Panera bread company case study answers

UVA-F-1575 Rev. Sept. 3, 2009

This case was prepared by Associate Professor Marc Lipson. It was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2008 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 9/09. ◊

PANERA BREAD COMPANY As the end of 2007 drew near, Panera Bread Company was facing a brand-new challenge.

Until recently, strong margins had allowed Panera to finance its rapid growth largely through retained earnings and very minor equity infusions resulting from compensation programs. The company used no permanent debt financing and, in fact, had allowed a $10 million dollar credit facility to expire. But now Panera was facing a decline in margins that would limit its ability to rely on internal funds. With growth expected to continue and a $75 million stock repurchase under consideration, the company realized it would almost surely need capital from external markets—in both the short run and the long run.

History and Business Model Panera Bread Company had its origins in another successful bread venture, Au Bon Pain

Co., which was founded in 1981. The success of Au Bon Pain in the 1980s gave rise to the 1993 purchase of Saint Louis Bread Company, a small bakery-café company located in St. Louis, Missouri. By the end of 1999, the Saint Louis Bread Company concept was being expanded under the Panera Bread name, Au Bon Pain had sold off all its units except Panera Bread, and Au Bon Pain itself had adopted the Panera name.

The goal of Panera Bread Company was to create a dining experience centered on fresh-

baked bread in an environment where people “slowed down to enjoy real food.”1 Its emphasis on wholesome foods and a welcoming environment placed the company in stark contrast to the fast- food experience that dominated the multiunit restaurant business. An essential element was a commitment to high-quality bread. Panera breads were baked fresh every day, at every location. The bread was featured in virtually all the store offerings, including such selections as made-to- order sandwiches and soup served in a bread bowl.

Ensuring high-quality bread required the best ingredients, specialized equipment, and

careful training. For example, Panera baked its breads on heated stone slabs in European-style

1 Panera Bread Company annual report, 2006.

This document is authorized for use by Suhan Patel, from 1/7/2018 to 4/7/2018, in the course: MBA 7294: Advanced Financial Analysis - John Bish 2018, Wilmington University.

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ovens. Customers appreciated the results—Panera consistently earned recognition for the quality of its offerings, often attaining the top position in customer-satisfaction surveys. The essential business model, therefore, was to provide a meal and dining environment of sufficient high quality that customers would gladly pay for that quality—at a price that would also make the company financially successful.

The success of this business model was readily apparent. Starting with just 20 stores in

1993, the firm had more than 1,000 locations across 38 states by the end of 2006 operating under the Panera Bread and Saint Louis Bread Co. names.2 During 2006 alone, the company increased its number of outlets by 17% and attained more than 4% same-store sales growth. For the three years ending in 2006, total revenues grew an average of 32% a year with operating profit to sales averaging 12%.3

Recent Challenges A key measure of success in the restaurant business was transaction growth—the increase

in same-store sales ignoring the effect of price increases. Transaction growth at the start of 2007, continuing a trend from the very end of 2006, was lower than anticipated. In addition, margins for 2006, while strong, were down slightly from the previous two years (financial statements for 2003 to 2006 are presented in Exhibits 1 and 2 with a forecast of operating results for 2007 presented in Exhibit 3) and were expected to be lower in 2007. These problems were not unique to Panera. Commodity costs, particularly wheat, had risen, and cost uncertainty was a concern for the entire restaurant industry.4 To drive transaction growth for the future, the company might need to back off on price increases even in the face of rising costs. In other words, to sustain the firm’s growth, Panera might have to operate at tighter margins.

Furthermore, as a result of tightening margins, uncertain costs, and a softening in

transaction growth in 2007, Panera’s stock price had dropped a precipitous 10% on the announcement of third-quarter results and was down almost 40% over the past year (Exhibit 4 presents recent stock price data). In response, the firm was considering a $75 million dollar stock repurchase. As JPMorgan analyst Steven Rees observed, the repurchase would signal management’s position on the “long-term potential of the business as well as many company- specific near-term initiatives to drive sales and margin improvements.”5

2 http://www.panerabread.com/about/press/kit/ (accessed October 7, 2008). 3 Panera Bread Company annual report, 2006. 4 Melanie Lindner, “Panera: This Bread is Not Rising,”Forbes.com Market Scan, October 24, 2007 (accessed

October 6, 2008). 5 Melanie Lindner, “Panera Bread Leavening,” Forbes.com, Market Scan, November 28, 2007.

This document is authorized for use by Suhan Patel, from 1/7/2018 to 4/7/2018, in the course: MBA 7294: Advanced Financial Analysis - John Bish 2018, Wilmington University.

Any unauthorized use or reproduction of this document is strictly prohibited*.

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Financing In the past, Panera had financed growth through retained earnings and through the modest