Hospitality Review Volume 23 Article 4 Issue 1 Hospitality Review Volume 23/Issue 1 January 2005 Who Shook Big Mac?: Panera Bread Co. Kyuho Lee Virginia Polytechnic Institute and State University, [email protected] Melih Madanoglu Virginia Polytechnic Institute and State University, [email protected] Follow this and additional works at: https://digitalcommons.fiu.edu/hospitalityreview Part of the Hospitality Administration and Management Commons 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 This work is brought to you for free and open access by FIU Digital Commons. It has been accepted for inclusion in Hospitality Review by an authorized administrator of FIU Digital Commons. For more information, please contact [email protected]. Who Shook Big Mac?: Panera Bread Co. 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 Canada. Furthermore, the second restaurant segments, which represent 60 largest fast-food chain, Burger King, 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, Baja Fresh Mexican Grill, Au in Saint Louis, Missouri. Au Bon Pain Bon Pain, Chipotle, Qdoba, 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'