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