Panera Bread has an opportunity for growth within a challenging industry in two key areas: increasing sales of specialty drinks and opening international locations, which will allow the company to spread its mission of fresh bread for everyone while increasing sales. results for shareholders. By using many frameworks to think about and project the financial estimates of the company, we can empirically show that these two strategies will be beneficial to the client.
Use Historically High Margins on Specialty Beverages to Drive Final Growth
While Panera’s core business revolves around fresh bread, the style of the locations suggests that there is substantial revenue from the sale of coffee and related beverages, similar to Starbucks. Regarding the coffee market, the estimated real growth is 2.7% or approximately 5.7% given an inflation rate of 3%, while the number of establishments, the real coffee shops, is expected to grow only one 1.6%, which means that, on average, each store will see an increase. revenues, due in part to a 3.5% growth in domestic demand (See Appendix A). In addition, the profit on specialty beverages is estimated at 19.8%, much higher than Panera’s 6.4% profit margin. This means that increasing sales of specialty beverages will have a positive impact on Panera’s results; clearly, the industry is growing and it is a good industry for Panera. According to the Buffalo Wild Wings franchise disclosure document, more than 40% of revenue is generated through sales of alcoholic beverages and specials. If Panera could generate this level of sales with a profit margin of 19.3%, its bottom line would increase by almost 7.8% to 14.2%, abnormally high for the restaurant industry (which averages margins of 4 -5%). Although this level of profit margin is likely not sustainable, the short-term increase in profit margin will help Panera expand its operations internationally to capture economies of scale with its suppliers.
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Visually, the design of a Starbuck’s, Dunkin ‘Donuts or Caribou Coffee is much more fluid than that of Panera Bread with respect to the place of order of the coffee. This analysis relies heavily on the Eden Prairie Mall and Downtown Minneapolis Nicollet Mall locations. Customer flow for Eden Prairie and Downtown is awkward; the customer must enter the store, go through the bakery and coffee areas, and then order at the cash registers. The problem is that the coffee menus are located on top of the bakery products, not in view of the customer at the time of ordering. When the customer is ready to order, they have forgotten which drink to order; Also, the drinks have creative names, which is positive for the brand identity, but uncomfortable for the average male customer to order. At a minimum, coffee and specialty beverages must undergo the following changes:
Move menus to the same wall as food menus to make sure customers know what coffee is on offer when ordering.
Place bakery display cases closer to cash registers to attract more impulse purchases
Eliminate queue markers during off-peak hours, especially in front of bakery display cases
Increase specialty beverage offerings, including alcoholic beverage research, to attract cafeteria regulars to Panera.
By focusing on combining cafeteria design with a cafeteria atmosphere, Panera can become a “chill out” place, as well as a prime spot for both lunch and dinner. In addition, this change can be brought to international markets where coffee environments predominate, such as those in France.
Expand internationally to build a brand image and diversify economic risks
Since Panera is looking for Canadian locations, it is safe to assume that the international fresh bread market is growing. In fact, the international market breakdown of industry revenue can be found in Appendix B. Clearly, the European market is a large market for fresh bread. However, IBIS World estimates that 135,000 bakeries operate in Europe, which means that the market is fragmented. A brand with a large marketing budget behind it could quickly enter the market and take a key position (See Appendix C). Since the culture and preferences of European customers may differ from those of the United States, it would be best to test new products in Canada prior to the overseas launch of the Panera brand. An interesting facet of the European market is the strong relationship between industrial milling and agricultural companies and industrial bakeries. The largest bakeries belong to the largest agricultural and milling companies in the UK, Sweden and Austria. This can cause supply chain problems in these countries, although Panera could pursue a partnership or joint venture approach for these markets.
Leverage existing assets to increase shareholder returns and expand
According to Panera’s 2009 10-K, the company had an interest coverage ratio of 200.9x, with an EBIT of $ 140 million and interest payments of $ 700k. Also, the distance to default, a key metric for debt risk, is quite large (the bigger the better) as Panera’s available cash is $ 77.1 million and the debt / equity ratio is 0. , 0%. Retained earnings and total equity are $ 346 million and $ 495 million, respectively. This suggests a large cushion prior to debt default in an extreme situation. In Appendix D, the big difference between Panera and its rivals in terms of debt burden is clearly seen. Given that Panera has $ 153.2 million in FCF, it is safe to assume that Panera could issue at least 1.0x FCF, although a sure debt load for a company can be as low as 2x EBITDA, or $ 400 million in debt. With an average coffee costing $ 1.6 million, Panera could finance its brand expansion into approximately 250 corporate locations internationally. As seen in Appendix E, Panera would be in the top three of its main competition with these new locations.
As with all public companies, Panera must return value to its shareholders without ignoring the broader range of stakeholders with whom it interacts. FactSet estimates Panera’s sales growth in 2010 at 10.4% with EPS of $ 3.41 per share, an increase of 20.6% over 2009. Our proposed strategy would benefit the company both in the short as long term. In the short term, sales would increase and the profit margin would increase by 500 bps to 770 bps based on sales of specialty beverages. If the international expansion plan is followed, Panera would see sales growth in 2011 beyond the estimated 10.3% and EPS well beyond the projected $ 3.98. While increased debt may force management to pay more attention to the company’s cash flow, the increased leverage will allow Panera to substantially increase its ROE. If Panera wishes to remain competitive, it must use its economies of scale to grow faster than the competition and continually innovate, becoming the “fast follower” by utilizing the innovations of the adjacent industry in its coffee atmosphere.
The annexes can be found on the Liekos Group website.