% (from 172 to 636 stores). Between the years 2005 to 2006, system-wide revenues increased by 19.73% (1,596.6M to 1,911.6M) however, the basic earnings per share (EPS) only increased by 11.24% (from $1.69 to $1.88) over the same period, which is much lower than the EPS annual target growth rate of 25%. This is because since 2005 restaurant openings have been dominated by corporate-owned locations rather than franchises. Prior to 2005, franchise openings dominated Paneras growth, averaging 72% of the total 479 new restaurants. Since 2005, this has been reversed and corporate-owned establishments now account for the majority of new openings at 58% or 169 restaurants out of 286. Corporate-owned stores not only carry more risk they also carry all the costs associated with running each location, whereas franchise-owned operations are just a steady stream of revenue to the parent company without the risk and therefore increase overall earnings and EPS. We can see this deterioration in the financial statements after 2005. Although total revenues for Panera Bread Company have increased significantly overall, the pace of revenue growth appears to have slowed down from 2005 to 2006 in comparison to previous years with franchise royalties and fees leading the decline in the date of growth (Exhibit 1). Bakery-caf expenses as a
percentage of bakery-caf sales has gradually increased from 79.3% in 2003 to 81.5% in 2006 which indicates that it is becoming progressively more expensive to operate these bakery-cafs. On a positive note, the cost of sales of fresh dough has decreased over the years either due to lower costs of ingredients and/or improved internal processes. It appears that total costs and expenses are rising in relation to total revenues while operating profits and net income are on the decline. Paneras operating profits have shrunk by 2.7% from 2003 to 2006 and its net income has decreased from 8.43% in 2003 to 7.1% in 2006 (Exhibit 1). Even though the current ratio has declined from a high of 1.58 in 2003 to 1.16 in 2006, it is still within an acceptable range indicative of Paneras ability to meet its current obligations as they become due and also the ability to finance operations without the need to incur additional short-term debt. On the plus side, the working capital ratio is positive and the debt-to-equity ratio signals creditworthiness and good balance sheet strength. The debt-to-assets ratio at 0.27 (Exhibit 1) indicates that Panera Bread is on sound financial footing and does not face any real risk of bankruptcy at present.
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come at the expense of revenues generated from the other two segments: Franchises and Fresh-dough sales. In 2003, 10% of total revenues came from Franchise royalties and fees. This level dropped to 7% of total revenue during 2006. Likewise, revenue from fresh-dough sales made up 15% of total revenue of 2003 and dropped to 12% in 2006. The trend analysis of bakery-caf expenses from 2002-2006 indicates that the cost of operating these stores is on the rise, and therefore, its profitability is adversely affected as evidenced by the overall trend in decreasing operating profit margins and net income (Exhibit 1). In going forward, it may be wise for the company to focus attention on expanding operations through franchising and fresh-dough sales as these segments appear more profitable than company-operated bakerycafs.
Panera Bread has a very strong marketing team and the company has dominated market share in the industry. In addition, it is continuously expanding operations through franchising. Paneras stores are located in areas 6|Page
where market penetrations are high and people in the area are willing to dine out. Panera uses ingredients that are free of preservatives and chemicals. The dough is freshly made daily in its own facility to ensure high product qualities. New products are introduced on a regular basis and the menus are periodically revised to ensure consumer expectations are met and interest maintained. Currently, Panera has strong, longterm relationships with its suppliers. The Panera strategy has been based on broad differentiation, offering many product variations and a wide selection, emphasizing differentiating features, constant innovation and premium pricing. Analysis of Panera Breads past financial results indicates that it is currently faced with rising production costs and hence decreasing profitability. Industry and competitor analysis indicates increasingly fierce competition from value-based fast-food chains. Going forward, it is important that Panera address these two challenges in order to stay competitive, improve profitability and protect market share. Competitor Analysis The nature of the restaurant industry is very competitive. Major competitors that are closely competing with Panera including: Atlanta Bread, Applebees Neighborhood Grill and Bar, Chilis Grill and Bar, Au Bon Pain, Brueggers, California Pizza Kitchen, Cracker Barrel, and Starbucks. Information on the top five competitors follows: Company Applebee's Neighborhood Grill and Bar Number of Locations, 2005-2006 Select 2005 Financial Data 1,730+ locations in 49 states, plus some 70 locations in 16 other countries 2005 revenue of $1.2 billion; average annual sales of $2.5 million per location; alcoholic beverage accounted for about 12 percent of sales Key Menu Categories Beef, chicken, port, seafood, and pasta entrees plus appetizers, salads, sandwiches, a selection of Weight Watchers branded menu alternatives, desserts, and alcoholic beverages Chili's Grill and Bar 1,074 locations in 49 states and 23 countries Average revenue per meal of approx. $12; average capital investment of $2.4 million per location Chicken, beef, and seafood entrees, steaks, appetizers, salads, sandwiches, desserts, and alcoholic beverages Cracker Barrel 527 combination retail stores and restaurants in 42 states Restaurant sales of $2.1 billion in 2005; average restaurant sales of $3.3 million Two menus (breakfast and lunch/dinner); named "Best Family Dining Chain" for 15 consecutive years
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Bruegger's
Au Bon Pain
Baked goods (with a focus on croissants and bagels), soups, sandwiches and wraps, and coffee drinks
As indicated in the competitors information above, Applebees Neighborhood Grill and Bar has a very strong market position and offers a variety of menu categories including a selection of Weight Watchers branded menu alternatives in 1,730+ locations nationally and internationally. As consumers concern grows with healthy food choices, Applebees Weight Watchers branded menu alternatives would be a threat to Panera. The other four close competitors are showing strong market positions and also offer a variety of menu selections. Most of these competitors offerings are similar to Paneras but some competitors offer alcoholic beverages which Panera does not include in its menu categories. Consumers who enjoy alcoholic beverages as part of their dining experience would opt for such restaurants over Panera.
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130 million U.S. consumers are food service patrons at an eating establishment on a typical day; market growth is promising and could encourage new entrants. Consumer loyalty to existing restaurants is low and consumers are prone to give newly opened eating establishments a trial; favorable reviews encourage return visits and/or frequent customers which would encourage new entrants.
Competition from Substitutes - Varies Depending on Consumer Preferences Switching costs to substitutes are low. The primary consumers of fast-casual restaurants are those who are looking for quick-service dining with enticing menus, higher food quality and a more inviting dining environment than those of the fast food restaurant. The Bargaining Power and Leverage of Suppliers A Weak Competitive Force Ingredients can be obtained from a variety of suppliers. Suppliers are not likely to integrate forward or backward as it is not economically viable.
The Bargaining Power and Leverage of Buyers A Strong Competitive Force Cost of switching restaurants is low. Many consumers are willing to try new eating establishments, they may switch if they were pleased with their dining experience. Many competitors are offering similar menu selections.
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Panera should perform an in-depth analysis of its menu items and limit its offerings to the most successful ones. It needs to look at the profitability of its ingredients. For example, is the demand (and profit margin) for natural, antibiotic-free chicken great enough to justify its expense over regular chicken? Are the artisan sweet goods providing the required level of profitability? Is it necessary to have 5 varieties of scones? Panera should review margins on the products they sell and drop slow moving or low profit items (Focused Strategy). Panera also needs to stop trying to be all things to all people. Its success was initiated by its differentiation strategy and not by copying other companies. Advantages: Reducing the number of menu offerings to core items will reduce product costs, labour costs and other costs such as power (less in-store baking) and increase profitability; Disadvantages: There is a potential for loss of some customers due to Paneras streamlining of menu offerings. Alternative 2 Expand Fresh Dough Operations This segment is growing in both revenues and profitability. The segment margin for fresh dough operations was 13.3% in 2005 and 15.48% in 2006, an increase of 16.41%. The company should look at the possibility of expanding its dough sales to other non-competing companies. If there is available, unused capacity, this may provide additional revenues/profits and better use of assets. Advantages Making alliances with other companies may provide increased revenues and better use of available labour and capital assets, thereby increasing segment profits. Disadvantages The formation of strategic alliances may result in higher maintenance costs, and distract from Paneras core business. Alternative 3 Review Existing Locations Examine existing locations closely and close those which are not meeting company profit expectations. Panera should determine if any locations are losing money, and if so, why. Is the advertising strategy in the unprofitable market effective? Panera has traditionally taken a soft approach to its advertising campaigns. Perhaps it is time for a more aggressive means of marketing. Are the menu items suitable for the location? If all efforts to revive profitability in these locations have failed, these cafes should be closed to prevent further drain on the companys resources. 10 | P a g e
Advantages: Closing unprofitable locations will reduce losses and increase overall profitability; Disadvantages: Closing locations may also cause damage to the companys reputation; revenues will be reduced, and shareholders confidence may decrease; Alternative 4 Expansion through Franchise Operations The franchise operations need close examination. The franchised locations are performing better on a weekly basis than the company-owned locations, with franchise operations doing $39,894 (2006) versus $37,833 for company-owned locations. Franchise operations also increase revenue without adding expenses to Paneras bottom line because the burden of operational expenses lies with the franchisee. The company has many opportunities for franchise expansion in markets that have not previously been explored. A focused expansion into areas where there is less saturation may prove to be very profitable i.e. L.A., Miami, Northern California or Canada. We are not given the investment requirements for other, similar, restaurants, but it seems the requirements Panera sets are unusually high. Why is there a need for each franchisee to commit to opening 15 bakerycafes in six years? This would limit the number of potential franchise owners and place undue stress on existing franchise owners. Perhaps opening the market to more franchisees with less location commitments would prove more successful in the long run. This move may alleviate the necessity for the parent company to repurchase locations, as well as increasing franchise fees and dough sales, thereby increasing overall profitability. In addition, Panera should remove the clause allowing its purchase of franchisee locations any time five years after the execution of the franchise agreement. Given the prerequisite to open 15 locations in five years, it would appear to be a strong disincentive to potential new franchisees. Panera could also adopt a more aggressive advertising campaign with its franchisees and contribute a higher percentage towards advertising. This would help entice more franchisees as well as increase brand awareness. Advantages: Reducing the franchise investment would provide greater potential for more locations, increased franchise revenues, increased profitability; Expansion will enlarge the customer base and spread business risk across a wider foundation; - facing competition in low penetration area or Canadian market (eg: Applebees is doing well in Canada); Expansion of franchise operations will provide new revenue streams for all segments, and increased namebrand awareness which may benefit all markets; 11 | P a g e
Franchise operations add revenue without the burden of additional expenses and the additional revenue increases earning and EPS. Disadvantages: Expansion into new markets may require significant capital investment in that new dough making facilities may be required; Alternative 5 Expand Catering Segment Adding the catering program increased revenues by $80 million in 2005. Panera could focus on expansion of this program to help increase EPS and overall profitability while gaining the opportunity of a relatively new market without changing the brand image. Advantages: Increased revenues, increased profitability and increased brand awareness. Disadvantages: Increased capital investment for dough-making facilities; distraction from core business.
and cutting costs to increase profitability may cause loss of interest and end up losing consumers and market share in the long run. Alternative 2 is not recommended. Paneras fresh dough is sold to company owned and franchised bakery cafs. The increase in fresh dough profit positively correlates to increasing demands from company bakery and franchised bakery cafes. Even though Panera could sell dough to other non-competing companies and use this side business to generate more revenue, it can potentially increase business risk, qualify control risk, operation and management complication, and incur additional costs. Alternative 3 is not recommended. Evaluation of costs and benefits of existing locations is important. Panera is facing rising costs from 2003 to 2006. However the need of immediately addressing this issue is not strong. Increasing cost relates to increasing sales. With a strong balance sheet, increasing earnings per share, and healthy operation profits, it will be less effective for the company to focus strategy on cutting locations at this stage. Alternative 5 is not recommended. Expanding the catering program will help the company extend its market and generate more revenue. However it represents an insignificant portion of companys business. Increasing capital investment in additional physical facilities could slow down expansion on other business lines and distract Paneras core business. It is not in companys best interest to focus on this side business at the current stage.
Action Plans
Date Item Description Market research on new regions and low penetration areas in United states for possible expansions, market research of meal habits of Canadians Re-evaluate franchise application criteria based on franchisees operation and performance data Specialty evaluation team reviews market research results and draft report to management to explain feasibility of expansion in these new areas Management approve of expansion to new areas Identify specific strategic plan to expand to new areas and low penetration areas Based on analysis and re-evaluation, revise franchise application criteria and make it more achievable and easier for new franchise applicants Increase advertising such as commercial, radio, networking, on new region in United States, low penetration areas and possible Canadian areas Assign contacting staff for new franchise application in new areas and low penetration areas Evaluate and approve new applicants in new areas
Immediately Market research Franchise application Immediately criteria re-evaluation Analyze market research result Management decision of possibility of expansion Identify strategic plans for expansion Reduce franchise application constraints
2 months
Increase advertising Assign contacting staff Evaluate and approve new applicant
Long term
Provide support Provide training Re-evaluate strategies and make adjustment Continue to provide leadership, support and help to franchisees
Provide franchisee help including site selection assistance, lease review, design service and new store opening assistant Start providing various training programs to new franchisees Re-evaluate strategies and make adjustments based on current market conditions and accommodate changes Continue providing leadership, controls and support to franchisees and maintaining good working relationship with franchisees
Contingency Plan
In case Paneras management would like to withhold any further expansion, alternative 3 can be considered. Decreasing profit and increasing costs could be due to various reasons including changes in population mix in local areas, increasing health concerns, new openings of competitors stores, etc. Panera needs to review operations and conduct profit analysis to identify factors that caused its costs to rise. Conducting market and consumer research helps identify factors which affect performance in certain locations. Based on analysis of the results, Panera could improve performance by introducing new items and dropping slow moving and low profit items. For those locations which continue generating poor contributions, Panera can review lease agreements and make decisions on whether to discontinue under-performing locations or relocate existing cafes.
Attachments
Exhibit 1
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Panera Bread Company - Ratios Y.O.Y. % change in bakery-caf sales Y.O.Y. % change in franchise royalties & fees Y.O.Y % change in fresh dough sales Y.O.Y. % change in revenues Food and paper as % of bakery-caf exp Labour as % of bakery caf exp Occupancy as % of bakery-caf exp Other operating exp % bakery caf exp Bakery-caf exp as % of bakery-caf sales Fresh dough cost of sales /dough sales Total costs & expenses / total revenue Operating profit as a % of total revenue Net income as a % of total revenue Current ratio = CA / CL Working capital = CA - CL Debt-to-assets ratio = total debt/ total assets Debt-to-equity ratio = Total debt/total equity
2006 33.4% 13.3% 17.0% 29.5% 36.3% 37.8% 9.0% 17.0% 81.5% 84.5% 89.0% 11.0% 7.1% 1.16 18,008 0.27 0.36
2005 37.9% 22.2% 19.3% 33.6% 35.5% 37.7% 9.3% 17.4% 80.4% 86.7% 87.3% 12.7% 8.2% 1.18 15,909 0.28 0.38
2004 36.2% 22.6% 18.0% 31.7% 35.1% 38.2% 9.2% 17.6% 80.2% 90.4% 87.1% 12.9% 8.0% 1.05 2,515 0.26 0.35
2003 25.1% 29.9% 47.6% 28.9% 35.0% 38.5% 9.0% 17.5% 79.3% 89.3% 86.3% 13.7% 8.4% 1.58 26,079 0.18 0.24
Notes
Trend - rising costs Trend - decreasing costs Trend - rising costs Trend - decreasing Trend - decreasing Trend - declining but within acceptable range Positive Low risk of bankruptcy Good balance sheet strength
Exhibit 2
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Selected Consolidated Financial Data for Panera Bread, 2002 - 2006 ($ in millions, except for per share amounts)
Income Statement Data Revenues: Bakery-caf sales Franchise royalties & fees Fresh-dough sales to franchisees
Bakery-caf expenses: Food and paper products Labour Occupancy Other Operating Expenses Total Bakery-caf Expenses
Fresh dough cost of sales to franchisees Depreciation and amortization General & administration expenses Pre-opening expenses Total costs and expenses Operating profit Interest expense Other (income) expenses net Provision for income taxes Net income Earnings per share Basic Diluted Weighted average shares outstanding Basic Diluted Balance Sheet Data Cash and cash equivalents Investments in govt securities Current assets Total assets Current liabilities Total liabilities Stockholders' equity Cash Flow Data Net cash provided by operating activities Net cash used in investing activities Net cash provided by financing activities Net inc/(dec) in cash & cash equivalents
85,618 44,166 59,306 6,173 738,179 90,792 92 1,976 33,827 58,849 1.88 1.84 31,313 32,044
75,036 33,011 46,301 3,241 559,180 81,095 50 1,133 29,995 52,183 1.69 1.65 30,871 31,651
65,627 25,298 33,338 2,642 417,301 61,838 18 1,065 22,175 38,430 1.28 1.25 30,154 30,768
54,967 18,304 28,140 1,531 313,764 49,938 48 1,592 17,629 30,669 1.02 1.00 29,733 30,423
38,432 13,794 24,986 1,051 248,184 34,041 32 467 12,242 21,300 0.74 0.71 28,923 29,891
104,895 110,628 84,284 90,917 - 129,640 - 102,291 13,668 13,824 5,244 27,646 5,188 12,763
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Exhibit 3
Exhibit 4
Panera Bread Company Income Statement Data - Extract Revenues $: Bakery-caf sales Franchise royalties & fees Fresh-dough sales to franchisees Revenues as % of total revenue: Bakery-caf sales % Franchise royalties & fees % Fresh-dough sales to franchisees % Total 2006 2005 2004 2003 2002
212,645 27,892 41,688 282,225 75% Trend - increasing 10% Trend - decreasing 15% Trend - decreasing 100%
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