At Panera Bread Co., competitive strengths include more than just “great food and superior customer service,” according to the company. The St. Louis-based company also is committed to creating an ambiance in its bakery-cafes and a culture within its restaurants that is “warm, inviting, and embracing.”
Achieving such goals is no easy task, though. The company has divided its strategy into two buckets: initiatives meant to make Panera a better competitive alternative and initiatives intended to expand Panera’s growth opportunities.
In a conference call in mid-February to discuss fiscal 2014 results, Ron Shaich, chairman and chief executive officer of Panera, said the company is focused on four areas to build competitive position: Panera 2.0; operational improvements; revised positioning; and innovation in food, marketing and design.
Pushing the buttons on 2.0
The Panera 2.0 initiative was introduced last year as a strategic effort intended to enhance the experience for both dine-in and to-go guests. The enhanced guest experience is enabled by technology and operational improvements designed to keep up with high transaction volumes and to deliver “unrestrained production demand,” according to Panera.
The individual elements of Panera 2.0 include web, mobile, kiosk and e-commerce ordering; new operational systems; extra labor; deliver-to-the-table service; and “the wall,” a wall that was added to certain cafes to close off the back of the house to support Panera’s equipment needs.
“Panera 2.0 has had a consistent and sustained impact on our guest experience,” Mr. Shaich said. “We’ve done that without adding anything different in food, marketing, or essentially design. It’s really simply been about reducing friction, and that impact shows up in our customer health data, and it shows up in the retail sales increases we are experiencing. And the rate of sales growth appears to continue to get better over time. The reality is that this is happening, and it is funneling and fueling a change in our relationship with the guest. And it ultimately speaks to our ability to change that trajectory with our guest over the long term.
“While the data is still relatively immature for our 2.0 cafes, and we cannot say definitively what the long-term sales impact is, we do know that Panera 2.0 has the potential to be an important element in materially changing the trajectory of our business and in preparing Panera to compete more effectively in the future, especially a future that is increasingly more digital. Indeed, we would argue that ultimately all restaurant companies will need to meet the ante that Panera 2.0 represents.”
Panera expects to convert approximately 300 more company cafes in 2015 to Panera 2.0, bringing it to 400, or almost half its company stores, by year-end.
As optimistic as Mr. Shaich was in his comments about Panera 2.0, analysts have expressed doubts.
“Required spending behind the roll-out of Panera 2.0 is expected to be substantial again in 2015 and could actually accelerate in 2016,” said Alton Stump, an analyst with Longbow Research, in a March 13 research report. “As a result, Panera may face just as much of a challenge to grow earnings next year in comparison to the current year. The time frame for a material profit recovery post the 2.0 roll-out is unclear and may in fact take several years even if this program proves successful in driving higher same-store traffic.
“To date, the small portion of Panera stores converted to 2.0 are generating higher revenues but seemingly not enough to justify higher associated spending. We are also concerned 2.0 will apply meaningful pressure to Panera’s product mix, which was the largest single driver of higher same-store sales for the company over the last 3 to 5 years. Also, Panera’s new product platform may be diminished at least in the near term as operators and in-store employees focus on implementing the 2.0 initiatives.”
Analysts with Zacks also expressed some concern with the program.
“Given the improvement in revenues and comps, we believe that the Panera 2.0 program, menu innovation and promotional strategies have begun yielding results,” Zacks said. “However, the company is incurring heavy costs related to these initiatives. Also, higher food costs, especially that of beef, is partially offsetting the positive impact of these efforts. In fact, given the scenario, the company provided a weak profit guidance for 2015.”
Operations, positioning also vital
It’s not all about 2.0 at Panera, though. The company is focused on improving operations across its cafes. To this end, it has added incremental hours at each cafe, upgraded equipment to grow capacity and added a new kitchen display system.
Panera also is homing in on revised positioning.
“For a year now we’ve been reviewing and evolving our understanding of how we best position Panera,” Mr. Shaich said. “Said another way, we’ve been thinking about who we are as a concept and how we best meet specific target customer needs. In 2014, we undertook a deep and thoughtful review of our position in the marketplace, and we conducted an extensive update to our customer segmentation work. We studied MyPanera data; we studied demographic data; and we utilized a range of external research and strategic resources in this effort.
“The result is a much clearer sense of our core customer and what excites and moves her to choose Panera over other options. I am not going to go through the details of our research nor how we are evolving our positioning, for both time and for competitive reasons. But know this: our positioning going forward over the next several years can be summarized simply — cravable food, an ally for wellness, and an elevated experience.”
Results validate Panera’s success offering “cravable” food. The company’s pairing of turkey chili with Southwestern flatbread was a big hit in 2014, and in early 2015 the company has seen strong consumer response to its new line of broth bowls, including a Soba Noodle bowl with chicken and a lentil quinoa bowl,
Mr. Shaich said.
“Both bowls, which were an extension of our soup line, are designed to awaken an appetite for adventuresome eating at Panera and appeal to those seeking more healthful menu items,” he said.
Panera also is using sourcing to its advantage, Mr. Shaich said.
“An advantage Panera now has is the scale compared to these smaller players,” he said. “Frankly, we can do things that they can’t, based on our size. That’s true about technology and it’s true about the power we wield in sourcing. While we have a decade-long history of progressive food practices, last year we announced our food policy and our animal welfare policies. Our sourcing muscle gives us the unique ability to deliver on those promises. Later this year and into 2016, you will be able to taste the difference this advantage makes when we roll out a range of clean products. This summer, we will introduce salads made with clean dressings.”
On the lookout for new opportunities
In terms of expanding growth, Mr. Shaich said Panera has a simple philosophy: “We are pursuing big, billion-dollar market opportunities that are adjacent to our current businesses.”
“First and foremost among those are large-order delivery or catering and, as well, small-order delivery,” he said. “But here’s the reality, folks: We may have the best name in soups, salad and sandwiches, but we need to have the infrastructure and we need to have the capabilities in place to effectively go after the large-order delivery and small-order delivery opportunities. Simply put, we can’t attack these markets from the back of already constrained high-volume cafes.”
Mr. Shaich said he believes in Panera’s ability to grow its large-order delivery business because of past experience with delivery hubs the company prototyped in 2012 and 2013.
“In those hubs we removed catering sales from our most constrained cafes and found we were better able to serve the large-order delivery market,” he said. “We also found that when retail operators focused on retail, when they did not have to serve two masters, they did a better job. For these reasons, delivery hubs are potentially a powerful addition to our system. They offer the necessary capacity, the necessary capabilities, and they enable focus needed to grow catering, at the same time they relieve the pressure of two masters on our retail cafes. They also offer the potential to ultimately serve the small-order delivery market.”
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