PANERA BREAD COMPANY CASE STUDY

PANERA BREAD COMPANY CASE STUDY ANALYSIS Jeremy Svagdis Columbia College June 18, 2012

PANERA BREAD COMPANY CASE STUDY

History: Panera Bread Company and its subsidiaries operate a national bakery-cafe concept with 1,541 Company-owned and franchise-operated bakery-cafe locations in 42 states, the District of Columbia, and Ontario, Canada, serving almost 6.5 million customers a week (Panera Bread Company 2011 10-K). Paneras bakery-cafes are located in urban, suburban, strip mall, and regional mall locations. Panera features high quality, value priced food in a warm, inviting, and comfortable environment. With our identity rooted in handcrafted artisan bread we bake every day, we are committed to providing great tasting, quality food that people can trust (Panera Bread Company, 2011 10-K, 2012). Panera operate as three business segments: Company bakery-cafe operations, franchise operations, and fresh dough and other product operations. (Panera Bread Company, 2011 10-K, 2012). There are 740 Company-owned bakery-cafs, 801 franchise operated bakery-cafs, and 24 fresh dough facilities (22 are company owned, and 2 are franchise operated) (Panera Bread Company, 2011 10-K, 2012). Total revenues in fiscal 2011 increased 18.1 percent to $1,822.0 million compared to $1,542.5 million in fiscal 2010. Net bakery-cafe sales in fiscal 2011 increased 20.6 percent to $1,593.0 million compared to $1,321.2 million in fiscal 2010. Franchise royalties and fees in fiscal 2011 increased 7.7 percent to $92.8 million compared to $86.2 million in fiscal 2010 (Panera Bread Company, 2011 10-K, 2012).

Identification of Resources: Through this recession, as many are wondering where they are getting their next meal from, Panera Bread Company has expanded operations, experienced double digit yearly earnings increases, and watched as their stock price continues to rise. A startup more than twenty years ago, Panera Bread Company has amassed and refined their resources. Potentially their greatest resource, CEO Ronald Shaich created Panera as place that could be an everyday oasis for those seeking higher quality food, a sweet treat, or maybe a smoothie. Panera offers a great variety of healthy, fresh menu items. Panera has done much to earn their corporate Goodwill and brand name recognition. There is comprehensive front and back house training of employees, whom they see as skilled providers of the Paneras Concept Essence, and not merely cogs in machine. Something unique, Panera gives healthcare benefits to everyone who works 25+ hours a week, employee stock purchase plan, and competitive, or many times, higher wages than competitors. The well trained associates and owners in return maintain excellent quality control. The high quality of food, and excellent quality control had led to a great amount of Goodwill for the company, as well as brand name recognition. Much of the advertising and

PANERA BREAD COMPANY CASE STUDY marketing for Panera is by word of mouth. Through traditional advertising and word of mouth advertising, Panera reaches their target audience. Their mix of advertising mediums include television, radio, billboards, social networking, and in-store sampling days (Panera Bread Company 2011 10-K).

Capabilities: Paneras healthy, value-oriented menu provided customers with a variety of choices building on Paneras baking expertise. Menu items were regularly reviewed and updated. Panera did not use a test kitchen. Instead, many of the menu offerings had their start at the Research and Development teams twice-yearly retreats to the Adirondacks, where team members took turns trying to out-do each other. Many creations have come directly from these retreats to the bakery-cafs. These tasty treats added to Paneras product differentiation and aided in spurring on growth. As Panera expanded operations, it used its cash to build new bakery-cafs that generated a high ROI, as Panera took advantage of the recessionary factors that were driving costs down, while still remaining focused on finding locations that would deliver high sales volume. Panera was also able to negotiate favorable terms on real estate leases, as well as food supply contracts due to solid name recognition and perceived stability of the Panera Bread Company corporate brand.

Core Competencies: Panera has developed and proven many core competencies. From the beginning Panera has had the goal to exceed customer expectations. This starts with the selling of high quality mid-priced food. Ensuring that Panera will always bake good bread are the regional fresh dough distribution centers, that deliver the high quality dough for the bakery-cafs to bake. Panera will regularly review and innovate our menu offerings to feature new taste profiles we believe our customers crave (Panera Bread Company 2011 10-K). We believe our menu innovation is one reason our value scores with customers remain so strong. Zagats 2011 consumer-generated National Restaurant Chains Survey for eating onthe-go rates us number one among chain restaurants with fewer than 5,000 locations in the Best Salad and Best Facilities categories while ranking us among the top five in the Best Value, Best Grilled Chicken, Top Service, and Best Breakfast Sandwich categories (Panera Bread Company 2011 10-K). Management of corporate and franchise growth, as well a deep sense of community involvement and the desire to give back to community, further solidify Paneras placement as something different in today marketplace. Paneras deep sense community can be seen as Panera gives away leftover bread to homeless shelters and collects money for other charitable causes such as the Operation Dough-Nation program, and the opening of the Panera Cares bakery-caf in Missouri, which had no set prices; instead customers were asked to pay what they wanted (Wheelen 32-4).

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Fact # 1 - Paneras Concept Essence differentiates them from the competition. Paneras Concept Essence differentiates them from the competition. It is Paneras blueprint for attracting and retaining customers. Panera brand is customer friendly approach; signature caf designed interior, warm furniture, and fireplace, as well as convenient locations, focusing on the product niche Artisan fast food. Concept Essence begins with artisan bread, quality products, and a warm, friendly, comfortable environment. It calls for each of our bakery-cafes to be a place customers can trust to serve high quality food. Bread is our passion, soul, and expertise, and serves as the platform that makes all of our other food special (Panera Bread Company, 2011 10-K, 2012). Part of Paneras Concept Essence is the creation of an ambience in their bakery-cafs, and continuing of a culture within Panera that is warm, inviting, and embracing CEO Ronald Shaich interpreted the culture and conditioning prevalent in the fast food restaurants. In the 1990s, in many ways, fast-food restaurants were self-service gasoline stations for the human body. People began to wake up and say, "I deserve something better." We can do bread the way our grandparents did it: no preservatives, no chemicals, with a stone deck oven. The quality of food came not just from how cheap it was, and not just how fast it was served. It was food defined by the quality of the ingredients, the taste, the flavors, how fresh it was. The environment in stores was part of that, and the people who work there were part of that. We wrote that vision on a piece of paper in 1994, and it hasn't varied (Bloomberg BusinessWeek, 2010). We believe that operational excellence is the most important element of Panera Warmth and that without strong execution and operational skills, it is difficult to build and maintain a strong relationship with our customers. To develop a strong connection with our customers, our bakery-cafes are staffed by engaged associates who are skilled at and passionate about their jobs. Additionally, we believe high-quality restaurant management is critical to our long-term success and, as such, we provide detailed operations manuals and hands-on training to each of our associates (Panera Bread Company 2011 10-K). We believe that our strategy of increasing our store profit through investing in the quality of our customers experience to drive differentiation and competitive advantage, unit growth, driving operating leverage and deploying our excess capital in high-ROI investments positions us well to continue to deliver our targeted long-term EPS growth rate of 15% - 20% annually (Panera Bread Company 2011 Annual Report). Paneras dedication to their belief in Concept Essence allows the company to enjoy brand loyalty, positive name recognition, and goodwill. Most of Paneras marketing historically has been by word of mouth, recently Panera has been incrementally increasing advertising budget, now spending approximately 1.5% of revenue on sales and marketing. Shaich believes Panera is in the right place in terms of strategic approach, content, media, and that our customers will view these efforts as an extension of Panera, rather than a departure from. That said we will undoubtedly keep refining our efforts (Gutman, 2011). With that, Panera is launching a new marketing campaign the draws attention

PANERA BREAD COMPANY CASE STUDY to the differences, and the little extras that Panera chooses to do for its customers. This campaign will focus on the items that single out Panera from the competition, including the baking of fresh bread daily and Paneras lettuce program, which has decreased the transit time for lettuce from the field to our customers in half (Gutman, 2011). Panera feels that they have an important story to tell. This campaign is indeed important to Panera. It is the largest and most significant ad campaign run by the company. Paneras Make Today Better campaign will have a price tag of $40 million spent. This amount may seem large to Panera, but Paneras media spend is slightly over 1% of revenues in an industry where the competition is spending on average 3-5%. CEO Ronald Shaich has said, Paneras history is one of zigging when others zag. When others retrenched during the recession, we invested in our products, services and our differentiationOur business is strong. Weve been one of the best performing restaurant companies during the recession. We think marketing will add tailwind towards ensuring that position into the future (Gutman, 2011). Shaich continues stating his beliefs, In times of great change, which is what this recession represented, it was an opportunity to create significantly greater competitive differentiation, competitive advantage. So when everybody pulled back, we actually invested. And we invested in the customer experience, in product development, we invested in marketing in a very serious way, we invested in operations and we invested in category management. And we said now is the time to stay the course, to continue our game and to continue doing this strategy that served us so well over the prior decade (Bruno, 2010).

Fact # 2 - Franchising in Key to Paneras Success Our success in part depends on the success of our franchisees business (Panera Bread Company 2011 10-K). As of December 27, 2011 there were had 801 franchise-operated bakery-cafs open and operating, and Panera has commitments for an additional 195 franchise-operated bakerycafs to open. When franchisee purchase from Panera, the do not purchase the right for just one franchise. Instead, the purchase the right to develop and area, and they must open an agreed upon number of franchises in a certain amount of time. The timetables for opening these bakery-cafes are established in the various Area Development Agreements, referred to as ADAs, with franchisees, which provide for the majority of these bakery-cafes to open in the next four to five years. The ADAs require a franchisee to develop a specified number of bakery-cafes on or before specific dates (Panera Bread Company 2011 10-K). Our franchisees, which as of December 27, 2011, operated approximately 52.0 percent of our bakery-cafes, are comprised of 40 franchise groups with an average of approximately 20 bakery-cafes per group (Panera Bread Company 2011 10-K). As of December 27, 2011, we had 801 franchise-operated bakery-cafes open, all located in the United States, and we have received commitments to open The revenues we receive from a typical ADA include a franchise fee of $35,000 per bakery-cafe (of which we generally receive$5,000 at the signing of the ADA and $30,000 at or before the bakery-cafe opening) and continuing royalties, which

PANERA BREAD COMPANY CASE STUDY are generally percent to 5 percent of net sales per bakery-cafe. Franchise royalties and fees in fiscal 2011 were $92.8 million, or 5.1 percent of our total revenues. Our franchise-operated bakery-cafes follow the same protocol for in-store operating standards, product quality, menu, site selection, and bakery-cafe construction as Company-owned bakery-cafes (Panera Bread Company 2011 10-K). We believe in providing bakery-caf operators the opportunity to share in the success of the bakery-cafe. Through our Joint Venture Program, selected general managers and multi-unit managers may participate in a bonus program, which is based upon a percentage of the cash flows of the bakerycafes they operate over a period of five years (subject to annual minimums and maximums). We believe the programs multi-year approach improves operator quality, management retention, and creates team stability, generally resulting in a higher level of consistency and customer service for a particular bakerycafe. It also leads to stronger associate engagement and customer loyalty (Panera Bread Company 2011 10-K).

Fact #3 No Debt is good for growth. Our primary capital resource is cash generated by operations. We also have access to a $250.0 million credit facility. During fiscal 2011 we had no borrowings outstanding (Panera Bread Company 2011 10-K). We believe the best use of our capital is to invest in our core business, either through the development of new bakery-cafes or through the acquisition of existing bakery-cafes from our franchisees or other similar restaurant or bakery-cafe concepts, such as our acquisition of Paradise Bakery & Caf, Inc (Panera Bread Company 2011 10-K, 2012). We ended 2011 with $223 million of cash on our balance sheet and no debt. We have been able to deploy more than $400 million in excess capital since the first half of 2010 to increase shareholder value and drive EPS (Panera Bread Company 2011 Annual Report). As we have often said, we believe the best use of our capital is to build new high return on investment (ROI) Panera Bread bakery-cafes. In 2011, we increased our number of bakery cafes by 8%, by opening 112 new bakery-cafes system-wide. Our Company-owned new unit average weekly sales (AWS) volume was $41,637 for the full year 2011. This represented the highest new unit AWS in our history, topping last years record year (Panera Bread Company 2011 Annual Report). Since the end of 2007, about the time the U.S. recession began, Panera Bread (PNRA) has boosted revenue 24 percent and added 191 caf-bakeries to its 1,421-unit chainall while increasing its workforce by 20 percent with the hiring of 4,661 extra workers. The U.S. restaurant industry, meanwhile, saw same-store sales drop 2 percent last year, including a 4.7 percent decline at casual restaurants, according to a Restaurant Research analysis of chains with more than $1 billion in sales. Since the start of 2008, the Standard & Poor's Midcap Restaurants index is up 4 percent, while shares of Panera, which is based in Richmond Heights, Mo. near St. Louis, are up 161 percent, trading less than a dollar below their Oct. 22 record of 94.40 (Bloomberg BusinessWeek). Panera has continued to invest in labor, training, quality, and skill of the people working at their bakery-cafs. More money has gone into the quality of the food. Panera did what no one else was doing. When others cut costs and decreased spending, Panera did the opposite, increasing costs,

PANERA BREAD COMPANY CASE STUDY providing a better products, and resultant customer loyalty. Panera has experienced almost double digit same store sales increase for more than a year, and the stock price has tripled. With a debt-free balance sheet, Panera had the ability, and flexibility to spend more, expand operations, and take advantage of depressed prices. Shaich believes that the best time for expansion is during a recession. During the times when the economy was booming, Panera had to stand by and wait for the right opportunities. Sticking with the disciplined approach to find the right place and the right price, Panera has been able to build more stores during a time when construction and real estate costs are low, and Panera sales volumes are high (Bloomberg BusinessWeek, 2010).

SWOT Analysis: Strengths: Panera provides excellent customer service, premium food at moderate prices resulting in increased customer satisfaction and customer loyalty. Paneras fresh, quality food is seen as healthy. Paneras value-oriented menu is designed to provide our customers with fairly priced products built on the strength of our bakery expertise (Panera Bread Company 2011 10-K). Their catering business and regional distribution of dough has allowed them to become the National Leading Bakery Caf. Being the national leader, affords Panera financial strength (to meet obligations, and pursue expansion). We believe our competitive strengths include more than just great food at the right price. We are committed to creating an ambiance in our bakery-cafs and a culture within Panera that is warm, inviting, and embracing (Panera Bread Company 2011 10-K). This ambiance and culture has created corporate goodwill, and has increased the value of the Panera brand and name.

Weaknesses: The first weakness of a national restaurant chain brand is that customers not as connected as they would be in a smaller locally owned and operated deli/bakery which creates very loyal clientele. Although Panera has been able to be virtually immune to the recession, they are operating in an industry that governed by discretionary income and spending. If the economy continues to slide further into a depression, there will become a point where the employed will decrease spending and the unemployed cannot afford to visit. The leasing of real estate and the cyclical nature of prices can become a weakness of Paneras as real estate prices rise. The offsite preparation of the dough at regional facilities, due to geographic limitations and current bakery-caf locations, can result in underutilization of plant capacity and equipment. The remotely made dough also requires delivery, and increased costs of fuel and other raw materials can affect delivery cost. Paneras historically low marketing spending could be seen as a weakness as the market matures and competition increases. An interesting observation that may indicate an underlying weakness is that franchisee sales are higher than corporate sales.

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Opportunities: Panera has numerous opportunities within their market segment. In addition to geographic expansion including global expansion, Paneras food is seen as healthy food, and in an increasingly health conscious society, Panera will be able to reap the rewards. Paneras catering business, especially to offices, is a great opportunity for revenue and expansion. Having lunch catered by Panera takes you out of the office. It is like its own little oasis on Asiago bread. Threats: Threats facing Panera Bread Company include items that would increase operating costs, or deter people from frequenting a dining establishment. More specifically, Disruptions or supply issues in the bakery-caf supply chain or the fresh dough facilities and supply chain (including rising fuel prices) could adversely affect business and operations. Continued recession and global economic downtown could decrease amount of discretionary spending. Customers wants, needs, and desires may change. Market saturation, as well as local, regional, and potentially national competition from restaurants with similar concept/ambiance could detrimentally affect business. Loss of valued employees (associates, managers, executives, board members) could impact operations. Laws and regulations could change drastically affecting operations, trademarks, and copyrights.

The company in November 2000 was trading for $19 per share; today, a stake in the company could be yours for around $91. Total revenue in 2009 was around $1.3 billion, and Shaich says that the company is projecting earnings will be up around 26% to 27% for the year (Bruno, 2010). Co-Founder of Panera, and current CEO, Ronald Shaich evaluates the companys performance on a detailed set of metrics. These variables measure such things as the sales growth of individual product categories, accuracy of speed and service, hygiene, employee morale and turnover, variances in food and labor costs, growth in transaction per customer, and so forth. Profit is a by-product of getting a whole bunch of other things right (Deloitte, 2006).

PANERA BREAD COMPANY CASE STUDY Panera (PNRA) Stock Price Chart 2008-April 2012

http://www.nasdaq.com/symbol/pnra/stockchart?intraday=off&timeframe=5y&splits=off&earnings=off&movingaverage=None&lowerstudy=volum e&comparison=off&index=&drilldown=off

PANERA BREAD COMPANY CASE STUDY Works Cited: Bloomberg Businessweek. How Panera Bread Kept Rising Through the Recession. Bloomberg L.P. Nov 8, 2010. June 17, 2012. http://www.businessweek.com/investor/content/nov2010/pi2010118_183529.htm Bruno, Ken. Panera Bread: Making Dough Despite Tough Times. Forbes.com LLC. Oct 19, 2010. June 17, 2012. http://www.forbes.com/sites/marketshare/2010/10/19/panera-bread-making-doughdespite-tough-times/ Deloitte. Adopting the Value Habit (And Unleashing More Value for Your Stakeholders) Deloitte Development. 2006. June 17, 2012. http://www.michaelsamonas.gr/resources/us_value_AdoptingValueHabUpdated906white.pdf ECUATORIALL. How Panera Makes Your Day Better ecuatoriall.com. Feb 29, 2012. June 17, 2012 http://ecuatoriall.com/panera-day/ Gutman, Brandon. Panera Bread Launches $40 Million 'Make Today Better' Campaign. Forbes.com LLC. June 13, 2011. June 17, 2012. http://www.forbes.com/sites/marketshare/2011/06/13/panera-breadlaunches-40-million-make-today-better-campaign/ NASDAQ.com. PNRA Stock Chart. NASDAQ.com. 2012. June 17,2012. http://www.nasdaq.com/symbol/pnra/stockchart?intraday=off&timeframe=5y&splits=off&earnings=off&movingaverage=None&lowerstudy=volum e&comparison=off&index=&drilldown=off Panera Bread Company. 2011 Annual Report to Stockholders. April 16, 2012. June 17, 2012. http://www.panerabread.com/pdf/ar-2011.pdf Panera Bread Company. Form 10-K Panera Bread Company. Feb 21, 2012. June 17, 2012, from http://www.panerabread.com/pdf/10k-2011.pdf Panera Bread. Management Biographies. Panera Bread. 2012. June 17, 2012. http://www.panerabread.com/about/company/mgmt.php Wheelen, Thomas L. and Hunger, J. David. Strategic Management and Business Policy toward Global Sustainability. Upper Saddle River, New Jersey: Prentice Hall, 2012.