Panera Bread: How Fast Can a Hot Eatery Expand?

How Fast

Panera Bread: How Fast Can a Hot Eatery Expand?

By GARY M. STERN, FOR INVESTOR’S BUSINESS DAILY
Posted 01:50 PM ET

Grow too fast and restaurant chains can fizzle like shooting stars. Expand too slowly and they can leave growth opportunities on the table.

Big eateries usually have two big ways to boost revenue: increase same-store sales or open new outlets. But expanding too quickly can drain resources, spark management and customer service issues, and undermine growth. When a stock is on the ascent like Panera Bread (PNRA), deciding how many new outlets to open is crucial to its long-term success.

Panera started as a small St. Louis bakery and has morphed into a powerhouse. Its stock price has surged about 32% since Oct. 20, and it’s on target to generate nearly $1.6 billion in revenue in 2011, up from $1.5 billion in 2010. But with 1,504 outlets as of Sept. 27, 2011, can it handle opening 110 new cafes or about 7% of its total eateries on an annual basis?
Stephen Anderson, a New York-based senior analyst with Miller Tabak, says that Panera’s decision to open 110 outlets last year was modest vs. a more rapid expansion of 10% to 15% in the early part of 2000.

Slowing its expansion made sense for Panera. “Management sought to address decelerating sales at existing units rather than expand rapidly, as was the case with other restaurant companies,” Anderson said.

In fact, Panera recently announced plans to step up its presence in Canada, where it has three cafes in Toronto. It plans to open about six or seven more cafes in 2012; four company-owned and three franchised.

“They have room to build 80 to 100 stores in the next few years,” Anderson said. Tim Hortons (THI) and McDonald’s (MCD) are its two big rivals in Canada, but Panera’s fast-casual style is expected to fill a void.

After so much success, Panera is just now launching in Manhattan, with plans to open three outlets in that urban hub in 2012. “They’ve been less aggressive than Chipotle in Manhattan,” he noted, which has built multiple outlets there.

Anderson says Panera’s move on the Big Apple is part of a threefold strategy. In the future, he says the chain is planning: 1. an “urban assault” on high-traffic urban areas like New York City, 2. building new outlets in malls and strip centers, including drive-through units, and 3. firming up growth in Canada.

With eateries located in only 40 states, Anderson says Panera also has more room to grow domestically. He reckons Panera would likely thrive in Anchorage or Honolulu, where the chain doesn’t have any outlets yet.

Halo Effect

Anderson credits Panera’s competitive edge to its ability to offer quality food while charging only a couple of dollars more than fast-food outlets. “They’re perceived as having a halo effect of being healthier and better,” he said.

Compared to rivals Starbucks (SBUX) and Dunkin’ Donuts (DNKN), Panera has focused on food, not just beverages, says Darren Tristano, an executive vice president at Technomics, a Chicago-based food industry research firm.

But a restaurant chain that grows too fast can skid. “When you grow too quickly, you focus on the next restaurant and can lose track of the ones already open,” Tristano said.

Another factor that could derail growth is higher commodity prices — especially for wheat, Anderson says. If large fast-food chains like McDonald’s, Burger King or Wendy’s copied the healthier sandwiches that Panera sells, it could also hurt sales.

But Panera’s playing it safe. In a tough economy, the chain’s going easy on consumer wallets. Most of its sandwiches and salads are priced from $7 to $9. It also introduced a deal in 2010 where consumers can add a beverage or baked goods for an extra 99 cents with any lunch or dinner entree.

When Anderson visits Panera for lunch, he favors its barbecue chicken salad. It’s filling, and yet only contains 500 calories. He noted that Panera was one of the first restaurant chains to post calorie counts nationwide.

Quality Across The Board

Panera owns 716 of its bakery/cafes and franchises 788 of them. Most of its franchises are owned by large groups that operate 30 to 40 eateries. This helps quality control. Most consumers couldn’t tell if they were dining at a company-owned cafe or a franchise, Anderson says.
Opening a new outlet is costly. The average size of a Panera cafe is 4,600 square feet and costs about $750,000 to build.

Restaurant chains need to be strategic about where they introduce new outlets. Stacking five new eateries in a city where there are already 25 cafes can cannibalize sales, says Tristano.
Opening new outlets is more than about real estate but also demands training employees, says Tristano. Panera is known for hiring friendly employees and creating a warm, comfortable ambiance. In expanding, it must focus on retaining top managers and training employees to maintain its level of customer service.

Panera also tinkers with menu items to please customers and reach new ones. For example, in 2011 it introduced a Thai chopped chicken salad that contains only 390 calories and low-fat wild berry smoothies. Moreover, it’s been making an effort to expand catering services to break open another revenue stream.

“What builds a brand is the emotional attachment a guest has,” Pearce said. “If I take care of the people and deliver great food, then the brand will be wildly successful.”

View the full article on Investor’s Business Daily

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