Panera Bread Essay
TOWS MATRIX
I can tell that you put a lot of effort and time into this project…I appreciate that, and the truth is that that is where the learning takes place. My only complaint, well, lets call it an observation, is that your opportunities are not opportunities--- in other words, they are not defined by external market forces, but conditions that you assume may be opportunities. For example growing in international markets could be an opportunity, but unless you tell me that demand in those countries actually exist, where is the opportunity? This would just be speculation right? I would give you a 90%, because you certainly deserve an A but should fix this misconception, but due to the work/ effort I can tell you put in this project: …show more content…
95%
MGT 527 – Strategic Management
Homework # 2
Professor Mario Hayek
October 19, 2011
History With the original name Au Bon Pain Co., Panera Bread Company was founded in 1981 by Louis Kane and Ron Shaich. From its first stores along the east coast, Panera has grown to over 1,493 cafes in 40 states to include Ontario Canada. Their stated mission is “a loaf of bread in every arm”, with a “single goal of making great bread broadly available to consumers across America” (Panera Bread Company, n.d.). The café-style restaurants offer fast casual dining experience with a product line from bread, bagels, made-to-order sandwiches, tossed-to-order salads, and soup served in bread bowls. Panera’s success has not gone unnoticed; since 2002 customers have rated Panera top among other chain restaurants in the Sandleman & Associates Quick-Track “Awards of Excellence”. The company has also been named “Most Popular” (Zagat, 2011), in addition to being awarded #1 ranking for “Best Salad and Best Facilities”. This attention from customers has paid off with Panera being ranked in the Fortune magazine’s “Top 25 Customer Service Champs” and “100 Fastest-Growing Companies” of 2010 (Panera Bread Company, n.d.). nice
Industry Overview Panera belongs to a category of the restaurant industry called “fast casual” and also to its subcategory called “bakery-café”. Fast casual is defined “as a hybrid of quick service and casual dining that offers consumers more freshly prepared and customized products than fast food restaurants” (Franchise Direct, n.d.). It wasn’t too long ago when there were only a few in the restaurant industry who knew about fast casual (Killifer, 2011) but today there are many more such businesses who are also Panera’s competitors for example Chipotle, Panda Express, Boston Market, and Einstein Bros’ Bagels. One of the bright spots concerning the fast casual industry is that since the economic downturn, this segment has led the restaurant industry in both sales and unit growth and it continues to outperform on both fronts (Killifer, 2011). It is clear that there is something to this industry even during bad times; let’s take a closer look at Panera Bread Company, the leader in this industry.
SWOT Analysis A SWOT analysis helps in identifying a company’s distinctive competencies and the opportunities that the firm is not currently able to take advantage of due to lack of appropriate resources (Wheelen & Hunger, 2010). A detailed look at Panera’s operating environment reveals the following:
Panera 's Strengths
Differentiation. Organic food…As a specialty bakery-café concept, it is one of few organizations that successfully positioned the concept at a national stage. The strategy consists of value pricing with exceptional quality and an inviting delivery method. Each store is equipped with comfortable furnishings that establish a quality atmosphere to dine and lounge for a desired repeat consumer experience. The menu and hours of operation allow for consumers to benefit from the product and service through breakfast, lunch, and dinner. Panera also offers its consumers the largest nationwide WIFI connection as part of the Panera dining experience. As a specialty bakery and combination café; these relatively simple concepts, in combination, provide Panera customers a unique selling proposition over its direct competitors.
Operational excellence. Operational excellence drives this business from managing its employees to managing its different business segments to delivering exceptional customer service. The company is leveraged between corporate-owned stores and a top class franchise program. The company also operates a fresh dough manufacturing segment that supplies proprietary units to both corporate-owned and franchised stores at a controlled price is this a strength…aren’t all franchises like this?. The relationship helps control variable costs of their product mix. They also have a strong ROI for their progressive franchises based on historical and forecasted growth trajectories. This is a competitive advantage for their overall business strategy as an avenue to promote growth of the brand and its profitability through the strong entrepreneurship of highly qualified franchise investors. Income from a franchise include initial franchise fee of $35K, a royalty fee between 4% - 5% of sales, and an overall initial investment of approximately $1.1 to 2 million, all inclusive (BusinessMart, 2011). The average net sales after royalties were at an estimated $2.1 million per store for fiscal year 2010 which is better than average for a startup organization (Panera Bread Company, 2011). As the numbers depict, there is a good probability for a Panera franchisee to turn profitable right at the franchise inception year unlike most startups that fold or only begin to turn profitable after the second or third year (Reid, 2009).
Strong financials. In a sector where differentiation and market penetration relies heavily on operating efficiencies and brand recognition, positioning and consumer demand; Panera has extremely strong financial conditions which can be attributed to strong and distinct business strategies. The company is highly profitable and has been operating through the great recession even when competitors were downsizing or operating in the negative. For comparison, based on a $100 per share investment, Panera was operating at an approximate 25% increase at the height of the recession in 2008. The S&P Mid Cap restaurant index, a sector grouping of Panera and its competitors, was collectively at an approximate 50% drop. Although the industry grew by slightly over 30% the following calendar year in 2009, it was still valued at a loss based on initial investments. On the contrary, Panera grew by another 37% and was valued well above the initial investment baseline at an over 70% increase (Panera Bread Company, 2010).
*initial investment of $100 December 25,2007
December 25, 2008
December 25, 2009 PBC
$ 91.54
$126.40
$172.74 NASDAQ
$123.71
$ 73.11
$105.61
S&P MidCap Restaurant
$100.96
$ 64.89
$ 85.04
Panera additionally has a strong investment outlook based on analysis from numerous financial firms and is currently viewed as trading below potential. The stock is currently trading in the $100 - $110 range (“Panera Bread Ratings”, 2011) however analysts have the stock trading at a level of $135. With tremendously positive cash flows, strong investment forecasts, zero debt, and stellar credit access; Panera’s capital resources enable the company to have strong investor relations to help leverage functioning and competing at very high levels and efficiencies.
Economies of scale. With a progressive growth rate and over 6 million weekly customers across their 1300 plus stores nationwide, Panera captures an “economies of scale” dynamic within its industry. Panera stands as one of the largest food service organizations in the US and the scale enables it to compete more advantageously with enhanced purchase, marketing, and specialized management power (Panera Bread Company, 2011).
Strong HR management program good. With a strong corporate culture that delivers an employee partnership initiative, Panera competes well to ensure a high level of customer service through retention of top industry talent by incentivizing their employees to do and perform well. Panera reinvests in their employees through progressive training programs that allow employees to grow as industry professionals, Panera corporate career track seekers or as potential future franchise managers and owners. There is also a unique joint venture program (JVP) which is a multi-year bonus program relative to a percentage of store cash flows. The program is a strong retention tool for store-level management and helps to create stability at the store level thereby promoting positive employee engagement which translates to improved customer engagement (Panera Bread Company, 2011).
Quality product yes. By 2011, nearly 18 years since the inception of the bakery-café concept that is now Panera Bread, the company has gathered strength in their product as a high quality, healthy food brand. On their menu is an assortment of artisan breads, led by an award winning, sourdough bread. As stated by CEO William Moreton, “Bread is our platform and the entry point to the Panera experience at our bakery-cafes. It is the symbol of Panera quality and a reminder of Panera warmth….” (Panera Bread Company, 2011). Panera’s multiple awards and recognitions such as “Best Bakery”, “Best Bread”, and “Healthy Eating on the Go” from national publications and organizations relay an exceptional corporate culture and brand image that sets itself apart from its competitors. Also brand name
Panera’s Weaknesses
Supply chain. Overdependence on its single distributor has been a cause of concern for Panera since its early days. The whole operation of the company depends on frequent deliveries of ingredients, produce, and other products to every bakery-cafe two or three times per week. In addition, the organization supplies both company-owned and franchise-operated restaurants with fresh dough and other products on a daily basis. The company’s overdependence on a single distributor reduces its bargaining power with the supplier which could adversely impact its business operations (Reuters, 2011). A recent shift Panera made was to attain some of its baked goods from external vendors instead of producing it internally but this again increases the power of suppliers.
Limited buying power. The restaurant industry is highly competitive with respect to location, customer service, price, taste, quality of products, and overall customer experience. Panera competes with specialty food, casual dining, and quick-service restaurant retailers, including large national and regional restaurants. Many of Panera’s competitors have substantially greater financial assets and resources (Panera Bread Company, 2011) which give them a stronger bargaining position in the market; for example Starbucks and McDonald 's recorded total revenues of $9,774.6 million and $22,744.7 million respectively in FY2009 whereas Panera recorded total revenues of $1,353.5 million which was much less compared to its peers (Wikiinvest, 2011). This limited buying power could turn out to be a disadvantage in the fiercely competitive market and if the organization is not able to address this factor successfully, it may be unable to sustain or increase its revenues and profitability.
High prices. Panera’s profitability depends in part on its ability to anticipate and react to changes in food and supply costs. The prices at Panera are higher than many other competitors because of the use of organic food in its menu. In the past, the organization has been able to recover inflationary cost and commodity price increases for fuel, proteins, dairy, produce, wheat, tuna, and cream cheese through increased menu prices (Panera Bread Company, 2011) however since many of Panera’s menu items directly correlate to commodity prices such as wheat and dairy, the supply process can get expensive very quickly in a volatile market which again can raise the price of the final product, causing aggravation for their existing customers.
Low customer awareness. The company’s success depends on its continuing ability to convince customers that food made with higher quality ingredients I guess this also depends on the external environment…under opportunities or threats is worth its price at the bakery-cafes relative to lower prices offered by some of the competitors, particularly those in the quick-service segment (Panera Bread Company, 2011). The organization’s current inability to successfully educate customers about the quality of its food could require change in marketing or promotional strategies which could materially and adversely affect the profitability of the company (Watson, 2010). In addition, other well-known restaurants are developing the same concept as Panera and this can potentially hurt the organization in the long run especially in new markets where the company is not yet established.
High franchising costs. The company’s growth strategy primarily consists of new market development and further penetration of existing markets, including the selection of new sites to achieve targeted returns on invested capital. The success of this strategy depends on numerous factors that are not completely controlled by Panera or involve risks that may impact the development of future bakery-cafes. In December 2010 approximately 54.4% of all Panera bakery-cafes were operated by franchisees (Panera Bread Company, 2011). The opening and success of franchises depend on a number of factors and the availability of suitable franchise candidates. Because of the high startup cost for every franchisee, the company has fewer candidates for new establishments yes. The future growth rate of the company will depend on the franchisees’ ability to receive financing from banks and other financial institutions, which may become more challenging in the current economic environment (Watson, 2010).
Panera’s Opportunities
Opportunities are defined as “favorable conditions in the environment that could produce rewards for the firm if acted upon properly; they are situations that exist but must be acted upon if the firm is to benefit from them” (Pride & Ferrell, 2006). The situations and conditions that exist for Panera are endless, but the most important opportunities available for Panera to pursue and exploit are market penetration, domestic and international market development, and product diversification.
Market penetration not an opportunity… this would be a corporate decision (internal) and not a market condition that needs to be acted on. Market penetration is “increasing sales of a firm’s present products in its present markets - probably through more aggressive marketing mix” (Perreault, Cannon, & McCarthy, 2009). Panera uses radio, billboards, social-networking, television, and in-store sampling days to promote their store but in total only 2.4% of overall net sales were spent on marketing in the fiscal year 2010 (Panera Bread Company, 2011). Although increasing advertising efforts could potentially attract repeat purchases, competitors’ customers, or new customers, Panera is still hesitant to increase these expenses drastically due to the potential adverse effects on the results of their consolidated operations. Their 2010 annual report addresses this concern in the following excerpt:
We expect our advertising expenses to continue to increase and to dedicate greater resources to advertising and marketing than in previous years. If new advertising and other marketing programs do not drive increased net bakery-café sales or if the costs of advertising media or marketing increase greater than expected, our consolidated financial results could be materially adversely affected. (p. 16)
It is obvious that Panera is aware that an increase in their advertising effort is needed not only at corporate level but at the franchisee level as well. The awareness of this opportunity is half the battle; now, Panera must make a valiant effort to increase its advertising with a positive attitude, using their current success as the motivation and exploit this opportunity to its fullest.
Domestic market development. Market development is defined as an “increase in sales by selling present products in new markets” (Perreault, Cannon, & McCarthy, 2009). There are currently 1,453 company-owned and franchise-operated bakery-cafes in 40 states, the District of Columbia, and Ontario, Canada (Panera Bread Company, 2011). Panera serves six million customers a week and is currently one of the largest food service companies in the US. Having stated the above facts, it is certain that Panera is desired by a plethora of different people, especially proven by the diverse areas of North America it currently operates in. This fact alone presents the serious opportunity of expanding into the other 10 states where it does not currently operate. Although Panera plans on expanding the number of bakery-cafes between 95 and 105 in 2011, these locations are not in the other 10 states, a market that is just waiting for a health-conscious chain to begin contributing to the overall physical wellbeing of its inhabitants how do you know.
International market development. Another aspect of market development is developing a competitive advantage abroad. “If customers are interested in the products a firm this is what you are trying to identify in this section offers or could offer, serving them may improve economies of scale” (Perreault, Cannon, & McCarthy, 2009). An added benefit of expanding globally is capitalizing on current trends around the world; the trend of increasing incomes and populations in other parts of the world is critical to overseas success. Entering an unhindered market for the fresh products that Panera offers could be an opportunity that would put Panera on the global map of food services, not just North America. Implementing their Canadian strategy globally (by tailoring it to the respective country) could prove very lucrative for Panera in the long-run.
Product development and diversification.
Panera currently serves “fresh baked goods, including a variety of freshly baked bagels, breads, muffins, scones, rolls, and sweet goods, made-to-order sandwiches on freshly baked breads, hearty, unique soups and side items, freshly prepared and hand-tossed salads, and custom roasted coffees and cafe beverages, such as hot or cold espresso and cappuccino drinks and smoothies” (Panera Bread Company, 2011). This is essentially Panera’s competitive advantage over its industry; organic, natural, fresh ingredients used to produce all of its menu items. Menu innovation is the main reason for Panera’s loyal customer base but though the company has constantly updated its food menu in the past, their beverage menu is lacking and needs attention. In 2010 Panera introduced a whopping 12 new items to its menu but every one of those items was a food item. Exploring the beverage menu could prove to be lucrative because it could attract consumers who would visit Panera not only for their amazing food, but also their beverages. The beverage industry is known for their beverages with their food being secondary whereas Panera is known for its awesome food with beverages being secondary. If Panera could attract the beverage consumers, they could potentially capture a portion of this market and entice them towards their food products as well. Panera obviously knows how to develop new products and introduce them - they just need to exploit the opportunity of diversifying into the beverage
industry.
Panera’s Threats
According to Pride and Ferrell (2006) threats refer to “conditions or barriers that may prevent the firm from reaching its objectives”. In other words, these are variables that affect an organization externally. Companies cannot influence any of these forces directly but they can definitely take steps to improve the resiliency of their organizations against them. Panera faces the following external threats from its existing and emerging competitors, and various other economic, legal, political, and natural forces:
Existing and emerging competition. Although Panera has been able to carve out a niche for itself in the restaurant industry, there is an imminent threat from the company’s current competitors that include fast food restaurants, sit-down restaurants, coffee houses, and casual dining restaurants. A change in the business strategy of any of these competitors could cause Panera to lose its competitive edge for example if Starbucks decides to extend its food menu or if McDonald’s decides to change its breakfast/desert menu to include bagels, muffins, scones, etc.; it could seriously hurt Panera’s business strategy and sales.
There is always a big threat from emerging competition since Panera is still an evolving business in the restaurant industry. If a new company is able imitate Panera’s current business model and offer better product prices, it could very well reduce their customer base and overall market share. Therefore the company needs to constantly modify its products, designs, and strategies to survive and succeed in the restaurant industry.
Economic environment. The current economic recession has reduced sales and income for companies all across the globe. Recent figures released in July 2011 show softer sales and lower customer traffic, with the US Restaurant Performance Index slipping to its lowest level in 11 months (Gauri, 2011). Inflation in addition to recession is adding to the woes of all businesses. Historically, the effects of inflation on a company’s consolidated results of operations have not been materially adverse (Associated Press, 2011) however increased volatility in certain commodity markets, including those for wheat, produce, and proteins, has an adverse effect on the company. In the past few years Panera’s operating income has wavered, primarily because of increased commodity prices (Wikiinvest, 2011). If this trend continues, the company will need to adjust its menu prices upwards to reflect the increase in commodity prices, which could potentially hurt its customer base.
Legal environment. Panera operates mainly through its franchise-operated bakery-cafes. These franchises have to go through a series of local, state, and federal agencies to get their licenses (Datamonitor, 2010). A change in laws at any level directly impacts the franchises and the company. Currently Panera requires each franchisee to open a minimum of 15 bakery-cafes in a particular geographic location within a period of 6 years. This strategy helps the company to expand very quickly however if for any reason a franchisee’s license is delayed or not approved; it can ruin the company’s business plan for the entire region at the same pace. In fact the company reiterates this threat by stating “difficulties or failures in obtaining and retaining the required licensing or approval could result in delays or cancellations in the opening of new fresh dough facilities or bakery-cafes as well as fines and possible closure of existing fresh dough facilities or bakery-cafes” (Panera Bread Company, 2011).
Political environment. Many oil-rich nations around the globe have been going through a phase of high uncertainty and conflict which has caused the price of crude oil to increase from $61.04 in December 2005 to $82.98 in October 2011 (“Crude Oil Price History”, 2011). This change has affected people and businesses alike. Panera operates facilities that supply and require fresh ingredients daily so increase in oil prices increases the company’s operating expenses drastically and reduces net income. Additionally Panera’s out-of-country operations (e.g. Canada) are subject to the laws and regulations of that country which causes further uncertainty and confusion for the company’s long-term strategy and planning.
Natural environment. Panera Bread relies heavily on its dough facilities for fresh supply of dough. This means that any potential supply disruption due to severe weather conditions could threaten the smooth running of its business operations. Shortage of products and supply disruptions would not only affect the company financially but also create dissatisfaction among its existing customers, reducing its goodwill and reputation in the market.
While the above threats are specific to Panera, the company is also open to external threats that affect the restaurant industry in general for example change in customers’ food preferences, increase in insurance rates, entry of substitute products, exposure to complaints and lawsuits, etc. Panera’s future survival and success in this industry depends on how fast and effectively it acts to prevent these threats from limiting its capabilities.
Potential Strategies
The below TOWS Matrix gives a summary of the strategies Panera Bread Company could use to exploit its strengths and opportunities, and tackle its threats and weaknesses successfully: INTERNAL FACTORS (IFAS)
EXTERNAL
FACTORS
(EFAS)
Strengths (S)
Differentiation
Operational excellence
Strong financials
Economies of scale
Strong HR management program
Quality product
Weaknesses (W)
Supply chain
Limited buying power
Higher prices
Low customer awareness
High franchising cost
Opportunities (O)
Market penetration
International market development
Domestic market development
Product development and diversification
SO Strategies
Strong financials for international market, product development, and domestic market penetration
Operational excellence and strong HR management program for domestic market development
WO Strategies
Improve market penetration by increasing customer awareness.
Improve market development by minimizing supply-chain dependence.
Product diversification by reducing the influence of commodity prices.
Threats (T)
Existing and emerging competition
Economic environment
Legal environment
Political environment
Natural environment
ST Strategies
Use differentiation and economies of scale to tackle competition.
Use operational excellence to solve economic and legal threats.
Use strong financials to solve political and natural threats.
WT Strategies
Reduce supply chain weakness to tackle threat from competition.
Eliminate high price and low buying power weaknesses to counter economic threats.
Increasing customer awareness to solve legal and political threats.
Strength-Opportunity (SO) Strategies
The following SO strategies pursue opportunities that can be effectively exploited using Panera’s strengths:
Use strong financials for international market, product development, and domestic market penetration. In order to continue in a high yield growth trajectory, Panera has to capitalize on opportunities to organize and expand its business strategy to promote growth in other major markets. One of Panera’s strengths exists heavily within its capital resources and utilization capabilities. Panera has an opportunity to market and expand its services beyond the North American borders. In the footsteps of McDonalds, Starbucks, and KFC who have found success beyond US borders; Panera must take advantage of transcending their brand to other continents that might be receptive to the service concept and product mix they have to offer. Panera indeed has the capital to invest in the appropriate market research in order to determine the best regions to penetrate. More importantly, they have the capital to take on the risk and to execute their strategies. As an opportunity marker take for example the successful 2010 fiscal numbers for McDonalds which were led by their global sales. McDonalds US sales were up in 2010 by 3.8% but their global sales were up 4.4% in Europe and 6% in the remaining global areas of operations (McDonalds Corporation, 2011).
Product development is also a key component for expanding business into a global market. It takes plenty of capital not only to launch global chains successfully but to sustain global demand and competition specific to global consumer markets. In some circumstances, product development may even move from opportunity to necessity for example if Panera opens chains in an Asian country, research may find that the menu is better served to include a rice dish of some nature as rice is a staple food in many Asian countries like China, Japan, and Philippines. Having familiar dishes can depict a more inviting establishment for that specific consumer group and increase consumer traffic because “people purchase foods based on their income level, their belief in a food 's health benefit, and cost however, ethnicity also impacts people 's food choices” (Lowe, Beydoun, &Wang, 2007).
The healthy capital structure to help launch product development opportunities in the global setting could also translate to penetrating domestic sub-ethnic markets successfully. For instance succeeding globally with the launch of a rice cake dish might give leverage for Panera stores in the US, that are located in predominantly Asian communities, to compete in local markets more effectively. As an added bonus, this dynamic could also work in the reverse.
Use operational excellence and strong HR management program for domestic market development. Panera is positioned uniquely in a sector of the restaurant industry that doesn’t currently have a direct competitor with the same national reach it currently captures however instead of sustaining their current hold as a leader in the bakery-café service concept, Panera can compete and earn market share from its many indirect competitors by utilizing a combination of its strengths. With a strong operational infrastructure, especially one that speaks well to talented employees and strategic investors, Panera has the ability to draw from other competitors’ talents and investor pools by continuing to strengthen its internal environment. Because Panera has a profitable business model and an incentivized labor force, it can increase market share by acquiring past or current franchisees or acquire past employees of competitive firms who have valuable knowledge, skills, abilities, and relations that can benefit the Panera family. The strategy may result in direct market penetration by stealing consumers attached to business relationships especially with large scale residual business for example Panera’s relatively new Catering division was a core driver in its 26% sales increase from 2009 to 2010 fiscal year (Panera Bread Company, 2011). Catering contracts can be large residual business to business transactions for Panera and its progressive growth could potentially be derived from the acquisition of competing personnel or investor relationships from competing firms who have accounts that make buying decisions based on a strong relationship with franchise owners or account managers. If Panera continues to compete well against its competitors for the best investors, labor and managerial talent, then by default, profitable business relationships attached to these individuals have high probability of transitioning into the Panera family.
Strength-Threat (ST) Strategies ST strategies identify ways whereby a firm can use its strengths to reduce its vulnerability to external threats (WikiSWOT, n.d.). Panera can use the following strategies to counter its external threats:
Use differentiation and economies of scale to tackle existing and emerging competition. Strong brand identity and strong customer loyalty are two important barriers of entry in any business environment (Investopedia, n.d.). Panera’s strength lies in its ability to differentiate itself from the other restaurants. By constantly improving processes, customer service, and menu offerings, the company can strengthen its reputation and increase customer loyalty. This will make it difficult for Starbucks or McDonald’s or any other competitor to succeed even if they entered Panera’s market niche in the future.
Further, new emerging companies cannot compete with the size of operations of established companies and hence they have high cost of production and low margins. As stated earlier, Panera enjoys economies of scale due to the size of its operations so the company can use this strength to increase its bargaining position with suppliers and create strong entry barriers against emerging competitors.
Use operational excellence to solve economic and legal threats. Panera’s operational excellence enables it to control its variable costs. During periods of inflation, the company could use this strength to effectively reduce operational costs and maintain the final price of their products. Additionally the “Panera Cares” program is a good way to highlight the company’s concern for its community while handling the threat of recession effectively.
To ensure that the company’s business strategies progress according to plan, Panera needs to exploit its relations with the current franchisees and create an alternate plan for the new franchisees. If for any reason a new franchisee’s license gets delayed or cancelled, one of the existing franchisees could pick up the process and continue with the plan until the original franchisee is ready to take over.
Use strong financials to solve political and natural threats. Currently Panera Bread Company does not have any outstanding dues, which gives them the opportunity to research and explore transportation options that are eco-friendly and cheap; for example the company can mitigate the threat of increase in oil price by investing in hybrid vehicles. This will help Panera in supporting the “green” concept and again highlight their corporate social responsibility.
Building backup warehouses locally is one strategy for the company to hedge against the threat of shortages caused due to unpredictable weather conditions. Another strategy for Panera would be to integrate backwards with some of the suppliers to increase operational capacity and ensure timely, cost-effective supplies. The company’s solid financial position permits it to undertake these demanding but potentially profitable tasks.
Weakness-Opportunity (WO) Strategies WO Strategies are strategies that are implemented specifically to defeat weaknesses within a company so that opportunities can be exploited. It is certain that Panera can successfully develop effective WO Strategies due to the minimal legitimate weaknesses present within the company (Perreault Jr., Cannon, & McCarthy, 2009). Currently Panera has the following three major opportunities that can definitely prove profitable if correct measures are taken to capitalize on them: Improve market penetration by increasing customer awareness. Panera has to overcome its weakness of inadequate marketing to take full advantage of the market penetration opportunity (Panera Bread Company, 2011). The company’s inability to inform its potential customers about the extensive health benefits and natural quality of its menu items could lead to a serious negative effect in attracting new customers (Watson, 2010). The only method for Panera to overcome this deficiency is to implement a more aggressive marketing mix by increasing their current advertisements (e.g. radio, billboards, social-networking, television, and in-store sampling days) or by developing a different marketing strategy (e.g. saturating local or national newspapers and magazines) to promote the health benefits and quality of their products. Improve market development by minimizing supply-chain dependence. The reason for Panera’s existence is its customers’ demand for organic, natural, and fresh made food products. To satisfy this purpose, all ingredients must be delivered multiple times throughout a week to ensure freshness of all foods. Fresh produce is delivered three to six times per week while other ingredients are delivered two to three times per week (Panera Bread Company, 2010). In order for Panera to expand globally or domestically, a more efficient method must be implemented to provide the same ingredients to all restaurants through preservation of delivered goods and modification of the frequency with which the company receives its ingredients. This will help in decreasing the final delivery costs as well. Panera Bread Company can take full advantage of the opportunity of market development (expansion) by implementing a strategy to “manage” the weakness of too frequent deliveries and providing options to ensure long-term preservation of fresh ingredients. Product diversification by reducing the influence of commodity prices. Although Panera tailors its products for customers, the company has not explored and exploited the beverage sector effectively. Volatility of commodity prices (which make up a large portion of their daily ingredients) precludes them from making a valiant effort to develop new beverages. Although these commodities do not directly affect the development of a beverage, Panera must adjust customer prices constantly to make up for the volatility. This type of inconsistency does not give Panera the opportunity to explore other menu items and requires them to concentrate on their food menu. If Panera could eliminate the weakness of having to charge customers higher to compensate for an ingredient’s volatility through possible price agreements with suppliers, then it will give the company the opportunity to diversify into the beverage industry.
Weakness-Threat (WT) Strategies
Panera Bread Company needs to evaluate its present industry standing and develop a defensive strategy to not be susceptible to external threats and avoid weaknesses. This will help the organization to be successful in a bad economic market without major downsizing and allow them to gradually expand while keeping costs low. For the organization to achieve this level of success, it needs to implement WT strategies that minimize weaknesses in the business and neutralize the possible impact of industry’s threats.
Reduce supply chain weakness to tackle threat from competition. Panera’s distinctive niche in the restaurant industry helps it achieve a strategic advantage against all its competitors, big and small. The company produces its main product, bread, in several fresh dough facilities and is able to deliver the product at lower operational cost to its stores (Watson, 2010). This vertical integration allows Panera to neutralize some of the threats from competing large restaurants by controlling its profit margin. On the other hand to minimize the impact of small scale competitors (such as privately owned local coffee or bakery shops) and the threat of entry of substitutes in the industry, the organization will need to market itself with the same warmth and welcoming appeal of a small neighborhood “mom and pop” shop.
Additionally the company needs to address the issue of overdependence on its single distributor. Since many of Panera’s menu ingredients are directly purchased from the open market at competitive prices, the company will need to move in a direction to acquire suppliers and look at alternate ways of delivery for all their restaurants. This will lower delivery prices and allow the firm to compete more strongly with its competitors.
Eliminate high price and low buying power weaknesses to counter economic threats. The restaurant business depends heavily on the discretionary spending of its customers. Companies usually implement low price strategies during economic slowdowns because they think it will help to retain customers and stay afloat (Thompson, 2008). Panera, however, can adopt a different approach to address this potential problem by giving customers more value for their money. By increasing the size and quality of their best-selling menu items, the company can continue charging prices at the same rate and sustain profitability in the long run.
Despite operating in an uncertain cost environment, the company’s concept of aggressive expansion will help Panera to remain strong as evidenced by the leading customer satisfaction ratings, high unit volumes, and resulting strong return on investment (Wikiinvest, 2011). This expansion strategy primarily consists of new market development and further penetration of existing markets. Panera’s franchising plan looks very aggressive for the next three to five years due to the opportunities presented by the current real estate market. This plan can propel the company to reach higher scale of operations, enlarge the firm’s market area, and drastically improve its buying power (Panera Bread Company, 2011). Without long-term debt, with small but sustainable growth over the last several years, high indexes of liquidity and profitability, the organization can definitely continue to expand and adopt an inflation-proof pricing approach.
Increasing customer awareness to solve legal and political threats. Study results suggest that developing positive customer perception relies not only on a company’s ability to increase consumer satisfaction but also on establishing a favorable image and perceived value therefore, favorable image building and brand expansion are crucial for Panera’s future (Combs, 2006). There has been a strong push for healthier eating and proper nutrition consumption in the US. Panera has adapted to this trend by offering a wider variety of salads, healthier meats, and healthier bread options. If the company can expand and capitalize on this latest trend more, it will be able to realize very high level of customer loyalty. By increasing marketing efforts to spread awareness of its use of natural ingredients and antibiotic-free chicken products, the company can maintain interest of its regular customers, satisfy changing consumer preferences, and be responsive to various healthy trends in the market (Watson, 2010).
The taste of consumers evolves over time due to many reasons. Panera should be very attentive to any changes or demands from their customers including the ones outside US (e.g. Canada). Growing number of restaurants now are posting nutrition information on their menus because today 83% of restaurant customers like nutrition information on the food products (Combs, 2006). Panera should continue to focus on a healthy menu advertisement and the presentation of its comprehensive nutritional information. The organization will also need to pay attention to various federal or local government regulations and ordinances. In many cities laws have been passed that require food establishments to post inspection results in a visible place (Panera Bread Company, 2011). By paying attention to its customer’s feedback and evolving healthy trends in the food industry Panera Bread Company can capitalize on its position to increase consumer satisfaction and establish a favorable business image and perceived value.
Conclusion
Responsible financial management in a debt ridden economy is a powerful position against any competitor. Panera is undoubtedly a successful business because they not only know what their customers enjoy and capitalize on that knowledge to the best of their abilities, but they also continue to utilize their capital wisely to invest in new, profitable venues. It is obvious that the company has already penetrated the threshold of success, making it much easier to identify their opportunities; the product is of great quality, the consumer base is large, the industry is thriving, and they are increasing their revenues every year. How wisely Panera Bread Company capitalizes on their successes and strengths in pursuit of the many opportunities available to them, while avoiding their weaknesses and threats, will truly dictate how well they perform in the future.
References
Associated Press. (2011). Panera Bread shares fall Friday. CBS MoneyWatch. Retrieved from http://moneywatch.bnet.com/economic-news/news/panera-bread-shares-fall-friday/6311884/
Businessmart. (2011). How much does a Panera franchise cost? Business Mart. Retrieved from http://franchises.businessmart.com/how-much-does-a-panera-franchise-cost.php
Combs, J. K. (2006). Effective Managing Service Chain Organizations. Organizational Dynamics, 35(4), 357-371.
Crude Oil Price History. (2011). Retrieved October 11, 2011, from http://www.nyse.tv/crude-oil-price-history.htm
Datamonitor. (2010). Panera Bread Company SWOT Analysis. Retrieved from EBSCOhost.
Fare Digest. (2011). Bakery-Café: The foodservice bright spot. CSPnet. Retrieved from http://www.cspnet.com/news/foodservice/articles/bakery-cafe-foodservice-bright-spot
Franchise Direct. (n.d.). Fast Casual Restaurant Franchise Industry Report. Franchise Direct. Retrieved from http://www.franchisedirect.com/foodfranchises/fastcasualrestaurantfranchisestudy/14/260
Gauri. (2011). The Great Recession & The Restaurant Industry. Beinformed. Retrieved from http://www.beinformedjournal.org/beinformed-journal/2011/9/17/the-great-recession-the-restaurant-industry.html
Investopedia. (n.d.). Barriers to Entry. Investopedia. Retrieved from http://www.investopedia.com/terms/b/barrierstoentry.asp#axzz1b5W00fhh
Killifer, V. (2011). What’s the hottest segment of the restaurant industry? Fast casual. Fast Casual. Retrieved from http://www.fastcasual.com/blog/6633/What-s-the-hottest-segment-of-the-restaurant-industry-Fast-casual-Infographic
Lowe, K., Beydoun, M., & Wang, Y. (2007). Johns Hopkins Researchers Examine Why People Eat the Foods They Do. Medical News Today. Retrieved from http://www.medicalnewstoday.com/releases/66258.php
McDonalds Corporation. (2011). 2010 Annual Report. McDonalds. Retrieved from http://www.aboutmcdonalds.com/etc/medialib/aboutMcDonalds/investor_relations3.Par.91546.File.dat/2010%20Interactive%20Annual%20Report.pdf
Minkin, T., Brittani R. (2009). America’s Top 10 Healthiest Fast Food Restaurants. Health Magazine. Retrieved from http://living.health.com/2009/02/19/americas-healthiest-fast-food-restaurants/
Panera Bread Company. (n.d.). 2010 Awards and Recognitions. Panera Bread. Retrieved from http://www.panerabread.com/about/press/awards.php
Panera Bread Company. (n.d.). Company FAQs. Panera Bread. Retrieved from http://www.panerabread.com/about/company/
Panera Bread Company. (n.d.). Our History. Panera Bread. Retrieved from http://www.panerabread.com/about/company/history.php
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Panera Bread Ratings & Financials. (2011). Share Builder. Retrieved from https://research.sharebuilder.com/customer/sharebuilder/Stocks/Snapshot?symbol=PNRA
Perreault, Jr., W. D., Cannon, J.P., & McCarthy, J.E. (2009). Basic marketing: A marketing strategy planning approach (17th ed.). New York, NY: McGraw-Hill/Irwin.
Pride, W. M. & Ferrell, O. C. (2006). Foundations of marketing. Boston, MA: Houghton Mifflin.
Reid, S. (2009). Business Timeline: How long will it take for your business to make a profit? Discovering Your Inner Samurai. Retrieved from http://www.discoveringyourinnersamurai.com/2009/06/business-timeline-how-long-will-it-take-for-your-business-to-make-a-profit.html
Reuters. (2011). Panera Bread Co (PNRA.O). Reuters. Retrieved from http://www.reuters.com/finance/stocks/companyProfile?symbol=PNRA.O
Thompson, A. S. (2008). Crafting and Executing Strategy. Ney York: McGraw-Hill.
Watson, R. (2010). Panera Bread Company-Case Study. Espire Marketing. Retrieved from http://www.espiremarketing.org/panera-bread-company-case-study/
Wheelen, T. L. & Hunger, J. D. (2010). Strategic management and business policy: Achieving sustainability. Upper Saddle River, NJ: Prentice Hall.
WikiInvest. (2011). Panera Bread Company (PNRA). Wiki Invest. Retrieved from http://www.wikinvest.com/stock/Panera_Bread_Company_(PNRA)
WikiSWOT. (n.d.). What is a SWOT Analysis? Wiki SWOT. Retrieved from http://www.wikiswot.com/swot.htm
Zagat. (2011). The 2010 Zagat Survey. Zagat. Retrieved from http://www.zagat.com/fastfood
I can tell that you put a lot of effort and time into this project…I appreciate that, and the truth is that that is where the learning takes place. My only complaint, well, lets call it an observation, is that your opportunities are not opportunities--- in other words, they are not defined by external market forces, but conditions that you assume may be opportunities. For example growing in international markets could be an opportunity, but unless you tell me that demand in those countries actually exist, where is the opportunity? This would just be speculation right? I would give you a 90%, because you certainly deserve an A but should fix this misconception, but due to the work/ effort I can tell you put in this project: …show more content…
95%
MGT 527 – Strategic Management
Homework # 2
Professor Mario Hayek
October 19, 2011
History With the original name Au Bon Pain Co., Panera Bread Company was founded in 1981 by Louis Kane and Ron Shaich. From its first stores along the east coast, Panera has grown to over 1,493 cafes in 40 states to include Ontario Canada. Their stated mission is “a loaf of bread in every arm”, with a “single goal of making great bread broadly available to consumers across America” (Panera Bread Company, n.d.). The café-style restaurants offer fast casual dining experience with a product line from bread, bagels, made-to-order sandwiches, tossed-to-order salads, and soup served in bread bowls. Panera’s success has not gone unnoticed; since 2002 customers have rated Panera top among other chain restaurants in the Sandleman & Associates Quick-Track “Awards of Excellence”. The company has also been named “Most Popular” (Zagat, 2011), in addition to being awarded #1 ranking for “Best Salad and Best Facilities”. This attention from customers has paid off with Panera being ranked in the Fortune magazine’s “Top 25 Customer Service Champs” and “100 Fastest-Growing Companies” of 2010 (Panera Bread Company, n.d.). nice
Industry Overview Panera belongs to a category of the restaurant industry called “fast casual” and also to its subcategory called “bakery-café”. Fast casual is defined “as a hybrid of quick service and casual dining that offers consumers more freshly prepared and customized products than fast food restaurants” (Franchise Direct, n.d.). It wasn’t too long ago when there were only a few in the restaurant industry who knew about fast casual (Killifer, 2011) but today there are many more such businesses who are also Panera’s competitors for example Chipotle, Panda Express, Boston Market, and Einstein Bros’ Bagels. One of the bright spots concerning the fast casual industry is that since the economic downturn, this segment has led the restaurant industry in both sales and unit growth and it continues to outperform on both fronts (Killifer, 2011). It is clear that there is something to this industry even during bad times; let’s take a closer look at Panera Bread Company, the leader in this industry.
SWOT Analysis A SWOT analysis helps in identifying a company’s distinctive competencies and the opportunities that the firm is not currently able to take advantage of due to lack of appropriate resources (Wheelen & Hunger, 2010). A detailed look at Panera’s operating environment reveals the following:
Panera 's Strengths
Differentiation. Organic food…As a specialty bakery-café concept, it is one of few organizations that successfully positioned the concept at a national stage. The strategy consists of value pricing with exceptional quality and an inviting delivery method. Each store is equipped with comfortable furnishings that establish a quality atmosphere to dine and lounge for a desired repeat consumer experience. The menu and hours of operation allow for consumers to benefit from the product and service through breakfast, lunch, and dinner. Panera also offers its consumers the largest nationwide WIFI connection as part of the Panera dining experience. As a specialty bakery and combination café; these relatively simple concepts, in combination, provide Panera customers a unique selling proposition over its direct competitors.
Operational excellence. Operational excellence drives this business from managing its employees to managing its different business segments to delivering exceptional customer service. The company is leveraged between corporate-owned stores and a top class franchise program. The company also operates a fresh dough manufacturing segment that supplies proprietary units to both corporate-owned and franchised stores at a controlled price is this a strength…aren’t all franchises like this?. The relationship helps control variable costs of their product mix. They also have a strong ROI for their progressive franchises based on historical and forecasted growth trajectories. This is a competitive advantage for their overall business strategy as an avenue to promote growth of the brand and its profitability through the strong entrepreneurship of highly qualified franchise investors. Income from a franchise include initial franchise fee of $35K, a royalty fee between 4% - 5% of sales, and an overall initial investment of approximately $1.1 to 2 million, all inclusive (BusinessMart, 2011). The average net sales after royalties were at an estimated $2.1 million per store for fiscal year 2010 which is better than average for a startup organization (Panera Bread Company, 2011). As the numbers depict, there is a good probability for a Panera franchisee to turn profitable right at the franchise inception year unlike most startups that fold or only begin to turn profitable after the second or third year (Reid, 2009).
Strong financials. In a sector where differentiation and market penetration relies heavily on operating efficiencies and brand recognition, positioning and consumer demand; Panera has extremely strong financial conditions which can be attributed to strong and distinct business strategies. The company is highly profitable and has been operating through the great recession even when competitors were downsizing or operating in the negative. For comparison, based on a $100 per share investment, Panera was operating at an approximate 25% increase at the height of the recession in 2008. The S&P Mid Cap restaurant index, a sector grouping of Panera and its competitors, was collectively at an approximate 50% drop. Although the industry grew by slightly over 30% the following calendar year in 2009, it was still valued at a loss based on initial investments. On the contrary, Panera grew by another 37% and was valued well above the initial investment baseline at an over 70% increase (Panera Bread Company, 2010).
*initial investment of $100 December 25,2007
December 25, 2008
December 25, 2009 PBC
$ 91.54
$126.40
$172.74 NASDAQ
$123.71
$ 73.11
$105.61
S&P MidCap Restaurant
$100.96
$ 64.89
$ 85.04
Panera additionally has a strong investment outlook based on analysis from numerous financial firms and is currently viewed as trading below potential. The stock is currently trading in the $100 - $110 range (“Panera Bread Ratings”, 2011) however analysts have the stock trading at a level of $135. With tremendously positive cash flows, strong investment forecasts, zero debt, and stellar credit access; Panera’s capital resources enable the company to have strong investor relations to help leverage functioning and competing at very high levels and efficiencies.
Economies of scale. With a progressive growth rate and over 6 million weekly customers across their 1300 plus stores nationwide, Panera captures an “economies of scale” dynamic within its industry. Panera stands as one of the largest food service organizations in the US and the scale enables it to compete more advantageously with enhanced purchase, marketing, and specialized management power (Panera Bread Company, 2011).
Strong HR management program good. With a strong corporate culture that delivers an employee partnership initiative, Panera competes well to ensure a high level of customer service through retention of top industry talent by incentivizing their employees to do and perform well. Panera reinvests in their employees through progressive training programs that allow employees to grow as industry professionals, Panera corporate career track seekers or as potential future franchise managers and owners. There is also a unique joint venture program (JVP) which is a multi-year bonus program relative to a percentage of store cash flows. The program is a strong retention tool for store-level management and helps to create stability at the store level thereby promoting positive employee engagement which translates to improved customer engagement (Panera Bread Company, 2011).
Quality product yes. By 2011, nearly 18 years since the inception of the bakery-café concept that is now Panera Bread, the company has gathered strength in their product as a high quality, healthy food brand. On their menu is an assortment of artisan breads, led by an award winning, sourdough bread. As stated by CEO William Moreton, “Bread is our platform and the entry point to the Panera experience at our bakery-cafes. It is the symbol of Panera quality and a reminder of Panera warmth….” (Panera Bread Company, 2011). Panera’s multiple awards and recognitions such as “Best Bakery”, “Best Bread”, and “Healthy Eating on the Go” from national publications and organizations relay an exceptional corporate culture and brand image that sets itself apart from its competitors. Also brand name
Panera’s Weaknesses
Supply chain. Overdependence on its single distributor has been a cause of concern for Panera since its early days. The whole operation of the company depends on frequent deliveries of ingredients, produce, and other products to every bakery-cafe two or three times per week. In addition, the organization supplies both company-owned and franchise-operated restaurants with fresh dough and other products on a daily basis. The company’s overdependence on a single distributor reduces its bargaining power with the supplier which could adversely impact its business operations (Reuters, 2011). A recent shift Panera made was to attain some of its baked goods from external vendors instead of producing it internally but this again increases the power of suppliers.
Limited buying power. The restaurant industry is highly competitive with respect to location, customer service, price, taste, quality of products, and overall customer experience. Panera competes with specialty food, casual dining, and quick-service restaurant retailers, including large national and regional restaurants. Many of Panera’s competitors have substantially greater financial assets and resources (Panera Bread Company, 2011) which give them a stronger bargaining position in the market; for example Starbucks and McDonald 's recorded total revenues of $9,774.6 million and $22,744.7 million respectively in FY2009 whereas Panera recorded total revenues of $1,353.5 million which was much less compared to its peers (Wikiinvest, 2011). This limited buying power could turn out to be a disadvantage in the fiercely competitive market and if the organization is not able to address this factor successfully, it may be unable to sustain or increase its revenues and profitability.
High prices. Panera’s profitability depends in part on its ability to anticipate and react to changes in food and supply costs. The prices at Panera are higher than many other competitors because of the use of organic food in its menu. In the past, the organization has been able to recover inflationary cost and commodity price increases for fuel, proteins, dairy, produce, wheat, tuna, and cream cheese through increased menu prices (Panera Bread Company, 2011) however since many of Panera’s menu items directly correlate to commodity prices such as wheat and dairy, the supply process can get expensive very quickly in a volatile market which again can raise the price of the final product, causing aggravation for their existing customers.
Low customer awareness. The company’s success depends on its continuing ability to convince customers that food made with higher quality ingredients I guess this also depends on the external environment…under opportunities or threats is worth its price at the bakery-cafes relative to lower prices offered by some of the competitors, particularly those in the quick-service segment (Panera Bread Company, 2011). The organization’s current inability to successfully educate customers about the quality of its food could require change in marketing or promotional strategies which could materially and adversely affect the profitability of the company (Watson, 2010). In addition, other well-known restaurants are developing the same concept as Panera and this can potentially hurt the organization in the long run especially in new markets where the company is not yet established.
High franchising costs. The company’s growth strategy primarily consists of new market development and further penetration of existing markets, including the selection of new sites to achieve targeted returns on invested capital. The success of this strategy depends on numerous factors that are not completely controlled by Panera or involve risks that may impact the development of future bakery-cafes. In December 2010 approximately 54.4% of all Panera bakery-cafes were operated by franchisees (Panera Bread Company, 2011). The opening and success of franchises depend on a number of factors and the availability of suitable franchise candidates. Because of the high startup cost for every franchisee, the company has fewer candidates for new establishments yes. The future growth rate of the company will depend on the franchisees’ ability to receive financing from banks and other financial institutions, which may become more challenging in the current economic environment (Watson, 2010).
Panera’s Opportunities
Opportunities are defined as “favorable conditions in the environment that could produce rewards for the firm if acted upon properly; they are situations that exist but must be acted upon if the firm is to benefit from them” (Pride & Ferrell, 2006). The situations and conditions that exist for Panera are endless, but the most important opportunities available for Panera to pursue and exploit are market penetration, domestic and international market development, and product diversification.
Market penetration not an opportunity… this would be a corporate decision (internal) and not a market condition that needs to be acted on. Market penetration is “increasing sales of a firm’s present products in its present markets - probably through more aggressive marketing mix” (Perreault, Cannon, & McCarthy, 2009). Panera uses radio, billboards, social-networking, television, and in-store sampling days to promote their store but in total only 2.4% of overall net sales were spent on marketing in the fiscal year 2010 (Panera Bread Company, 2011). Although increasing advertising efforts could potentially attract repeat purchases, competitors’ customers, or new customers, Panera is still hesitant to increase these expenses drastically due to the potential adverse effects on the results of their consolidated operations. Their 2010 annual report addresses this concern in the following excerpt:
We expect our advertising expenses to continue to increase and to dedicate greater resources to advertising and marketing than in previous years. If new advertising and other marketing programs do not drive increased net bakery-café sales or if the costs of advertising media or marketing increase greater than expected, our consolidated financial results could be materially adversely affected. (p. 16)
It is obvious that Panera is aware that an increase in their advertising effort is needed not only at corporate level but at the franchisee level as well. The awareness of this opportunity is half the battle; now, Panera must make a valiant effort to increase its advertising with a positive attitude, using their current success as the motivation and exploit this opportunity to its fullest.
Domestic market development. Market development is defined as an “increase in sales by selling present products in new markets” (Perreault, Cannon, & McCarthy, 2009). There are currently 1,453 company-owned and franchise-operated bakery-cafes in 40 states, the District of Columbia, and Ontario, Canada (Panera Bread Company, 2011). Panera serves six million customers a week and is currently one of the largest food service companies in the US. Having stated the above facts, it is certain that Panera is desired by a plethora of different people, especially proven by the diverse areas of North America it currently operates in. This fact alone presents the serious opportunity of expanding into the other 10 states where it does not currently operate. Although Panera plans on expanding the number of bakery-cafes between 95 and 105 in 2011, these locations are not in the other 10 states, a market that is just waiting for a health-conscious chain to begin contributing to the overall physical wellbeing of its inhabitants how do you know.
International market development. Another aspect of market development is developing a competitive advantage abroad. “If customers are interested in the products a firm this is what you are trying to identify in this section offers or could offer, serving them may improve economies of scale” (Perreault, Cannon, & McCarthy, 2009). An added benefit of expanding globally is capitalizing on current trends around the world; the trend of increasing incomes and populations in other parts of the world is critical to overseas success. Entering an unhindered market for the fresh products that Panera offers could be an opportunity that would put Panera on the global map of food services, not just North America. Implementing their Canadian strategy globally (by tailoring it to the respective country) could prove very lucrative for Panera in the long-run.
Product development and diversification.
Panera currently serves “fresh baked goods, including a variety of freshly baked bagels, breads, muffins, scones, rolls, and sweet goods, made-to-order sandwiches on freshly baked breads, hearty, unique soups and side items, freshly prepared and hand-tossed salads, and custom roasted coffees and cafe beverages, such as hot or cold espresso and cappuccino drinks and smoothies” (Panera Bread Company, 2011). This is essentially Panera’s competitive advantage over its industry; organic, natural, fresh ingredients used to produce all of its menu items. Menu innovation is the main reason for Panera’s loyal customer base but though the company has constantly updated its food menu in the past, their beverage menu is lacking and needs attention. In 2010 Panera introduced a whopping 12 new items to its menu but every one of those items was a food item. Exploring the beverage menu could prove to be lucrative because it could attract consumers who would visit Panera not only for their amazing food, but also their beverages. The beverage industry is known for their beverages with their food being secondary whereas Panera is known for its awesome food with beverages being secondary. If Panera could attract the beverage consumers, they could potentially capture a portion of this market and entice them towards their food products as well. Panera obviously knows how to develop new products and introduce them - they just need to exploit the opportunity of diversifying into the beverage
industry.
Panera’s Threats
According to Pride and Ferrell (2006) threats refer to “conditions or barriers that may prevent the firm from reaching its objectives”. In other words, these are variables that affect an organization externally. Companies cannot influence any of these forces directly but they can definitely take steps to improve the resiliency of their organizations against them. Panera faces the following external threats from its existing and emerging competitors, and various other economic, legal, political, and natural forces:
Existing and emerging competition. Although Panera has been able to carve out a niche for itself in the restaurant industry, there is an imminent threat from the company’s current competitors that include fast food restaurants, sit-down restaurants, coffee houses, and casual dining restaurants. A change in the business strategy of any of these competitors could cause Panera to lose its competitive edge for example if Starbucks decides to extend its food menu or if McDonald’s decides to change its breakfast/desert menu to include bagels, muffins, scones, etc.; it could seriously hurt Panera’s business strategy and sales.
There is always a big threat from emerging competition since Panera is still an evolving business in the restaurant industry. If a new company is able imitate Panera’s current business model and offer better product prices, it could very well reduce their customer base and overall market share. Therefore the company needs to constantly modify its products, designs, and strategies to survive and succeed in the restaurant industry.
Economic environment. The current economic recession has reduced sales and income for companies all across the globe. Recent figures released in July 2011 show softer sales and lower customer traffic, with the US Restaurant Performance Index slipping to its lowest level in 11 months (Gauri, 2011). Inflation in addition to recession is adding to the woes of all businesses. Historically, the effects of inflation on a company’s consolidated results of operations have not been materially adverse (Associated Press, 2011) however increased volatility in certain commodity markets, including those for wheat, produce, and proteins, has an adverse effect on the company. In the past few years Panera’s operating income has wavered, primarily because of increased commodity prices (Wikiinvest, 2011). If this trend continues, the company will need to adjust its menu prices upwards to reflect the increase in commodity prices, which could potentially hurt its customer base.
Legal environment. Panera operates mainly through its franchise-operated bakery-cafes. These franchises have to go through a series of local, state, and federal agencies to get their licenses (Datamonitor, 2010). A change in laws at any level directly impacts the franchises and the company. Currently Panera requires each franchisee to open a minimum of 15 bakery-cafes in a particular geographic location within a period of 6 years. This strategy helps the company to expand very quickly however if for any reason a franchisee’s license is delayed or not approved; it can ruin the company’s business plan for the entire region at the same pace. In fact the company reiterates this threat by stating “difficulties or failures in obtaining and retaining the required licensing or approval could result in delays or cancellations in the opening of new fresh dough facilities or bakery-cafes as well as fines and possible closure of existing fresh dough facilities or bakery-cafes” (Panera Bread Company, 2011).
Political environment. Many oil-rich nations around the globe have been going through a phase of high uncertainty and conflict which has caused the price of crude oil to increase from $61.04 in December 2005 to $82.98 in October 2011 (“Crude Oil Price History”, 2011). This change has affected people and businesses alike. Panera operates facilities that supply and require fresh ingredients daily so increase in oil prices increases the company’s operating expenses drastically and reduces net income. Additionally Panera’s out-of-country operations (e.g. Canada) are subject to the laws and regulations of that country which causes further uncertainty and confusion for the company’s long-term strategy and planning.
Natural environment. Panera Bread relies heavily on its dough facilities for fresh supply of dough. This means that any potential supply disruption due to severe weather conditions could threaten the smooth running of its business operations. Shortage of products and supply disruptions would not only affect the company financially but also create dissatisfaction among its existing customers, reducing its goodwill and reputation in the market.
While the above threats are specific to Panera, the company is also open to external threats that affect the restaurant industry in general for example change in customers’ food preferences, increase in insurance rates, entry of substitute products, exposure to complaints and lawsuits, etc. Panera’s future survival and success in this industry depends on how fast and effectively it acts to prevent these threats from limiting its capabilities.
Potential Strategies
The below TOWS Matrix gives a summary of the strategies Panera Bread Company could use to exploit its strengths and opportunities, and tackle its threats and weaknesses successfully: INTERNAL FACTORS (IFAS)
EXTERNAL
FACTORS
(EFAS)
Strengths (S)
Differentiation
Operational excellence
Strong financials
Economies of scale
Strong HR management program
Quality product
Weaknesses (W)
Supply chain
Limited buying power
Higher prices
Low customer awareness
High franchising cost
Opportunities (O)
Market penetration
International market development
Domestic market development
Product development and diversification
SO Strategies
Strong financials for international market, product development, and domestic market penetration
Operational excellence and strong HR management program for domestic market development
WO Strategies
Improve market penetration by increasing customer awareness.
Improve market development by minimizing supply-chain dependence.
Product diversification by reducing the influence of commodity prices.
Threats (T)
Existing and emerging competition
Economic environment
Legal environment
Political environment
Natural environment
ST Strategies
Use differentiation and economies of scale to tackle competition.
Use operational excellence to solve economic and legal threats.
Use strong financials to solve political and natural threats.
WT Strategies
Reduce supply chain weakness to tackle threat from competition.
Eliminate high price and low buying power weaknesses to counter economic threats.
Increasing customer awareness to solve legal and political threats.
Strength-Opportunity (SO) Strategies
The following SO strategies pursue opportunities that can be effectively exploited using Panera’s strengths:
Use strong financials for international market, product development, and domestic market penetration. In order to continue in a high yield growth trajectory, Panera has to capitalize on opportunities to organize and expand its business strategy to promote growth in other major markets. One of Panera’s strengths exists heavily within its capital resources and utilization capabilities. Panera has an opportunity to market and expand its services beyond the North American borders. In the footsteps of McDonalds, Starbucks, and KFC who have found success beyond US borders; Panera must take advantage of transcending their brand to other continents that might be receptive to the service concept and product mix they have to offer. Panera indeed has the capital to invest in the appropriate market research in order to determine the best regions to penetrate. More importantly, they have the capital to take on the risk and to execute their strategies. As an opportunity marker take for example the successful 2010 fiscal numbers for McDonalds which were led by their global sales. McDonalds US sales were up in 2010 by 3.8% but their global sales were up 4.4% in Europe and 6% in the remaining global areas of operations (McDonalds Corporation, 2011).
Product development is also a key component for expanding business into a global market. It takes plenty of capital not only to launch global chains successfully but to sustain global demand and competition specific to global consumer markets. In some circumstances, product development may even move from opportunity to necessity for example if Panera opens chains in an Asian country, research may find that the menu is better served to include a rice dish of some nature as rice is a staple food in many Asian countries like China, Japan, and Philippines. Having familiar dishes can depict a more inviting establishment for that specific consumer group and increase consumer traffic because “people purchase foods based on their income level, their belief in a food 's health benefit, and cost however, ethnicity also impacts people 's food choices” (Lowe, Beydoun, &Wang, 2007).
The healthy capital structure to help launch product development opportunities in the global setting could also translate to penetrating domestic sub-ethnic markets successfully. For instance succeeding globally with the launch of a rice cake dish might give leverage for Panera stores in the US, that are located in predominantly Asian communities, to compete in local markets more effectively. As an added bonus, this dynamic could also work in the reverse.
Use operational excellence and strong HR management program for domestic market development. Panera is positioned uniquely in a sector of the restaurant industry that doesn’t currently have a direct competitor with the same national reach it currently captures however instead of sustaining their current hold as a leader in the bakery-café service concept, Panera can compete and earn market share from its many indirect competitors by utilizing a combination of its strengths. With a strong operational infrastructure, especially one that speaks well to talented employees and strategic investors, Panera has the ability to draw from other competitors’ talents and investor pools by continuing to strengthen its internal environment. Because Panera has a profitable business model and an incentivized labor force, it can increase market share by acquiring past or current franchisees or acquire past employees of competitive firms who have valuable knowledge, skills, abilities, and relations that can benefit the Panera family. The strategy may result in direct market penetration by stealing consumers attached to business relationships especially with large scale residual business for example Panera’s relatively new Catering division was a core driver in its 26% sales increase from 2009 to 2010 fiscal year (Panera Bread Company, 2011). Catering contracts can be large residual business to business transactions for Panera and its progressive growth could potentially be derived from the acquisition of competing personnel or investor relationships from competing firms who have accounts that make buying decisions based on a strong relationship with franchise owners or account managers. If Panera continues to compete well against its competitors for the best investors, labor and managerial talent, then by default, profitable business relationships attached to these individuals have high probability of transitioning into the Panera family.
Strength-Threat (ST) Strategies ST strategies identify ways whereby a firm can use its strengths to reduce its vulnerability to external threats (WikiSWOT, n.d.). Panera can use the following strategies to counter its external threats:
Use differentiation and economies of scale to tackle existing and emerging competition. Strong brand identity and strong customer loyalty are two important barriers of entry in any business environment (Investopedia, n.d.). Panera’s strength lies in its ability to differentiate itself from the other restaurants. By constantly improving processes, customer service, and menu offerings, the company can strengthen its reputation and increase customer loyalty. This will make it difficult for Starbucks or McDonald’s or any other competitor to succeed even if they entered Panera’s market niche in the future.
Further, new emerging companies cannot compete with the size of operations of established companies and hence they have high cost of production and low margins. As stated earlier, Panera enjoys economies of scale due to the size of its operations so the company can use this strength to increase its bargaining position with suppliers and create strong entry barriers against emerging competitors.
Use operational excellence to solve economic and legal threats. Panera’s operational excellence enables it to control its variable costs. During periods of inflation, the company could use this strength to effectively reduce operational costs and maintain the final price of their products. Additionally the “Panera Cares” program is a good way to highlight the company’s concern for its community while handling the threat of recession effectively.
To ensure that the company’s business strategies progress according to plan, Panera needs to exploit its relations with the current franchisees and create an alternate plan for the new franchisees. If for any reason a new franchisee’s license gets delayed or cancelled, one of the existing franchisees could pick up the process and continue with the plan until the original franchisee is ready to take over.
Use strong financials to solve political and natural threats. Currently Panera Bread Company does not have any outstanding dues, which gives them the opportunity to research and explore transportation options that are eco-friendly and cheap; for example the company can mitigate the threat of increase in oil price by investing in hybrid vehicles. This will help Panera in supporting the “green” concept and again highlight their corporate social responsibility.
Building backup warehouses locally is one strategy for the company to hedge against the threat of shortages caused due to unpredictable weather conditions. Another strategy for Panera would be to integrate backwards with some of the suppliers to increase operational capacity and ensure timely, cost-effective supplies. The company’s solid financial position permits it to undertake these demanding but potentially profitable tasks.
Weakness-Opportunity (WO) Strategies WO Strategies are strategies that are implemented specifically to defeat weaknesses within a company so that opportunities can be exploited. It is certain that Panera can successfully develop effective WO Strategies due to the minimal legitimate weaknesses present within the company (Perreault Jr., Cannon, & McCarthy, 2009). Currently Panera has the following three major opportunities that can definitely prove profitable if correct measures are taken to capitalize on them: Improve market penetration by increasing customer awareness. Panera has to overcome its weakness of inadequate marketing to take full advantage of the market penetration opportunity (Panera Bread Company, 2011). The company’s inability to inform its potential customers about the extensive health benefits and natural quality of its menu items could lead to a serious negative effect in attracting new customers (Watson, 2010). The only method for Panera to overcome this deficiency is to implement a more aggressive marketing mix by increasing their current advertisements (e.g. radio, billboards, social-networking, television, and in-store sampling days) or by developing a different marketing strategy (e.g. saturating local or national newspapers and magazines) to promote the health benefits and quality of their products. Improve market development by minimizing supply-chain dependence. The reason for Panera’s existence is its customers’ demand for organic, natural, and fresh made food products. To satisfy this purpose, all ingredients must be delivered multiple times throughout a week to ensure freshness of all foods. Fresh produce is delivered three to six times per week while other ingredients are delivered two to three times per week (Panera Bread Company, 2010). In order for Panera to expand globally or domestically, a more efficient method must be implemented to provide the same ingredients to all restaurants through preservation of delivered goods and modification of the frequency with which the company receives its ingredients. This will help in decreasing the final delivery costs as well. Panera Bread Company can take full advantage of the opportunity of market development (expansion) by implementing a strategy to “manage” the weakness of too frequent deliveries and providing options to ensure long-term preservation of fresh ingredients. Product diversification by reducing the influence of commodity prices. Although Panera tailors its products for customers, the company has not explored and exploited the beverage sector effectively. Volatility of commodity prices (which make up a large portion of their daily ingredients) precludes them from making a valiant effort to develop new beverages. Although these commodities do not directly affect the development of a beverage, Panera must adjust customer prices constantly to make up for the volatility. This type of inconsistency does not give Panera the opportunity to explore other menu items and requires them to concentrate on their food menu. If Panera could eliminate the weakness of having to charge customers higher to compensate for an ingredient’s volatility through possible price agreements with suppliers, then it will give the company the opportunity to diversify into the beverage industry.
Weakness-Threat (WT) Strategies
Panera Bread Company needs to evaluate its present industry standing and develop a defensive strategy to not be susceptible to external threats and avoid weaknesses. This will help the organization to be successful in a bad economic market without major downsizing and allow them to gradually expand while keeping costs low. For the organization to achieve this level of success, it needs to implement WT strategies that minimize weaknesses in the business and neutralize the possible impact of industry’s threats.
Reduce supply chain weakness to tackle threat from competition. Panera’s distinctive niche in the restaurant industry helps it achieve a strategic advantage against all its competitors, big and small. The company produces its main product, bread, in several fresh dough facilities and is able to deliver the product at lower operational cost to its stores (Watson, 2010). This vertical integration allows Panera to neutralize some of the threats from competing large restaurants by controlling its profit margin. On the other hand to minimize the impact of small scale competitors (such as privately owned local coffee or bakery shops) and the threat of entry of substitutes in the industry, the organization will need to market itself with the same warmth and welcoming appeal of a small neighborhood “mom and pop” shop.
Additionally the company needs to address the issue of overdependence on its single distributor. Since many of Panera’s menu ingredients are directly purchased from the open market at competitive prices, the company will need to move in a direction to acquire suppliers and look at alternate ways of delivery for all their restaurants. This will lower delivery prices and allow the firm to compete more strongly with its competitors.
Eliminate high price and low buying power weaknesses to counter economic threats. The restaurant business depends heavily on the discretionary spending of its customers. Companies usually implement low price strategies during economic slowdowns because they think it will help to retain customers and stay afloat (Thompson, 2008). Panera, however, can adopt a different approach to address this potential problem by giving customers more value for their money. By increasing the size and quality of their best-selling menu items, the company can continue charging prices at the same rate and sustain profitability in the long run.
Despite operating in an uncertain cost environment, the company’s concept of aggressive expansion will help Panera to remain strong as evidenced by the leading customer satisfaction ratings, high unit volumes, and resulting strong return on investment (Wikiinvest, 2011). This expansion strategy primarily consists of new market development and further penetration of existing markets. Panera’s franchising plan looks very aggressive for the next three to five years due to the opportunities presented by the current real estate market. This plan can propel the company to reach higher scale of operations, enlarge the firm’s market area, and drastically improve its buying power (Panera Bread Company, 2011). Without long-term debt, with small but sustainable growth over the last several years, high indexes of liquidity and profitability, the organization can definitely continue to expand and adopt an inflation-proof pricing approach.
Increasing customer awareness to solve legal and political threats. Study results suggest that developing positive customer perception relies not only on a company’s ability to increase consumer satisfaction but also on establishing a favorable image and perceived value therefore, favorable image building and brand expansion are crucial for Panera’s future (Combs, 2006). There has been a strong push for healthier eating and proper nutrition consumption in the US. Panera has adapted to this trend by offering a wider variety of salads, healthier meats, and healthier bread options. If the company can expand and capitalize on this latest trend more, it will be able to realize very high level of customer loyalty. By increasing marketing efforts to spread awareness of its use of natural ingredients and antibiotic-free chicken products, the company can maintain interest of its regular customers, satisfy changing consumer preferences, and be responsive to various healthy trends in the market (Watson, 2010).
The taste of consumers evolves over time due to many reasons. Panera should be very attentive to any changes or demands from their customers including the ones outside US (e.g. Canada). Growing number of restaurants now are posting nutrition information on their menus because today 83% of restaurant customers like nutrition information on the food products (Combs, 2006). Panera should continue to focus on a healthy menu advertisement and the presentation of its comprehensive nutritional information. The organization will also need to pay attention to various federal or local government regulations and ordinances. In many cities laws have been passed that require food establishments to post inspection results in a visible place (Panera Bread Company, 2011). By paying attention to its customer’s feedback and evolving healthy trends in the food industry Panera Bread Company can capitalize on its position to increase consumer satisfaction and establish a favorable business image and perceived value.
Conclusion
Responsible financial management in a debt ridden economy is a powerful position against any competitor. Panera is undoubtedly a successful business because they not only know what their customers enjoy and capitalize on that knowledge to the best of their abilities, but they also continue to utilize their capital wisely to invest in new, profitable venues. It is obvious that the company has already penetrated the threshold of success, making it much easier to identify their opportunities; the product is of great quality, the consumer base is large, the industry is thriving, and they are increasing their revenues every year. How wisely Panera Bread Company capitalizes on their successes and strengths in pursuit of the many opportunities available to them, while avoiding their weaknesses and threats, will truly dictate how well they perform in the future.
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