| Panera Bread has an opportunity for growth | | | | can be carried to the international markets where |
| within a challenging industry in two key areas - | | | | café atmospheres, such as those in France, are |
| increased sales of specialty drinks and opening | | | | more prevalent. |
| international locations - that will enable the | | | | Expand Internationally to Build Brand Image and |
| company to spread its mission of fresh bread for | | | | Diversify Economic Risks |
| everyone while increasing the bottom line for | | | | Given that Panera is pursuing Canadian locations, it |
| shareholders. By utilizing many frameworks for | | | | is safe to assume that the international market |
| thought and projecting the estimated financials of | | | | for fresh bread is growing. Indeed, the |
| the company, we are able to empirically show | | | | international market breakdown of industry |
| that these two strategies will be beneficial to the | | | | revenues can be found in Appendix B. Clearly, the |
| customer. | | | | European market is a large market for fresh |
| Utilize Historically High Margins on Specialty Drinks | | | | bread. However, IBIS World estimates that |
| to Drive Bottom Line Growth | | | | 135,000 bakeries operate in Europe, meaning the |
| While Panera's core business revolves around | | | | market is fragmented. A brand with a large |
| fresh bread, the style of the locations suggests | | | | marketing budget behind it could quickly enter the |
| that there is substantial revenue in selling coffee | | | | market and take a key position (See Appendix C). |
| and related drinks, similar to Starbucks. Looking at | | | | Given that the culture and preferences of |
| the coffee market, estimated real growth is 2.7% | | | | European customers may differ from Americans, |
| or roughly 5.7% given a 3% inflation rate while | | | | it would be best to test new products in Canada |
| the number of establishments, the actual coffee | | | | prior to the overseas launch of the Panera brand. |
| shops, is expected to grow only 1.6%, meaning | | | | An interesting facet of the European market is |
| that each shop on average will see increased | | | | the strong relationship between the industrial |
| revenue, due in part to a 3.5% growth in | | | | agricultural and milling companies and the industrial |
| domestic demand (See Appendix A). Further, | | | | bakeries. The largest bakeries are owned by the |
| profit in specialty drinks is estimated at 19.8%, | | | | largest milling and agricultural firms in the U.K., |
| much higher than Panera's 6.4% profit margin. | | | | Sweden, and Austria. This may cause supply chain |
| This means that increasing the sales of specialty | | | | issues in these countries, though Panera could |
| drinks will have a positive impact on Panera's | | | | pursue a partnership or joint venture approach to |
| bottom line - clearly the industry is growing and is | | | | these markets. |
| a good industry to be in for Panera. According to | | | | Leverage on Existing Assets to Increase |
| Buffalo Wild Wings' franchise disclosure document, | | | | Shareholder Return and Expand |
| more than 40% of revenue is generated via | | | | According to Panera's 2009 10-K, the company |
| alcohol and specialty drinks sales. If Panera were | | | | had an interest coverage ratio of 200.9x, with |
| able to generate this level of sales with a 19.3% | | | | EBIT of $140m and interest payments of $700k. |
| profit margin, its bottom line would increase by | | | | Additionally, distance-to-default, a key metric for |
| nearly 7.8% to 14.2%, abnormally high for the | | | | risk of debt, is quite large (larger is better) as the |
| restaurant industry (which averages 4-5% | | | | cash on hand of Panera is $77.1m and the debt |
| margins). Though this profit margin level is likely | | | | equity ratio is 0.0%. Retained earnings and total |
| not sustainable, the short-term boost in profit | | | | equity are $346m and $495m, respectively. This |
| margin will help Panera expand its operations | | | | suggests a large cushion prior to debt default in |
| internationally to capture economies of scale with | | | | an extreme situation. In Appendix D, the large |
| its suppliers. | | | | difference between Panera and its rivals in terms |
| Look to Industry Incumbents for Knowledge and | | | | of debt load is clearly seen. Given that Panera has |
| Re-arrange Menu Locations | | | | $153.2m in FCF, it is safe to assume that Panera |
| Visually, the layout of a Starbuck's, Dunkin' | | | | could issue at the very least 1.0x FCF, though a |
| Doughnuts, or Caribou Coffee are much more | | | | safe debt load for a company can be as low as |
| fluid than Panera Bread with respect to the | | | | 2x EBITDA, or $400m in debt. With the average |
| coffee ordering location. This analysis draws | | | | café costing $1.6m, Panera would be able to |
| heavily on the Eden Prairie Mall and Downtown | | | | finance the expansion of its brand across |
| Minneapolis Nicollet Mall locations. The customer | | | | approximately 250 corporate-owned locations |
| flow for Eden Prairie and Downtown is awkward; | | | | internationally. As seen in Appendix E, Panera |
| the customer must enter the store, walk past | | | | would be in the top three of its main competition |
| the bakery and coffee areas, and then order at | | | | with these new locations. |
| the registers. The issue is that the coffee menus | | | | As with all public companies, Panera must return |
| are located above the bakery items, not in clear | | | | value to its shareholders while not ignoring the |
| view of the customer at the time of ordering. By | | | | broader array of stakeholders with whom it |
| the time the customer is ready to order, he or | | | | interacts. FactSet estimates Panera's 2010 sales |
| she has forgotten what drink to order; | | | | growth at 10.4% with EPS of $3.41 per share, a |
| furthermore, the drinks are creatively named | | | | 20.6% increase over 2009. Our proposed |
| which is positive for brand identity, but awkward | | | | strategy would benefit the company both in the |
| for the average male customer to order. At the | | | | short term and long term. In the short term, |
| very least, the coffee and specialty drinks need | | | | sales would be increased and profit margin would |
| to undergo the following changes: | | | | increase by 500 bps to 770 bps based on |
| · Move the menus to the same wall face as the | | | | specialty drink sales. If the international expansion |
| meal menus to ensure customers know what | | | | plan is pursued, Panera would see sales growth in |
| coffee is offered when ordering | | | | 2011 beyond the estimated 10.3% and EPS well |
| · Arrange the bakery display cases nearer to | | | | beyond the projected $3.98. Though the increase |
| the registers to entice more impulse purchases | | | | in debt may force management to pay more |
| · Remove queue line markers during non-rush | | | | attention to the cash flow of the company, the |
| times, especially in front of the bakery display | | | | increased leverage will allow Panera to increase its |
| cases | | | | ROE substantially. If Panera wishes to remain |
| · Increase the offerings of specialty drinks, | | | | competitive, it must utilize its economies of scale |
| including researching alcoholic beverages, to attract | | | | to grow faster than competition and continually |
| coffee shop regulars into Panera | | | | innovate, becoming the "fast follower" by utilizing |
| By focusing on combining the café design with | | | | adjacent industry innovations in its café |
| a coffee shop atmosphere, Panera can become a | | | | atmosphere. |
| "chill out" spot as well as a premier location for | | | | Appendicies can be found at Liekos Group's |
| both lunch and dinner. Furthermore, this change | | | | website. |