MBA MGMT D31 Individual Case Study: Panera Bread Company

Nisanart Thadabusapa D540068

Panera Bread Company (hereinafter referred to as PNRA or the Company)s strategy is to provide a premium specialty bakery and caf experience to urban workers and suburban dwellers. The strategy employed by PNRA is closely aligned with a broad differentiation strategy. PNRA strives to differentiate its products from those of its rivals in ways that the Company believes will appeal to a broad cross-section of customers. Before the Top Management decided to launch this strategy throughout the United States, extensive crosscountry market research was carried out. The Management found that consumers would be attracted to a higher-quality, quick-dining experience. For this reason, the Management decided to categorize PNRA as a fast-casual restaurant chain a mix between fast food and casual dining with an attempt to achieve competitive advantage in unique offerings that rivals dont have and cant afford to match. From the case study, PNRA core competencies, which are critical to a business achieving competitive advantage, include (i) bread baking expertise (i.e. signature artisan bread); and (ii) excellent human resources (i.e. specialty chefs that facilitate every aspect of the production on the fresh-dough bread process and the progressive management team that stated the exclusive marketing research which started the direction that resulted in Panera Bread today). PNRAs distinctive menu and signature product (i.e. artisan bread made from four ingredients), signature caf design and inviting ambience (i.e. Panera Warmth and G2 Design), and operation systems (i.e. PNRAs fresh dough-making operation systems) are competitive advantage that PNRA is trying to achieve. SWOT ANALYSIS Strengths 1. Intangible assets Trademarks and Trade name (i.e. Panera Bread brand) and Trade Secrets (i.e. breadbaking expertise) 2. Distinctive menu offerings (e.g. health/weight-conscious menu, whole grain breads, etc.) with high quality (i.e. food you crave; food you can trust theme - using natural products and ingredients and made fresh every day without preservations) at reasonable prices and the dining ambience - PANERA WARMTH and the new G2 caf design with free Wi-Fi internet. 3. Efficient fresh dough-making operation ensuring consistent quality and dough-making efficiency and more economical to concentrate the dough-making operations in a few facilities 4. Strong financial conditions (i.e. debt-free balance sheet) to fund the Companys growth and expansion 5. Strong customer loyalty and brand awareness in Mid-west and Northeast regions of the United States 6. Efficient franchisee operations for market growth (i.e. total sales of franchise-operated cafes run slightly higher than that of company-owned stores as shown in case Exhibit 2.) 7. Strong relationships with suppliers, distributors and franchisees 8. Raw materials can be procured from many authorized suppliers, not limited to only one single supplier. 9. Customer involvement in initiatives (i.e. product development) Test kitchens introduce new products to a limited number of the bakery cafes to determine customer response and verify that preparation and operating procedures resulted in product consistency and high quality standards. Weaknesses 1. Location Low customer loyalty and brand awareness in several large US markets (i.e. South and West regions) 2. Less well-known brand name than some competitors (e.g. McDonalds, Applebees and Starbucks) 3. Product costs are higher than other fast food chains (i.e. fast food competitors) 4. Off-site dough preparation and delivery result in high logistic costs up to 27% of the cost of each unit of sale 5. Sales of PNRA seem to rely more on franchise-operated stores than company-owned stores Problems of control and standards could arise 6. Dinner menu Limited product lines Difficult to sell its products and experience for dinner time this needs more attention 7. The idea, which lets customers discover Panera bread and then converts them into loyal customers, may not work since it is very easy for consumers in this industry to switch from one brand to another once they find better alternatives.

MBA MGMT D31 Individual Case Study: Panera Bread Company

Nisanart Thadabusapa D540068

Opportunities 1. Location Increase brand loyalty and awareness in larger US markets by opening more stores (i.e. both company-owned and franchised) in both low penetration markets and untapped markets as shown in case Exhibit 3 Go international (e.g. Vancouver and Toronto) since the market in the US seems to start saturating 2. Expand the product lines to meet current trends (i.e. increasing health conscientious among consumers) 3. Expand the catering business operation due to a success in the initial catering business 4. Boost trial of dining at Panera Bread at multiple meal times, starting with existing customers with dualincome families 5. Boost trial of dining at Panera Bread for dinner 6. Website marketing and ordering to help consumers expedite their ordering time and avoid waiting time at cafes 7. Increase average transaction size through premium entrees and supplemental purchases Threats 1. Multiple types of competitions - Since PNRA, a fast-casual restaurant (FCR) chain, is positioned between Quick-Service Restaurants (QSR) and Full-Service Restaurants (FSR), every player under all three types of restaurants compete against PNRA to some extent. 2. Rivals begin to follow PNRAs menu offerings making it harder for PNRA to clearly differentiate itself from rivals 3. Since consumers in this industry tend to switch brands quickly for better alternatives, new entry rival restaurant chains could draw PNRAs customers away 4. Increasing costs of goods sold (i.e. Grain price fluctuations hedging could reduce the risk but not totally) From the SWOT analysis, it reveals that PNRA is a very attractive company with high growth potential both in and outside the United States. With a strong financial position along with its unique offerings, it is very likely that the Company will use its free cash flow to open new restaurants, both company-own and franchiseoperated, in a number of low-penetration and untapped markets. However, in order for PNRA to stay competitive, the Company needs to stay innovative in their menu offerings and base their menu on consumer needs and trends (i.e. extensive marketing research is necessary for PNRA). COMPETITOR ANALYSIS Within this industry, there are three sub-segments: Quick-Service Restaurants (QSR), Full-Service Restaurants (FSR) and Fast-Casual Restaurant (FCR). Players in QSR and FSR are not competitors with each other. FCR players are positioned between the two and compete with both. For this reason, PNRA is in a highly competitive area. From Exhibit 9, rivals that are strongly positioned themselves in the industry are as follows: APPLEBEEs owns twice as many locations as PNRA in both the US (in 49 states) and internationals. This rival offers a wide variety of food and drink items, one of which is alcoholic beverages (i.e. accounted for about 12% of sales in 2005). Chills Grill and Bar is a FSR. It offers more items on menu. Just like APPLEBEEs, it has expanded to every state except one in the US and internationals. The capital investment per location is about the same as PNRA (i.e. 2.4M per location). Starbucks is also another strongly positioned rival. It could become number one rival of PNRA if it starts to offer hot food items because Starbucks was the first mover in terms of consumers experience and it has expanded all over the US and internationals (i.e. very huge market share in terms of both global and domestic markets) However, Corner bakery caf could become a strong competitor in the future if it decides to expand its locations. With its menu offerings and lower capital investment per location, PNRA needs to be careful of this growing company.

MBA MGMT D31 Individual Case Study: Panera Bread Company FINANCIAL ANALYSIS 2006 10.95% 14.80% 1.1643 0.3645 2005 12.67% 16.46% 1.1831 0.3807

Nisanart Thadabusapa D540068

Operating profit margin or Return on sales (ROS) Return on stockholders' equity (ROE) Current ratio (CR) Debt-to-equity ratio (D/E)

2004 12.91% 15.92% 1.0451 0.3452

2003 13.73% 15.82% 1.5822 0.2386

2002 12.06% 14.06% 1.8333 0.2151

From Exhibit 1, total sales of PNRA have been increasing by more than $100 million since 2003 but the operating margin has been gradually decreasing since 2003 and dropped down by 1.72% in FY2006. A decreasing trend of ROS signals looming financial troubles of the Company. In 2006, the operating profit margin that has dropped down by 1.72%. This slowing growth of net income could be due to the bakery caf cost that has been increasing significantly since 2004. It was mentioned in the case that the Company entered in a cost-plus agreement with Dawn Food Products Inc. to provide sweet goods for the period 2003-2007. This could be the factor that the operating margin has been decreasing since 2003. Another reason could be the logistic costs, which could be up to 27% of the cost of each unit of sale. ISSUES AND RECOMMENDATIONS Market penetration strategy needs to be considered since PNRA is segmented in between full-service and fast-food market segments (i.e. fast-casual). It competes with both fast food and full service segments. Therefore, in order for the Company to sustain its existence in the long run, it should attract customers from the two segments, using key common preferences that customers in each segment have. In order words, PNRA could attract customers from fast food business by offering them healthier and better quality fast food menus and attract customers from full-service business by offering them the experience. Work with franchisees to acquire Corner Bakery Caf? Expedite expansion in Canada or International (Europe) Vertically integrate and acquire Dawn Food Products Inc. Limit growth in existing markets and begin to focus on expansion into South and West Offer existing franchisees opportunity to enter markets first If limited interest open corporate stores to see if concept works before opening up new markets to new franchise partners