Sandwich Shop Chain Lures Customers With Tasty New Offerings

(Sunday, March 29, 2009) - You won't find the crew at Panera Bread (PNRA) digging up old recipes to tantalize customers.

As the recession kicked into high gear last year, management rolled out a strategy to heat up business and lift margins.

To pull in higher gross profits per item, it revamped the menu layout to make high-margin items like soup/sandwich/salad combo choices more visible.

It also added more offerings like a yogurt parfait at breakfast. And it upped prices on some items, such as soup. But it also increased the quantity of soup, so customers get 50% more for $1 more.

These efforts have helped keep the bakery-cafe chain rolling in dough at a time when many eateries are struggling.

Panera's earnings have climbed by double digits the past three quarters. And it's kept up its long-running record of double-digit sales gains.

Gauging Customers

Margin-improving efforts helped buoy fourth-quarter operating margin to 11.6% from 10.3% the prior year.

"We started to be more strategic about how we address our customers and how they look at our offerings, and we absolutely got a good response," said spokeswoman Michele Harrison.

Panera isn't resting on its laurels. It will keep up its efforts to drive higher gross profit per transaction.

This year, it will offer more high-end items, such as a chopped salad, now in testing. It will likely sell it for more than $7, says Harrison. That compares with its other specialty salads that go for less than $8.

It plans to test new initiatives like the "you pick four" offering. Here, a customer who orders an entree like a sandwich and also orders a beverage will be offered a baked good at an attractive price, said Chief Executive Ronald Shaich in the latest conference call.

"Since our cost on a marginal baked good is relatively low, this is potentially a real gross profit per transaction booster," he said.

And the company will continue to enhance menu choices with new offerings such as oatmeal and a healthy breakfast sandwich to be added sometime this year.

It's also testing new entrees, such as oven-baked macaroni and cheese and an open face beef brisket sandwich.

This year, it will keep up its policy of matching price increases to cost inflation, says Harrison.

On the marketing front, it will start testing TV commercials, probably in the Chicago market, she says.

It will also increase its radio and print coverage to 70% of its markets from 50% in 2008.

Panera turned in a solid fourth quarter, even as the spending climate got cooler. Earnings rose 42% to 84 cents a share. Sales grew 19% to $357.8 million. Same-store sales rose 2.7% vs. a year ago.

Panera's focus on high quality food has been a big draw, says analyst Steve West of Stifel, Nicolaus & Co.

It features antibiotic-free chicken, whole grain bread, organic and all-natural ingredients.

A lot of consumers want that natural, high quality food now, says West.

Panera's strong showing comes at a time when the fast-casual segment in which it operates is sizzling. Fast casual eateries are higher priced than fast-food chains, but cheaper than casual dining restaurants.

"The fast-casual category is the sweet spot of the restaurant industry now," said West.

The fast-casual segment is the industry's fastest growing category, says Darren Tristano, executive vice president at Technomic, a restaurant industry consulting and research firm.

Sales at fast-casual chains are rising at a 10.5% rate vs. a 3.3% rate for the industry overall, he computes.

"It continues to be an attractive alternative for consumers who want to trade down from casual dining, and who are looking for good quality food in an upscale environment and want something a little better than a quick-service restaurant," he said.

Sweet Price On Wheat

Panera stands to get a lift from lower operating costs. For this year, it locked in a price of $9.50 a bushel for wheat vs. $14.50 a bushel in 2008, says Harrison. And next year, she sees the price coming down even more.

But, like most of corporate America, Panera faces head winds. West expects fast-casual and fast-food chains to start feeling the impact of the weak spending climate.

But he expects the company to sustain its earnings momentum.

"Wheat cost savings will continue to be a benefit for them, even if the consumer gets weaker," he said.

Analysts polled by Thomson Reuters expect 2009 earnings to rise 18% to $2.63 a share, then another 14% to $2.99 in 2010.

At 2008 year-end, Panera owned and franchised 1,252 bakery-cafes in its namesake and the Saint Louis Bread Co. name.

It plans to open 80 to 90 new stores in 2009. They'll be a combination of company-owned and franchised outlets.

View all Panera Bread/Saint Louis Bread Co. Press Releases

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