Mireille Bain
Panera Bread, with its unique appearance and signature breads, has quickly distinguished itself as one of the top quick-service restaurants in the U.S. market. It does, however, face transient success within a market segment that is very competitive. It must take initiatives to retain market presence and procure more to remain competitive in the volatile restaurant industry. Management has already announced plans to grow, but will it be enough? We have analyzed Panera’s current situation and have proposed a plan of action. 1. What is Panera Bread’s strategy? Which of the five generic competitive strategies discussed in Chapter 5most closely fit the competitive approach that Panera Bread is taking? What type of competitive advantage is Panera Bread trying to achieve? Driving concept is to provide a premium specialty bakery and café experience to urban workers and suburban dwellers.The one that fits the most is the Generic Broad differentiation strategy. The type of competitive advantage is they’re striving to build a competitive advantage based on the triple combination ofProduct, Environment, and Great Service (PEGS).
2. What does a SWOT analysis of Panera Bread reveal about the overall attractiveness of its situation? Does the company have any core competencies or distinctive competencies?
STRENGHTS
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Distinctive environment with a signature menu that gives them a competitive advantage among close competitors. Dominant restaurant operator in the specialty bakery-café segment. Increasing revenue since 2002. Different business components that contribute to their revenue. A well-structured business through the operation of both company-based and franchise stores with fresh-dough suppliers servicing both segments. Product Integrity – Trained bakers carefully oversee the baking process, menus are regularly reviewed and revised, and Panera provides its Franchises with training and certification. This focus on quality has garnered attention from the restaurant community. They received such accolades as Highest-Level of Customer Loyalty among quick-casual restaurants in 2003 and highest ranking among quick-service restaurants in the Midwest and Northeast regions in 2004. Page 1 of 6
Mireille Bain
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Panera’s product niche gives it flexibility in raising menu prices because consumers perceive its products as having high quality, especially in comparison to traditional fast food restaurants. Fast food restaurants chains are often criticized for selling unhealthy food, but the higher nutritional value found in Panera Bread’s products makes it less prone to nutrition campaigns that have hurt other chains. Dine in restaurants are very susceptible to drops in consumer spending. Panera Bread's cheaper items make it an attractive alternative to traditional eateries. In 2007, the company’s management introduced a 2.5% increase in Panera’s prices, and reported no significant decrease in the total number of sales. This becomes important when production costs increase.
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WEAKNESSES • •
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Non-aggressive Marketing – Panera has chosen a passive marketing campaign that may impede growth plans. Panera has adapted a stringent entry criterion for prospective franchisee which will deter interest in the Franchise component of the business. Panera operates under a very strict agreement for business operations includes such stipulations as: $35,000 franchise fee per bakery with a continuing 4-5 percent royalty on sales. A strict development schedule of 15 locations within 6 years or a termination of contract. High initial investment can deter entrepreneurs looking to invest in the company. Financial data is indicating a downward trend in profitability since 2002 (see figure 1.1). The company’s menu is filled with foods high in carbohydrates, making the business susceptible to changes in consumer preferences towards healthier alternatives. fast food restaurants have often do well during recessions, as they are perceived as cheaper alternatives to sit-down restaurants. Panera, as a hybrid of these two models, could go either way, consumer perception may be that Panera is a cheaper, healthy alternative and boost its numbers while the economy recedes, or like other casual dining restaurants its sales may suffer as consumers cut their food budgets.
Figure 1.1 OPPORTUNITIES • • •
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Entering un-tapped domestic and international markets. Vertical Integrating – Panera Bread can begin offering signature products through select food retailers. Panera Bread can search for insolvent or small companies within its market segment to takeover. chain is not very well established in the West and Southwest regions, which means that these two regions are attractive markets for expansion.
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Mireille Bain
THREATS •
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The restaurant business is very competitive. According Exhibit 9 in the Case, Panera has 21 competitors within its Fast-Casual market segment; this does not include other competitors in different restaurant categories. Volatile Industry – The restaurant industry is known for its transient success; restaurants come and go. Only the few that achieve a competitive advantage and customer loyalty survive. Substitute Products - Over 76 percent of meals are eaten at home; evening dining only operates 20 percent of overall sales. Many of the company’s competitors have greater financial resources, which translate into greater advertising capacity.
3. What is your appraisal of Panera Bread’s’ financial performance based on the data in case Exhibits 1, 2 and8? How well is the company doing financially? Use the financial ratios in Table 4.1 of Chapter 4 as a guide in doing the calculations needed to arrive at an analysis-based answer to your assessment of Panera’s recent financial performance. Strong CAGR in a number of important areas as well as total revenues, royalties, fresh dough sales, net income and EPS. Declines in G &A expense a desirable trend also some erosion in operating profit margins bears watching not a good thing. Declines in liquidity current ratio and a fluctuating but satisfactory ROE also warrant attention. Overall, the data indicate that Panera is growing quite rapidly and is performing well, although not great. While there are some areas of concern, the areas of weakness as of 2006 are from alarming.
4. What strategic issues and problems does Panera Bread management need to address? What to do to correct Panera Bread’s narrowing profit margins What more to do, if anything, to try to boost Panera’s traffic counts at its stores during dinner hours. What actions to take to boost sales at company-owned bakery cafes (and put them more on a par or even above the annual and weekly sales levels being achieved at franchised cafes). Page 3 of 6
Mireille Bain
KEY ISSUES (in no specific order) 1. Franchise requirements are too stringent and can deter prospective franchisee from
investing in this fledging segment of their business. 2. Panera has avoided an aggressive marketing campaign which could impede future
growth. 3. Many key markets remain un-tapped while Low-Penetration markets need more attention. 4. Downward trend in profitability reveal an under-lying issue with Panera’s finances. 5. What strategic issues and problems does Panera Bread management need to address? There are no big or threatening problems/issues that needs fixing or correcting.No need to overhaul or do major surgery on the company¶s broad differentiation strategy. Some possible actions: y Continue to exploit first-mover advantage ± secure prime retail locations in urban areas where Panera Bread has little or no market penetration. y Attack the causes of eroding operating and net profit margins. Do a better job of controlling expenses. y Continue to work hard on developing new menu items that will drive up traffic counts, particularly during the evening meal hours when traffic is somewhat light. ALTERNATIVE ACTIONS •
In an effort to protect the integrity of their product, Panera Bread has built an invisible barrier around its Franchise segment. The stringent requirements imposed by Panera, from a growth perspective, seem a bit too onerous. If they want to stimulate growth, they must encourage it not impede it. The Franchise requirements coupled with the high initial investment may deter prospective franchisee from investing in the company. Panera should revise its criterion without comprising its standards and lower initial investment; both actions should inevitably yield more entrepreneurial investment.
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Panera’s elected subtle Marketing scheme has yielded great results thus far. But with management proposing a massive growth plan, an aggressive marketing plan will have to be implemented.
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Panera is not fully represented in their market segment and this can be a perilous vulnerability. A holistic approach to growth that includes all components of its business should be put in place. Page 4 of 6
Mireille Bain
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The downward profitability trend is cause for concern. Panera’s management should focus on company expenses and jettison its load by cutting costs. The company’s revenues are impressive, but its profits are surely not indicative of this.
RECOMMENDED ACTIONS Panera has established itself has a strong competitor within its market segment. We feel Panera is prepared to proceed to the next level, which will propel its success even further. The plan we are proposing will have multiple steps and may have to be executed simultaneously. It will be focused on growth, which we feel is important to remain competitive and to increase market share which will inevitably lead to increased revenue. The following are the steps in order of execution: 1. The franchise segment is a very essential to the growth of the company. The stringent
requirements Panera has put in place are not conducive to growth. Were not suggesting to completely compromise its requirements, but to ease the entry process to encourage more franchisee to invest in Panera. 1a. Part of our proposed marketing scheme will include franchise-focused marketing where Panera will solicit prospective franchisee in Low-penetration areas and new markets. This is contingent on Panera making the aforementioned changes and making this segment more appealing and economically feasible. 2. The proposed Marketing scheme will include the franchise segment, which was
previously discussed, and concentration on disseminating the brand itself. Brand recognition must be established fast to run concurrently with growth plans (see step 2a). This will be accomplished by marketing the restaurant through local mediums on the local level and Commercials, Radio, participation in Social Networking Services on a national level. The key word is aggressive. 2a. The franchise-focused efforts should yield a great response which should stimulate growth considerably in that segment. The company owned units should be proliferated strategically across Low-penetration and new markets. Panera should designate a cadre of experienced managers to survey these regions for optimal placement of their units. The acceptance of these new café-bakeries will be dependent on the aforementioned proposed marketing scheme. The plan for growth will be funded by a temporary increase in the contribution to the marketing fund, sell of stock, company appropriated funds, and financing. We project for the company to grow significantly with the surge ending within 4 - 5 years.
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Mireille Bain
The downward trend in profitability was another key issue, however not one that needed to be addressed immediately. In the midst of the growth surge, it will have to take the back seat – for the moment at least. We suggest that it be on the company’s next agenda. We believe that the product of the growth plan, increased revenue, will alleviate the issue. But an analysis of the company’s financial data and an action plan with focus on costs will jettison unnecessary weight and boost profitability.
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