BLL

September 21, 2008

Panera Bread Company

Panera Bread Company is a bakery café which specializes in providing

customers with a menu of premium foods delivered to customers quickly.

The company rivals traditional fast food companies, as well as other

restaurants that cater to consumers on-the-go.

Panera Strategy

The main strategy that Panera has implemented is to provide a diverse

deli-style menu with an inviting ambience for its customers. The company’s

menu includes sandwiches, fresh-baked breads, soups and roasted coffees.

This menu delivers quality foods for consumers who do not have time to eat

in traditional restaurants. Freshly made breads are core to Panera’s success,

as customers know that they will not be served stale bakery items or bread.

Panera focuses its cafes in urban and suburban areas where customers

can gather with friends. The cafes had a signature style that created a

comfortable atmosphere for customers, while also providing free Wi-Fi

connections for customers. The atmosphere of the restaurants provides

customers with a warm setting, including comfortable seating that entices

customers to stay longer. Panera’s strategy allows it to succeed during

breakfast, lunch, daytime and early evening meals. The company strives to

be more successful that “the guys across the street”, attracting potentials

away from other fast-casual restaurants.

 The company has created a strong network of suppliers, enabling costs

to remain low within individual businesses. Panera has a network of facilities

which produce fresh dough for each bakery-café. These facilities are

strategically located around the country to provide quick deliveries to its

franchises. By providing freshly made dough, Panera has created a

competitive advantage among its rivals, ensuring consistent quality of its

products. Multiple suppliers provide Panera with its other essential goods,

preventing its suppliers from having too much leverage.

Panera’s strategy has allowed it to surpass much of its competition,

from its unique dining experience to its fresh menu of bakery items and

sandwiches. The company excels in creating an atmosphere which makes

customers feel as though they are eating at home. Furniture and fixtures

within each restaurant compliment the culture of the surrounding

neighborhood. While many rivals have flooded the market with restaurants,

many serving smaller numbers of consumers per store, Panera has taken the

approach of servicing larger populations per restaurant. This allows the

company to efficiently enhance its menus and café designs, while being seen

as a unique place to visit. Panera’s cafes offer patrons fresh deli sandwiches

and breads which can only be found at two or three other rivaling

companies. Its diverse menu brings in customers with a variety of tastes,

catering to the healthy crowd as well as consumers who are looking for a

fuller meal. Its prices are low compared to traditional restaurants, and
patrons can get there meal quickly and have plenty of time to enjoy the

aesthetics.

Though Panera’s strategy has many positive aspects, some problems

have arisen. Panera’s delivery trucks drive from 300 to 500 miles each day

to deliver fresh dough to only six cafes. Due to the restaurants being spread

from each other, the company spends excessive amounts of money using

temperature-controlled trucks to deliver dough to each location. Compared

to the high profit margins of company and franchise operated cafes, the

dough operations bring in a much smaller margin under 10%. Panera has

allowed customers to be enticed by new establishments, since cafes are

outnumbered by other restaurants. Loyalty to individual restaurants is low

due to extensive competition. By requiring potential owners to open more

than one dozen restaurants at once, Panera has limited the number of

potential owners. Owners must invest a large amount of capital, more than

$1 million per location.

Panera’s strategy closely coincides with the focused differentiation

strategy. The company does not have to compete directly with market

leaders, because most do not focus on the niche market. Panera has been

able to focus on one niche, where the market has many different niches. The

company offers deli products and coffees, while other restaurants provide

menus that include Mexican food and hamburgers. Few of Panera’s

competitors are focusing on the same target market, so the company can
create strong loyalty within its patrons. By grabbing a significant market

share within its niche, Panera is able to amass significant profits.

SWOT Analysis

Panera succeeds in tailoring its menu in the interest of its customers.

The company continually introduces new products in order to keep its

customers loyal its restaurants. While menu items change seasonally,

Panera provides its patrons with fresh products that are not easily replicated

by other businesses. Supplier pressures are kept to a minimum by the

company, since Panera produces its own dough for its breads, while many

suppliers provide the other non-essential goods. Panera has a strong

marketing campaign, where individual businesses contribute to a national

marketing campaign. With an aesthetically pleasing atmosphere, Panera

successfully caters its menu to consumers who want a quick, casual dining

experience.

Panera struggles against many of its competitors within the fast-casual

restaurant industry, since it has less than half of many lead competitors. The

company penetrates areas with populations larger than 300,000, preventing

it from competing in smaller suburban and rural communities. Panera still

struggles with early-evening customers, failing to continually get patrons

during the evening. The company’s stringent policies for potential owners

prevent new entrepreneurs from entering the business. Excessive amounts

of capital needed and the requirement of only using approved vendors limits

options for owners.

 Many opportunities exist for Panera Bread to succeed within their

market. The restaurant has yet to tap markets in more than a dozen cities,

many of which have metropolitan areas surpassing 300,000 people. Other

cities that Panera has already penetrated have a lot of room for expansion,

since the restaurant services more than 500,000 people per café. Panera

has an opportunity to extend its catering business, which generated more

than $80 million in 2005. Since the company produces its own fresh bread,

Panera could become a supplier to competitors or other vendors for fresh

products, increasing the company’s presence through joint ventures.

Panera must remain aware of threatening external factors. Since the

fast-casual dining experience is easy to penetrate, barriers to entry for new

restaurants are very low. Diverse menus from other restaurants create

greater choices for customers, luring away loyal customers. Many

restaurants already offer successful evening menus, which can reduce the

traffic at Panera. Panera’s largest rivals are Starbucks, Atlanta Bread

Company and Au Bon Pain. These cafes offer similar menus, as well as

similar dining experiences to Panera. These companies penetrate similar

markets, and are widespread around the country.

Panera has a solid financial statement, but exposes some aspects

where the company can improve. Though sales have been increasing by

more than $100 million since 2003, the growth of return on sales has fallen

1.5%. For the past five years, the return on sales and return on assets have

been flat until 2006. Return on sales fell to 8.8%, while return on assets
dropped 1% to 10%. This is due to the slowing growth of net income, with

overhead costs increasing significantly from 2004. The company has seen

its operating profit margin decrease by 2% since 2002 due to its operating

efficiencies. Panera’s dough facilities have saved the company significant

amounts of money, as the cost of dough compared to revenues fell 8% from

2003. Net working capital has not been an issue for the company; with little

to no debt, Panera has increased its net working capital by $16 million since

2004. The company’s solid performance has impressed shareholders, as the

EPS has risen 50% since 2004.

Strategic Issues and Recommendations

Panera has several issues that it must address in order to remain

competitive in the fast-casual food industry. Net profits have been slowing

during the past several years, mainly due to the increasing competition

within the industry. Selling and administrative costs have been increasing at

a greater rate than overall expenses. This is due to the strict operating
criteria set forth by Panera. By forcing owners to open at least 15 cafes at

once, Panera has made it difficult for new owners to curb costs.

While Panera has been able to lure new customers into its restaurants,

competitors are opening stores at a faster rate. Starbucks is able to serve a

smaller population of customers than Panera, allowing it customize its cafes

more to tailor to individual neighborhoods and communities. Though Panera

has heavily penetrated some larger markets, it has neglected other areas

which provide more opportunities for the company. Many other restaurant

chains have penetrated similar markets more heavily, allowing them to

individualize their services more.

Panera can remain competitive within the fast-casual dining industry

by following several recommendations:

• Open more cafes within the same area

• Penetrate new domestic markets

• Expand their catering business

Panera is already located in several large metropolitan areas; however, they

have few cafes within those areas to compete with Starbucks and Atlanta

Bread. Currently, only two restaurants are located in the Miami area, while

the Dallas area has less than a dozen locations. In order to curb costs for

transporting dough, Panera should open more restaurants in the Dallas area,

as well as begin penetrating the Austin and San Antonio markets. By having

more locations within 300 miles of each other, truckers can deliver dough
more efficiently to these metropolises. These costs will allow decrease as

more restaurants are found in a closer proximate within the same area.

Panera also needs to expand its locations in Miami and Los Angeles,

while opening cafes in New York City. These areas thrive with people

constantly on the go in need of a quality meal. The aesthetically pleasing

environment provided by Panera will create loyalty, and increase the

frequency of visits by customers. As Panera penetrates new markets, it will

allow potential owners to locate their cafes within the same area, allowing

them to work more efficiently with their clientele. The owners will gain a

familiarity with the area much more quickly, and will be able to cater to any

changing needs within their respective markets. In this manner, owners will

be more successful in operating their cafes, becoming strong experts within

their markets.

While Panera expands its operations in its current and new markets,

the company has an opportunity to expand its catering business as well.

Since the company has a strong reputation already within its communities, it

can efficiently cater to new consumers who may become customers of its
cafes later. With fresh dough already arriving at the local cafes, Panera can

quickly meet the needs of its customers. Panera can expand its operations

and gain a larger market share on its competitors by opening more cafes.

By not overloading one area with cafes, Panera will not be seen as a

commodity, but will still be more easily accessible to its patrons.