panera bread case analysis
TRANSCRIPT
Panera Bread CompanyCrafting and Executing Strategy
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 Panera’s 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 competition’s 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-café
restaurants business but across multiple dimensions challenging Applebee’s 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..................................................................................................................................................15
Exhibit 1....................................................................................................................................................15
Exhibit 2........................................................................................................................................................16
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-café 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 1980’s and 1990’s 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 café 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.
Panera’s 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.
Analysis and evaluation
Panera Bread Company’s strategic intent is to make great bread broadly available to consumers across the
United States through company owned and franchised bakery cafés that offered attractive menus and high
quality food at attractive prices in combination with superior dining ambiance and quick service to capitalize
on customer loyalty. The long-term objective is to make Panera Bread a nationally recognized brand name
and to be the dominant restaurant operator in the specialty bakery-café segment.
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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 company’s bakery
expertise
Menu offerings are reviewed and revised regularly to ensure customer preferences are met
The company’s fresh-dough-making capability provides a competitive advantage
Strong management and marketing team leading the company’s 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 company’s 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 Panera’s 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 cafés 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 Panera’s 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-café expenses as a
percentage of bakery-café 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-cafés. 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. Panera’s 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 Panera’s 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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Segment Profitability Analysis:
From the analysis in Exhibit 4, it appears that Panera's focus has been on increasing revenues in bakery-café
sales, which went up from 75% of total revenue in 2002 to 80% in 2006. However, this appears to have
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-café 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 bakery-
cafés.
Key Success Factors
Appealing marketing strategies – it is very essential in a highly competitive industry. Sound
marketing strategies will draw more consumers and increase market share.
Location – choosing the right geographic location for opening cafes is very important. Locations
with higher traffic and higher income demographics tend to generate more sales.
Customer satisfaction – Unique menus offering healthy food choices made with high quality
ingredients pricing and dining experience are factors that determine the level of customer
satisfaction. Maintaining a high level of customer satisfaction increases the possibility of repeat
customers.
Differentiation – due to the nature of the business, consumers can easily substitute the products at a
lower cost. Signature fresh artisan bread products help to differentiate the company from rivals in
order to maintain and attract more customers.
Knowing the competitors – competition is fierce in the restaurant industry. Having a good
knowledge of the competitors’ moves enables the company to alter the current strategy plan to stay
as market leader.
Strong relationship with suppliers – a long term strong relationship with the suppliers will save the
company from supply shortage and lower operating costs.
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. Panera’s stores are located in areas
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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, long-
term 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 Bread’s 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, Applebee’s Neighborhood Grill and Bar, Chili’s Grill and Bar, Au Bon
Pain, Brueggers, California Pizza Kitchen, Cracker Barrel, and Starbucks. Information on the top five
competitors follows:
Company Number of Locations, 2005-
2006
Select 2005 Financial
Data
Key Menu Categories
Applebee's
Neighborhoo
d Grill and
Bar
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
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
Two menus (breakfast
and lunch/dinner);
named "Best Family
Dining Chain" for 15
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million consecutive years
Bruegger's 260 bakery-cafes in 17 states 2005 revenue of $155.2
million; 3,500 full-time
employees
Several varieties of
bagels and muffins,
sandwiches, salads,
and soups
Au Bon Pain 190 company-owned and
franchised bakery-cafes in 23
states; 222 locations
internationally
System-wide sales of about
$245 million in 2005
Baked goods (with a
focus on croissants and
bagels), soups,
sandwiches and wraps,
and coffee drinks
As indicated in the competitors’ information above, Applebee’s 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, Applebee’s 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 Panera’s 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.
Five Forces Analysis
Rivalry among Competing Fast-Casual Restaurant – A Strong Competitive Force
Competitors consistently introduce new products to their menu selections based on changing
consumer preferences.
Industry members pursue differentiation strategies to set themselves apart from rivals via pricing,
food quality, menu theme, signature menu selections, dining ambience and atmosphere, service,
convenience, and location.
Switching costs for consumers from one restaurant to another are low; customer satisfaction and
consumer loyalty tends to be important in the restaurant industry.
Threat of Entry- A Strong Competitive Force
Many restaurants have fairly short lives due to many factors: lack of enthusiasm for the menu or
dining experience, inconsistent food quality, poor service, bad location, and meal prices could
discourage new entrants.
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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.
Alternatives and Discussion
Alternative 1 – Back to Basics
Panera’s original strategy was to provide “great bread broadly available to consumers across the United
States.” The company was originally known for its artisan breads and its upscale quick service atmosphere.
In 2006, the company, in an attempt to appease customers’ nutritional desires and attract more diners during
evening hours, made a number of changes. This entailed offering more menu items (a new line of artisan
sweet goods), upgrading the quality of ingredients (natural, antibiotic-free chicken), and adding light entrees.
In addition, the company changed many of its restaurant interiors in an attempt to create a Starbucks-like
atmosphere. The result of the menu and decor changes in strategy is an overall decline in net profit and an
increase in debt. Bakery-café expenses as a percentage of revenue rose from 80.4% in 2005 to 81.5% in
2006. Bakery-café revenues (as a percentage of overall revenue) dropped from 37.9% in 2005 to 33.4% in
2006. The bakery-café segment margin dropped from 19.59% in 2005 to 18.50% in 2006.
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)
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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 Panera’s 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 Panera’s 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 company’s resources.
Advantages:
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Closing unprofitable locations will reduce losses and increase overall profitability;
Disadvantages:
Closing locations may also cause damage to the company’s 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 Panera’s 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 bakery-
cafes 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: Applebee’s is doing well in Canada);
Expansion of franchise operations will provide new revenue streams for all segments, and increased name-
brand awareness which may benefit all markets;
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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.
Recommendations and Action Plans
Recommendations
Alternative 4 is recommended. Opening additional franchise locations is a core element of Panera’s
strategy. Panera has good control of franchise stores’ operations. Franchisees indicated high satisfaction with
Panera’s concept, leadership and overall support. The franchise-operated bakery cafés have higher average
weekly sales volumes and higher profits and return on equity than the company operated cafés. As
franchisees bear most of cost and risk of establishing foreign locations, Panera could expand franchise
business to low penetration areas, new regions in United States. Panera could also explore the possibility of
expanding its franchise business to Canadian areas. However, expanding internationally needs additional
strategic plans including availability of fresh dough facilities. Panera needs to evaluate the feasibility and
alternatives of continuing to provide fresh dough and administrative support out of the United States.
Overall, franchise expansion allows Panera to gain more access to new consumers and spreads business risk
to wider market. In order to make the franchise opportunity more attractive to potential investors, we
recommend the removal of some constraints from the franchise qualification requirements.
Alternative 1 is not recommended. Panera needs to constantly adjust its market strategies to better
accommodate changes in market conditions. As consumer loyalty to existing restaurants is low and
switching costs low, this route may be perceived as old fashioned. Strategies focusing on limiting offerings
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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. Panera’s fresh dough is sold to company owned and franchised bakery
cafés. 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 company’s business.
Increasing capital investment in additional physical facilities could slow down expansion on other business
lines and distract Panera’s core business. It is not in company’s best interest to focus on this side business at
the current stage.
Action Plans
Date Item Description
Immediately Market research
Market research on new regions and low penetration areas in United states for possible expansions, market research of meal habits of Canadians
ImmediatelyFranchise application criteria re-evaluation
Re-evaluate franchise application criteria based on franchisees’ operation and performance data
1 monthAnalyze market research result
Specialty evaluation team reviews market research results and draft report to management to explain feasibility of expansion in these new areas
1.5 monthsManagement decision of possibility of expansion Management approve of expansion to new areas
2 monthsIdentify strategic plans for expansion
Identify specific strategic plan to expand to new areas and low penetration areas
2 months Reduce franchise application constraints
Based on analysis and re-evaluation, revise franchise application criteria and make it more achievable and easier for new franchise applicants
3 months Increase advertising
Increase advertising such as commercial, radio, networking, on new region in United States, low penetration areas and possible Canadian areas
3 months Assign contacting staffAssign contacting staff for new franchise application in new areas and low penetration areas
Mid termEvaluate and approve new applicant Evaluate and approve new applicants in new areas
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Mid term Provide supportProvide franchisee help including site selection assistance, lease review, design service and new store opening assistant
Mid term Provide training Start providing various training programs to new franchisees
Long termRe-evaluate strategies and make adjustment
Re-evaluate strategies and make adjustments based on current market conditions and accommodate changes
Long term
Continue to provide leadership, support and help to franchisees
Continue providing leadership, controls and support to franchisees and maintaining good working relationship with franchisees
Contingency Plan
In case Panera’s 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% chg
2005-06 2006 2005 2004 2003 Notes
Y.O.Y. % change in bakery-café sales -4.5% 33.4% 37.9% 36.2% 25.1%Y.O.Y. % change in franchise royalties & fees -8.9% 13.3% 22.2% 22.6% 29.9%Y.O.Y % change in fresh dough sales -2.2% 17.0% 19.3% 18.0% 47.6%Y.O.Y. % change in revenues -4.2% 29.5% 33.6% 31.7% 28.9% Pace of Revenue growth slowed
Food and paper as % of bakery-café exp 36.3% 35.5% 35.1% 35.0%Labour as % of bakery café exp 37.8% 37.7% 38.2% 38.5%Occupancy as % of bakery-café exp 9.0% 9.3% 9.2% 9.0%Other operating exp % bakery café exp 17.0% 17.4% 17.6% 17.5%
Bakery-café exp as % of bakery-café sales 81.5% 80.4% 80.2% 79.3% Trend - rising costs
Fresh dough cost of sales /dough sales 84.5% 86.7% 90.4% 89.3% Trend - decreasing costs
Total costs & expenses / total revenue 89.0% 87.3% 87.1% 86.3% Trend - rising costs
Operating profit as a % of total revenue 11.0% 12.7% 12.9% 13.7% Trend - decreasing
Net income as a % of total revenue 7.1% 8.2% 8.0% 8.4% Trend - decreasing
Current ratio = CA / CL 1.16 1.18 1.05 1.58 Trend - declining but within acceptable range
Working capital = CA - CL 18,008 15,909 2,515 26,079 Positive
Debt-to-assets ratio = total debt/ total assets 0.27 0.28 0.26 0.18 Low risk of bankruptcy
Debt-to-equity ratio = Total debt/total equity 0.36 0.38 0.35 0.24 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 2006 2005 2004 2003 2002Revenues:Bakery-café sales 666,141 499,422 362,121 265,933 212,645 Franchise royalties & fees 61,531 54,309 44,449 36,245 27,892 Fresh-dough sales to franchisees 101,299 86,544 72,569 61,524 41,688
828,971 640,275 479,139 363,702 282,225
Bakery-café expenses:Food and paper products 197,182 142,675 101,832 73,885 63,370 Labour 204,956 151,524 110,790 81,152 63,172 Occupancy 48,602 37,389 26,730 18,981 15,408 Other Operating Expenses 92,176 70,003 51,044 36,804 27,971 Total Bakery-café Expenses 542,916 401,591 290,396 210,822 169,921
Fresh dough cost of sales to franchisees 85,618 75,036 65,627 54,967 38,432 Depreciation and amortization 44,166 33,011 25,298 18,304 13,794 General & administration expenses 59,306 46,301 33,338 28,140 24,986 Pre-opening expenses 6,173 3,241 2,642 1,531 1,051 Total costs and expenses 738,179 559,180 417,301 313,764 248,184
Operating profit 90,792 81,095 61,838 49,938 34,041 Interest expense 92 50 18 48 32 Other (income) expenses net 1,976- 1,133- 1,065 1,592 467 Provision for income taxes 33,827 29,995 22,175 17,629 12,242 Net income 58,849 52,183 38,430 30,669 21,300 Earnings per share Basic 1.88 1.69 1.28 1.02 0.74 Diluted 1.84 1.65 1.25 1.00 0.71 Weighted average shares outstandingBasic 31,313 30,871 30,154 29,733 28,923 Diluted 32,044 31,651 30,768 30,423 29,891
Balance Sheet Data Cash and cash equivalents 52,097 24,451 29,639 42,402 29,924 Investments in govt securities 20,025 46,308 28,415 9,019 9,149 Current assets 127,618 102,774 58,220 70,871 59,262 Total assets 542,609 437,667 324,672 256,835 195,431 Current liabilities 109,610 86,865 55,705 44,792 32,325 Total liabilities 144,943 120,689 83,309 46,235 32,587 Stockholders' equity 397,666 316,978 241,363 193,805 151,503
Cash Flow Data Net cash provided by operating activities 104,895 110,628 84,284 73,102 46,323 Net cash used in investing activities 90,917- 129,640- 102,291- 66,856- 40,115- Net cash provided by financing activities 13,668 13,824 5,244 6,232 5,664 Net inc/(dec) in cash & cash equivalents 27,646 5,188- 12,763- 12,478 11,872
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Exhibit 3
Exhibit 4
Panera Bread Company
Income Statement Data - Extract 2006 2005 2004 2003 2002
Revenues $:Bakery-café sales 666,141 499,422 362,121 265,933 212,645 Franchise royalties & fees 61,531 54,309 44,449 36,245 27,892 Fresh-dough sales to franchisees 101,299 86,544 72,569 61,524 41,688
828,971 640,275 479,139 363,702 282,225 Revenues as % of total revenue:Bakery-café sales % 80% 78% 76% 73% 75% Trend - increasingFranchise royalties & fees % 7% 8% 9% 10% 10% Trend - decreasingFresh-dough sales to franchisees % 12% 14% 15% 17% 15% Trend - decreasingTotal 100% 100% 100% 100% 100%
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