Hospitality Review Volume 23 Article 4 Issue 1 Hospitality Review Volume 23/Issue 1

January 2005 Who Shook Big Mac?: Co. Kyuho Lee Virginia Polytechnic Institute and State University, [email protected]

Melih Madanoglu Virginia Polytechnic Institute and State University, [email protected]

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Recommended Citation Lee, Kyuho and Madanoglu, Melih (2005) "Who Shook Big Mac?: Panera Bread Co.," Hospitality Review: Vol. 23 : Iss. 1 , Article 4. Available at: https://digitalcommons.fiu.edu/hospitalityreview/vol23/iss1/4

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Abstract The uthora s identify the firm-specific orc e competencies that Panera Bread has relied on to achieve a competitive advantage in its business domain. The tudys illustrates how the company scans the dynamically changing environments and tailors their products and services in accordance with these changes.

This article is available in Hospitality Review: https://digitalcommons.fiu.edu/hospitalityreview/vol23/iss1/4 Who shook Big Mac?: Panera Bread Co.

by Kyuho Lee and Melih Madanoglil

The authorr identi3 thefirm-per.~fir McDonald's Corporation, a company core competencier that Paizera Bread ha that has been in business since the relied on to achieve a comperitive 1950, reported irs historic firsr advantage in itr burinerr domain. The quarterly loss in January 2003. The snrdy illushater how the company rcanr magnitude of McDonald's loss was the dynamically changing enuironmentr $343.8 million in the fourth-quarter and tailorr theirproductr and sewicer in of 2002 and was four times higher accordance with there changer. than the figure analysts predicted.' McDonald's loss demonstrated that The business environment in the the company failed to be proactive to restaurant industry has become a series of environmental changes increasingly con~petitivedue to affecting the fast-food industry such as changing consumer prehrences, an increasing competition in the increased number of competitors, che industry, growing consumer presence of labor shortage, and the preferences for healthy foods, and sluggish U.S. economy.' As a result, mad cow incidents in Europe and both fast-food and full-service . Furthermore, the second restaurant segments, which represent 60 largest fast-food chain, , percent of the $400 billion restaurant shut down about 12 percent of its industty, have encountered several domestic outlets because of lagging market challenges which affected the financial results and fierce restaurant firm's bottom line. competition.' In particular, the fast-food industry has been impacted most severely from Fast-casual segment emerges the recent dramatic environmental The stumble of some of the fast-food changes such as growing obesity giants gave rise to a new segment, fast- problems, competition, and food casual, that capitalized on opportu- safety concerns related to mad cow nities to meet changing consumer disease across countries.' Not needs. Fast-casual restaurant chains surprising, the fast-food giant, have recorded robust sales growth

Contents © 2005 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. ranging between 6 and 8 percent 71.000 customers conducted by annually since 2000.~Sales of the fast- Nation? Ratuuranr N~wI." casual segment are expected to reach This study identifies the $35 billion by the end of this decade." competitive strategies that enabled The fast-casual dining segment Panera Bread to succeed in the fiercely positioned itself between fast-food competitive restaurant industry and and casual-dining restaurants by analyzes the firm's core competencies, offering high quality fresh food, a demonstrating how these self-service format (no tipping), a competencies are aligned with the comfortable atmosphere, takeout firm's innovative strategies. service, and fast service to customers.' According to Perlik? the check Company expands averages of most fast-casual restaurants Panera Bread was founded in March range between $7 and $10. Cosi, Caf& 1981 under the name ofAu Bon Pain Express, Mexican Grill, Au in Saint Louis, Missouri. Bon Pain, Chipotle, , and was established as a bakery-cafe selling Panera Bread are some of the players mainly bakery and cookies; its in this segment? restaurants were located primarily in the urban downtown areas targeting Panera gets attention white color ofice workers. In a move Panera Bread has recently drawn to penetrate suburban areas Au Bon considerable attention from Wall Pain later acquired the St. Louis Bread Street analysts by recording impressive Company in 1993, most of whose financial results and achieving an restaurants were located in the astonishing growth among all suburban areas. publicly-tnded restaurant The firm sold the Au Bon Pain companies.'"The company was division and changed the corporate ranked as the top national restaurant name to Panera Bread in 1998; the chain in the several restaurant food CEO of the Au Bon Pain, CEO Ron and customer satisfaction surveys. For Shaich had to sell the debt-lagging unit example, Restauranrr 8Institutions in order to grow Panera Bread, which magazine awarded Panera Bread had been developed based on the "Choice in Chains" based on former St. Louis Bread. One of the consumer satisfaction and food major reasons for the sale was that Au quality Also, Panera Bread was Ban Pain had several market challenges selected as the best restaurant among due to its urban locations, which 118 restaurants in a national customer derailed high fxed operation costs and satisfaction SUNey of more than high competition in the most of urban

Contents © 2005 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. areas."This resulted in severe and quick-casual offerings created a undercapitalization problems to the $5.2 billion category in the restaurant firm.!' Furthermore, Au Bon Pain industry.ldThe revenue of Panera could not maximize its asset produc- Bread for 2003 cited above (1.25 tivity by limiting its operation to billion) now comprises more than weekdays since its major target markets 115 of the market share of the were white collar ofice workers. emerging fast-casual segment. The company achieved this feat by The growth of Panera Bread remaining debt-free and maintaining Panera Bread is rxpanding q~~ickly $39 million in cash.lq across America, currently operaring In terms of stock performance 602 bakery-cafes (1 73 company- Panera Bread investors enjoyed an owned and 429 franchised) in 35 average of 59.1 percent holding period states.14 Strong bakery-cafe return annually over the 1998-2002 performancs fueled new-unit growth, period.'" This is considerably higher enabling Panera Bread to open 115 than the rerurn of casual-dining (12.9 new bakery-cafes in 2002 (23 percent) and fast-Cood (5.8 percent) company, '12 franchises). According to segmenrs for the same period as the company's annual reportL5the reported by Madanoglu and Lee." bakerylcafe firm is expected to open Risk-adjusted performance of the 140 new units in 2005. company for the 1998-2002 period, as The strategic decisions made by measured by Sharpe Ratio, was 3.47, Panera Bread's management are compared to 1.24 for casual-dining reflected in the firm's financial and 0.23 for fast-food segmenrs. This indicarors. Panera Brrad's strong implies that Panera Bread investors performance at the bakery-cafe level enjoyed a return per unit of risk three drove significant growth in corporate times higher than that ofcasual- revenue and earnings, the firm dining and more than ren fold over recorded system-wide sales which were fast-food restaurants. rraching $755 million in 2002. This denotes a compounded annual growth Planning requires scanning rate (CAGR) of 61 percent over the West and Olsen" claimed that last four years (1999-2002).1hPanera resraurant chains conducting regular Bread recorded approximately 1.25 environmental scanning perform billion in system-wide sales in 2003, better in comparison with resraurant which is particularly norahle as its firms that ignore environmental sales were just $114 million in 1998.'- scanning or rarely conduct environ- Consumer demand for b&rry-cafe mental scanning at all. The authors

Contents © 2005 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. argued that establishing regular competition, and new technology environmental systems is essential de~elopment.'~ for restaurant operators in their elfort One of the key factors that to tackle external environmental enabled Panera Bread to accomplish changes and formulate long-term such a high growth was the strategic planning. company's response ro customers' Dorf" contended that about three new needs by embracing necessary out of four restaurants were likely to products and services to cater to stumble in their very first year of their preferences based on the firm's business operations due to the lack thorough environmental scanning. of environmental scanning and lack Figure 1 below presents the new of strategic planning. Today, consumer needs and the way Panera establishing and conducting a series Bread develops and tailors its of environmental scannings regularly products and services strategically in has become more important than accordance with these emerging ever due to the rapid change in environmental changes and market consumer preferences, fierce demand as follows:

Figure 1: Panera Bread's innovative and competitive strategy

New Consumer Needs Products & SaNice

Contents © 2005 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. Growing obesity concerns: of Dimitric and Greene," the key According to Perlik," health is a drivers influencing the growth of key value driver when organic food consumption consumers choose a restaurant. include the desire for a healthier This is confirmed by a study lifestyle, the awareness of undertaken by the University of environmental pollution, and Colorado Health Sciences consumers' preferences for Center, which reports that quality food. approximately 3 1 percent of Panera Bread's varietv of Americans (which corresponds nutritious and healthy menu to 59 million people) are choices have a competitive edge considered obese, and 65 over fast-food menu items in percent of Americans are terms of freshness and overweight.'Wellmichi7 further nutrition. For example, a Veggi makes a prediction that the rate Garden of Panera of obesity will increase to 39 Bread contains 570 calories, percent by 2008. which is far less than that on With the rapid increase of menus of n~ajorfast-food obesity in the U.S., associated restaurants. A Whopper health costs have soared. contains 1,600 calories, while Obesity can increase heart an average male needs only disease, stroke, and high blood 2,200 calories daily. It simply pre~sure.'~According to the means that a consumer will have America Obesity Association," already fulfilled more than two- health costs related to obesity thirds of hislher suggested daily reach about $100 billion. The calorie intake by consuming a association further points out Wh~pper.~' that high consumption of fast Panera Bread's forward- food has played a significant looking initiative managed to role in the growing obesity rate detect the growing consumer in the U.S. Subsequently, desire for fresh and quality food consumers' desire for fresh and ahead of time. The firm then healthy food has increased. offered a variety of fresh and For example. rhe U.S. organic healthy food choices such as food market has recorded 20 fresh customized percent annual between and homemade soups which met 1997 and 2002 and is projected consumers' growing healthy to continue to grow.'"n the view food needs

Contents © 2005 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. Social gathering purpose: Convenience: Today consumers Increasing numbers of demand fast service so that they consumers visit a restaurant for can cope more efficiently with social gathering purposes in busy work schedules and addition to their main purpose lifestyles. However, a large of dining-out.?3 has number of these consumers been able to attract a variety of seem reluctant to visit customers ranging from mothers traditional fast-food restaurants to businessmen by creating a due to health and quality of coffee shop called "third place" food issues. Fast casual gained where consumers can congregate an edge in this aspect by for relaxation or a social or offering quality fresh food. business meeting away from Panera Bread CEO Ron Shaich offices, school, and home." stated that more than 45 Panera Bread followed suit by percent of consumers do not providing a cozy and comfortable want fast food; nevertheless, atmosphere with leather sofa consumers still prefer to utilize seating, fireplaces, and china fast-service restaurants because dishes. These surroundings have of fast-paced lifestyles and attracted a numher of consumers hectic schedules. who can meet friends or relatives According to Fieldhouse," in addition to their dining fast-food restaurants have purpose.?' appealed to consumers due to By providing comfortable the speedy service. On the settings, Panera Bread managed other hand, Panera Bread has to create "chill out" business for been able to take market share consumers who come in away from the fast-food between breakfast and lunch or segment by offering fast service lunch and dinner to eat pastry to customers at the speed the with coffee, or who come to the fast-food restaurants provide restaurant to meet friends. along with a variety of fresh Approximately, 25 percent of menus. Customers order and the company's revenue has been pick up their food at the generated from this bu~iness.'~ counter, which maximizes Furthermore, the appealing operational efficiency by atmosphere of the restaurant cutting labor costs.3sIn helps the chain maximize the addition, customers do not numher of repeat customers. have to leave tips for servers.

Contents © 2005 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. Customized food: Increasingly different tastes and preferences. consumers prefer to eat The company's variety of customized food rather than customized sandwiches in standardized hantburgers, even conjunction with its tangy and though the price of customized fresh bread has played an sandwiches is considerdbly higher important role in establishing its that that ofmass-standardized brand name and image as a fresh . However, the price and healthy sandwich bakery/c&, difference does not seem to deter which differentiates itself from a consumer~.'~ restaurant chain that mainly sells For example, Panera Bread fried and high-far fast food." offers 15 different sandwiches, served with 11 different types of Core competencies remain the company's own bread. Panera Bread continues to invest in Customers have a wide variety of a series of core competencies in order choices where they can select the to susrain the company's competitive ingredients and bread for their advantage and core products and sandwiches. This enables the services over competitors' service and chain to acconimodate more products. Figure 2 shows the core diversified cusromers who have competencies of the Panera bread:

Figure 1: Core competencies of Panera Bread

Contents © 2005 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. As shown in Figure 2, the key core of Panera Bread is the company's competency of the company is fresh, strategic focus on customer handcrafted bakery products. Ur~like satisfaction rather than a its competitors, the company does dependence on marketing methods not use frozen dough in its bakery such as hcavy advertising expenses products." Currently, Panera Bread and pricing strategies. For instance, operates fresh dough production Panera Bread ranks on top in the facilities across the country and level of consurner commitment delivers fresh sourdough daily to all among restaurant chains. According its outlets with 79 leased to a research conducted by TNS Furthermore, the company places an Intersearch, a market- research emphasis on thorough and rigorous firm, consumers' brand training of its bakers to assure the commitment for Panera Bread is 12 quality of all bakery products." percent, which far exceeds Training bakers is critical to McDonald's 6 percent and Burger maintain consistent quality of bakery King's 4 percent." bread since the chain bakes bread The company's high dedication only in stone-deck ovens. For that to customer satisfaction through its reason, the chain requires all bakers products, services, and operational to learn how to bake bread in these efficiency resulted in high brand ovens. The company also requires all loyalty even though the company franchisees to attend a 10 week spent only $842,170 for advertising intensive training program and in 2002. This figure is far lower provides baker certification aker the when compared to the advertising completion of the program." In expenses of fast-food giants addition, ongoing training is offered. McDonald's ($593.9 million) and The combination of fresh Burger King ($362.2 milli~n).~' sourdough and training of bakers This Panera Bread case makes up the core cotnpetencies demonstrates chat relying heavily on which enabled the chain to establish marketing practices might be more its brand name as a bakerylcaf6 chain effective in accomplishing a short- selling high-quality, fresh, tangy bread term financial goal. However, such as well as sandwiches. The variety of marketing straregies do not seem to fresh bakery products in the Panera guarantee customer satisfaction and Bread is well suited to consumers' loyalty, which are crucial factors for desires for fresh, high-quality food. a restaurant firm to accomplish its Another core competency that has long-cerm success by recording a contributed to the remarkable growth high return on inve~tment.~'

Contents © 2005 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. CEO Ronald Shaich stated: Bread is a prime example of how a "Consumers are smart. It's the restaurant firm esrablishes experience and how they relate to it."4i competitive strategies based on Shaich believes rhat today's consumers thorough environmental scanning are not easily tempted by restauranr and implements them efficiently. marketing rechniques while making Many restaurant firms have been restaurant selections, rather, ignoring developing long-term consumers tend to base their decisions strategic planning. on their food service experiences by Dolf '' pointed out that a number evaluating food quality, restaurant of restaurants suffered from atmosphere, and service. undercapitalization problems because restaurant operators did not Plan builds on core establish competitive sustainable This study displays how Panera strategies and conduct strategic Bread has developed the company's planning. Today's fierce compctition strategic plan and built its core among hst-food restaurant operators competencies to effectively capture unleashed a wave of price-cutting changing consumer preferences and such as $1 hamburgers which business environment by virtue of eventually resulted in hurting the the company's thorough environ- profit margin and brand value even mental scanning. Researchers4'hote though the series of discounts and that a restaurant firm's long-term promotions might help restaurant strategic vision includes elaborate operators achieve short-term strategic planning, systematic financial goals." environmental scanning, The study suggests that developing a development of core products, and competitive strategic plan and allocation of resources accordingly. implementing it based on the All these steps arc essential to bolster company's capabiliry is a key factor for a the profits of a hypothetical restaurant firm to survive in the highly resraurant firm and thus maximize volatile and competitive restaurant its mdrket value. industry. To no one's surprise, to meet Today competitive restaurant changing marker and environment environments and saturating needs and consumers' new preferences, domestic U.S. markets require restaurant operators have to switch restaurant operators to conduct from short-term profit orientation competitive strategic planning ro myopia into a long-term, htnre- focus on core products, and to oriented competitive strategic mindset allocate resources effectively. Panera in order to increase their firms' value.

Contents © 2005 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission. (hnp:l/w.online.wri.comlb~rr~ns~ References arricles10.SB105676162644838800.00 .hml). I S. kung, "Whcrei rhe Beep A Glutted l4 Panera Bwd Co., "Compog OU~~N," Market Leaves Food Chains Hungry for Sires," Pvlera Brcad Co. (2003): Rerrieved on 25 The W~USnt~fJoumol(lOcroher 2003l:Al; M~ Decembci 2003 from 1hrtp:lIwwwpanera D. Olxn andJ. L. Zhau, "The Rorauranr Rcvolunon-Growth. Change and Straregy in

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Kyuho Lee andMelih Mahnoglu ore PhD inrdencr in the department ofhoipitnlity nnd tourism managernmi/Pomplin Collefe ofBusinerr at Virg'nia ikh.

Contents © 2005 by FIU Hospitality Review. The reproduction of any artwork, editorial or other material is expresslv prohibited without written permission from the publisher, excepting thatone-time educational reproduction is allowed without express permission.