Panera sandwich
Making delivery an option at Panera could provide future growth for the company.

Calling sandwiches and salads products ideally suited to be delivered from bakery cafes, Ron Shaich, chairman and chief executive officer of Panera Bread Co., points out that delivery looms as a major source of future growth for the company.

During its latest quarter, Panera opened 25 new bakery cafes, bringing the total operating as of March 31 to 1,901. While the costs and promise of Panera 2.0 were a major topic during an earnings conference call, Shaich speaks at some length about the company’s delivery program and the potential. He said the delivery initiative is being led by the former president of one of the “big three” pizza companies, as well as this executive’s former executive vice president of operations.

“Let me share some of what we’ve come to understand about delivery,” Shaich says. “We’ve come to believe that delivery offers us the potential to materially increase our sales volumes per cafe and to become a long-term driver of sales growth. In fact, I would call it a very powerful opportunity. Further, we have come to learn salads and sandwiches, because they’re generally not heated and because they travel particularly well in a vehicle, are a perfect product for delivery, especially at lunch.”

Panera has also come to understand that delivery is hard, he adds, and the key to success with delivery is having the capabilities in place needed to execute delivery consistent with the high volumes it can generate and doing so all the while without damaging the retail business. “Indeed, delivery is not something you want to throw into an already high volume cafe environment, as doing so will appear smart in the short-term but ultimately prove a limited long-term positive impact if not executed properly with high customer satisfaction and with a driver network that efficiently leverages cost.”

Shaich distinguishes this delivery opportunity from Panera’s older catering initiative, which was handled mostly from delivery hubs. “On our present model, delivery will be done in our retail store,” he says. “Now our mission, as I defined for you earlier, the way we think of delivery is it has to manifest itself or show up to our store managers as simply another to-go order. If they get more involved in it than that, it is going to complicate their lives and be problematic. That is why it is so important that we have the digital ordering system. That is why it is so important the digital ordering system literally tie into the production systems.”

To avoid this complication, Shaich says delivery would be “essentially either outsourced or managed through a modestly different management system much like we manage our baking.”

Although Panera is focused on expanding delivery, its main focus will always be on bread.

Panera has been testing delivery for over a year and is currently operating in two markets with its own drivers an in another two with outsourced drivers, Shaich says.

“We will expand our test to additional markets in 2015 and will make a judgment relative to a broader roll-out in 2016,” he says. “In any case, expect that when Panera does delivery, it will do it right.”
Further, Shaich identified a number of product upgrades the company has implemented or planned, including the introduction of broth bowls, the reformulation of salad dressings with simpler ingredients and new turkey sandwiches.

“As well bread remains an important demonstration of our brand promise, so we will continue improving the health benefits of our breads,” he says. “Beginning in September all of our flatbreads will feature 15 grams of whole grain in each serving.”

Moving forward

Shaich spoke about the company’s delivery efforts in comments April 29 following the release of quarterly financial results. Panera’s net income in the first quarter ended March 31 totaled $31,860,000, equal to $1.20 per share on the common stock, down 25 percent from $42,395,000, or $1.55 per share, in the first quarter of 2014. Revenues were $648,504,000, up 7 percent from $605,337,000.

Contributing to the steep decline in earnings were charges during the first quarter of 2015 totaling $8.9 million related to the company’s refranchising initiative. The company is seeking to refranchise 50 to 150 bakery cafes. Excluding the charges associated with this effort, earnings during the quarter were down 9 percent.

While earnings were down, the company experienced a number of positives during the quarter, including a 1.5 percent increase in comparable bakery-cafe sales. Of this increase, 0.1 percent was attributed to transaction growth and the balance of 1.4 percent was due to average check growth.

Pressuring profitability was a 180 basis point decline in operating margins, pressured by higher wages and costs related to the company’s strategic initiatives, specifically its digital Panera 2.0 program.

Expanding on the tighter margins, Shaich says that increases in the minimum wage in several markets contributed to the pressure as did additional labor hours necessitated by work associated with Panera 2.0 conversions. He said the company was slow to pass these higher costs along.

“We took a 1.4 percent price increase partway through March, which we felt we needed to take to continue attracting to Panera the team members we desired,” he says. “We took the price to offset structural wage inflation, which in turn was driven by significant increases in the minimum wage in many markets in which we operate. In retrospect we likely waited too long to take the increase as the minimum wage increases on January 1 drove our managers to quickly raise wages to maintain a differential versus minimum.”

Ingredient costs for bakery products represented an offset to the higher wages, says Mike Bufano, the company’s chief financial officer.

“The margins of our fresh dough facilities improved by 160 basis points in the quarter,” he says. “This margin improvement is primarily the result of a year-over-year decrease in wheat costs, which declined by roughly 10 percent compared to the first quarter of 2014. As a reminder, we ladder our wheat purchases (to) the impact of swings up and down in the market are moderated in our P&L.”