2) Source Problem:
In my opinion, the source problem that Panera Bread Company is facing is the tough potential competition in the food and restaurant industry. This would make it difficult for them to create an optimization of brand, even though they have created a successful stand in the market providing higher quality meals and unique dining environment, but still, Panera is one of the small food and restaurant companies in the market compared to the strong presence and name recognition of the other fast food restaurants.
3) Secondary Problems:
3.1) Short Term:
- Pricing strategy: One of the main problems that Panera Bread is facing is their pricing strategy. With the state of the economy today, it definitely affects the consumer’s ability to eat at places like Panera Bread, especially when there are less expensive options available. These competitors, most of which are in the fast food industry, offer less expensive food items, although they may be of a lesser quality, they still pose a major threat.
- Menu differentiation: Most of the other competitors in the industry their menu have varieties of both food and beverages, however, Panera Bread is focusing more on the bakery items and have less coffee items and fruit or healthy items than its competitors e.g. Starbucks.
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Distribution of dough: Panera’s delivery trucks drive from 300 to 500 miles each day to deliver fresh dough to only six cafes. Due to the restaurants being spread from each other, the company spends excessive amounts of money using temperature-controlled trucks to deliver dough to each location. And also, for any reason, if the bread cannot make it to the store, sales and brand reputation can suffer.
3.2) Long Term:
- Panera Bread have major problem in expanding internationally, the company has many cafés all around the United States, in major cities such as St Louis, Los Angeles, Philadelphia, Dallas… but it is not recognized internationally as some of it’s main competitors like Starbucks, McDonald’s...etc.
- Franchise operations: Panera Bread has specific criteria that must be met for a person to open a franchise. Included the entrepreneur must open up 15 franchises in 6 years and have a net worth of $7.5 million while having qualified skills in the restaurant and real estate industry. Panera Bread depends upon franchises for much of their growth and strict guidelines may prohibit some potential franchisees from being formed. However, rapid growth expansion may also lead to quality control problems concerning locations and products.
4) Analysis:
In my analysis for Panera Bread Company, I will be using three techniques:
- Porter’s Five Forces Model of Competition.
- Financial Ratios and Trend Analysis.
- SWOT Analysis.
4.1) Porter’s Five Forces Model of Competition.
A. Rivalry among competitive sellers
The restaurant industry is a very competitive industry. On a typical day US consumers spend a total of $1 billion at eating establishments. There are constantly new entrants to worry about as well as companies struggling to make a profit. Panera competes on many levels including fast casual dining and specialty foods. Panera’s main competitors include McDonald’s, Starbucks Coffee and Subway. However there are hundreds of restaurants that compete with Panera on a national, regional, and local level that has a negative impact on the company’s revenue and market share. To stay profitable in the highly competitive restaurant industry, Panera regularly reviews and revises their menu “to sustain the interest of regular customers, satisfy changing customer preferences, and be responsive to various seasons of the year” Panera develops an advantage in changing their menu over competitors such as McDonald’s and Subway who do not change their menu frequently and customers often lose interest in their menu offerings.
B. Threat of substitutes
In the restaurant and food industry, there are not any substantial substitutes to food because people have to eat food every day. Food is a basic need and nothing can substitute that. Since there are no major substitutes the threat is relatively low in this category.
C. Threat of New Entrants
The threat of new entrants is high because barriers to entry are low and the pool of entry candidates is large. People are always looking for a new and different place to eat and because of this demand new restaurants open daily. In addition many restaurants do not stay in business for very long due to bad menus, dining experience, food quality and service. Barriers to entry are low because there are little regulations from the government, there are usually no patent or legal protection needed, and there are little technological drawbacks that other industries experience. If a person raised enough capital they could easily open up their own restaurant without many restrictions. New eateries also have an advantage over established restaurants because consumers are more likely to give new restaurants a try. Panera competes with these new entrants by constantly changing their menu to meet customers’ diet and seasonal wants.
D. Buyer Bargaining Power
Buyer bargaining power is relatively high for Panera. The restaurant must constantly be staying in tune to customer preferences or the customers will easily eat at another restaurant. The food industry is highly competitive and in addition there are low switching costs for consumers and consumers have access to quality and nutrition information. One item that makes the buyers bargaining power high is that there are relatively low switching costs to choose another restaurant over Panera. Consumers taste preferences change daily and eating at another restaurant other than Panera offers no additional costs other than the food prices. Panera recognizes this changing taste preference and offers a wide enough selection of menu items for customers to enjoy multiple times a week since the average American eats out four times a week.
E. Supplier Bargaining Power
Panera’s suppliers have a relatively low bargaining power because they implement a lot of controls to keep their bargaining power low. Panera controls the quality of their main product by making the bread themselves daily. Also, the company contracts with numerous suppliers to keep an individual suppliers bargaining power low. Panera has an advantage in terms of suppliers because the make their own bread in 17 fresh dough facilities and own 140 trucks to deliver the dough anywhere from 300 to 500 miles to stores. However, there are excessive amounts of money spent to use temperature-controlled trucks to deliver dough to each location. This vertical integration has made Panera capable of controlling the quality of its signature product, their bread. The bread is delivered daily so if for any reason the bread cannot make it to the store sales and brand reputation can suffer. Panera has numerous suppliers for each ingredient so that it can obtain ingredients from other suppliers when necessary. This lowers the risk of a supplier driving up the price for Panera because if one does, Panera could simply switch to another supplier.
4.2) Financial Ratios and Trend Analysis:
Referring to the income statement and balance sheet 2006-2009 for Panera Bread in appendix 1 and 2 the financial ratios and trend analysis for the company should be as follows:
1- Gross Profit Margin = revenues – cost of revenues / revenues
2006 (24%), 2007 (21%), 2008 (21%), 2009(33%)
- Percentages for revenue available to cover operating expenses and yield a profit were stable in the first 3 years and increased in 2009 which is good for the company and the trend is moving upward.
2- Operating Profit Margin = revenues – operating expenses / revenues
2006 (11%), 2007 (8%), 2008 (9%), 2009(10%)
- Profitability of operations with disregard to the interest charge is increasing from 2007 to 2009 which is good for the company and the trend is moving upwards.
3- Net Profit Margin = profits after taxes / revenues
2006 (7%), 2007 (5%), 2008 (5%), 2009(6%)
- After tax profits for Panera Bread was stable in the first 3 years then started to increase in 2009 and the trend is moving upward.
4- Return on Equity = Profits after tax / total equity
2006 (15%), 2007 (13%), 2008 (14%), 2009(14%)
- Stockholders earning on their investment is average as it is between 12% and 15 %.
5- Current Ratio = current assets / current liabilities
2006 (116%), 2007 (119%), 2008 (121%), 2009(226%)
- Panera Bread can pay all of its liabilities using their assets that can be converted to cash at it is very high on 2009 which is in the best interest of the company.
6- Quick Ratio = current assets – inventory / current liabilities
2006 (97%), 2007 (106%), 2008 (98%), 2009(206%)
- Panera Bread was able to pay its liabilities without relying on selling the inventory by the above percentages. It was having a lack in 2006 and 2008 but it increased in 2009.
7- Inventory Turn Over = cost of good sold / inventory
2006 (9513), 2007 (9362), 2008 (10861), 2009(11008)
- The turns of inventory per year for Panera Bread is increasing every year which is goog for the company and the trend is moving upward.
4.3) SWOT Analysis:
Strengths Weakness
Opportunities Threats
5) Criteria of Evaluation
In order to avoid the problems of the industry, Panera Bread should reach the following criteria:
- Recognized in all US states.
- Penetration rate in current states of business must be increased.
- Internationally recognized.
- Increase of profit.
- Product differentiation.
- Increase growth rate.
6) Alternatives
6.1) Short Term:
- Decrease their prices.
- Increase the awareness of the use of all natural ingredients to attract new customers.
- Introduce wide varieties of coffees and drinks to the menu.
- Hire professional to do distribution.
- Increase their dinner offerings
6.2) Long Term:
- Expand their business internationally and in other US states.
- Facilitate the criteria of franchisees.
- Joint venture with one of the leading companies.
- Increase their focus on expanding catering to expand the restaurant’s brand.
7) Recommended Strategies:
7.1) Short Term:
- While Panera's core business revolves around fresh bread, the style of the locations suggests that there is substantial revenue in selling coffee and related drinks, similar to Starbucks. Increasing the sales of specialty drinks will have a positive impact on Panera's bottom line. So, my suggestion is to introduce wide varieties of coffees and drinks to the menu.
- Panera Bread should decrease their prices to be the same or lower than the competitors and in order not to loose profit they should decrease their expenses.
- They should stop doing distribution themselves and hire a company that professionally does distribution, they have the knowledge and capacity to help Panera Bread distribute even in rapid growth, while Panera can focus in its core business.
7.2) Long Term:
- Given that Panera is pursuing Canadian locations, it is safe to assume that the international market for fresh bread is growing. Clearly, the European market is a large market for fresh bread. A brand with a large marketing budget behind it could quickly enter the market and take a key position. Given that the culture and preferences of European customers may differ from Americans, it would be best to test new products in Canada prior to the overseas launch of the Panera brand. Also, Panera should expand their business to the rest of US states.
- Panera Bread has specific criteria that must be met for a person to open a franchise. Included the entrepreneur must open up 15 franchises in 6 years and have a net worth of $7.5 million while having qualified skills in the restaurant and real estate industry. Panera Bread depends upon franchises for much of their growth, and strict guidelines may prohibit some potential franchisees from being formed. However, rapid growth expansion may also lead to quality control problems concerning locations and products.
8) Implementation of Entering New Market:
8.1) Steps to be taken:
- Market research including competitors, consumers and locations. They need to know the competitor’s market share in the region, consumer income and demographics.
- Decide the best markets to enter.
- Enter the markets.
- Measure the strategy and compare the net income before and after the implementation.
8.2) Controls needed:
- Contingency plan if any of the market research was insufficient.
- Forecasting analysis after each step is completed.
- Calculating budgets after each step.
- Understanding of the effect of the external policies such as regulations and public policy.
9) Appendices:
Appendix 1
Income statement for Panera Bread 2006-2009
Source www.nasdaq.com
Appendix 2
Balance Sheet for Panera Bread 2006-2009
Source:
Appendix 3
Source: Panera Bread, Inc. website
Appendix 4
Source: Panera Bread, Inc. website
10) References:
- Hudson, B. (1995). Venture capital in the restaurant industry.
- Thompson, A, Strickland, A, & Gamble, J. (Ed.). (2008). Crafting and executing
strategy. New York: Magraw-Hill.
- York, E. (2009). PANERA. Advertising Age, 80(39), 16.
