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and franchised units in 2010, 88 new units in 2011, 111 new units in 2012, 125 units in 2013, 114 units in 2014, and 112 units in 2015. Going into 2016, Panera had 1,972 company-owned and franchised bakery-cafés in operation in 46 states, the District of Columbia, and Ontario, Canada. Plans called for opening 90 to 100 new company-operated and fran-chised units in 2016.

But despite the ongoing series of store openings, the company was struggling to grow revenues and earnings nearly as fast as top executives wanted. Rev-enue growth of 6.0 percent in 2014 and 6.1 percent in 2015 was well short of the robust 19.9 percent com-pound average growth achieved during 2009–2013. Moreover, sales at bakery-cafés open at least one year rose only 1.1 percent in 2014 and 1.9 percent in 2015, compared to 2.3 percent in 2013 and 6.5 percent in 2012. The slower-than-desired revenue growth, cou-pled with higher operating expenses, squeezed Pane-ra’s profitability, resulting in declines in net income from $196.2 million in 2013 to $179.3 million in 2014 and to $149.3 million in 2015 and drops in earn-ings per share from $6.85 in 2013 to $6.67 in 2014 to $5.81 in 2015.

Nonetheless, in February 2016, top manage-ment confidently expressed the belief that Panera had turned the corner and forecast that recently undertaken strategy initiatives would deliver positive

In spring 2016, Panera Bread was widely regarded as the clear leader of the “fast-casual” segment of the restaurant industry—fast-casual restaurants were viewed as being a cut above traditional quick-service restaurants like McDonald’s because of bet-ter food quality, limited table service, and, in many instances, often wider and more upscale menu selec-tions. On average, 7.8 million customers patronized Panera Bread’s 1,972 company-owned and fran-chised bakery-cafés each week, and Panera baked more specialty breads daily than any other bakery-café enterprise in North America. In 2015, Panera had corporate revenues of $2.7 billion, systemwide store revenues of $4.5 billion, and average sales of $2.5 million per store location.

In 2006, Panera Bread executives announced their strategic intent to grow the company from 1,027 locations to 2,000 locations by the end of 2010. But the advent of the Great Recession of 2008–2009 forced the company to drastically downscale the number of planned store openings; Panera ended 2009 with only 1,380 bakery-café locations. Then, in 2010 with a modest economic recovery seemingly underway, Panera’s top executives decided that mar-ket conditions were favorable enough to permit the company, given customer enthusiasm for eating at Panera’s bakery-cafés, to accelerate the number of new store openings and reinstitute their strategy to grow the company, albeit at a pace slower than what was envisioned back in 2006. The company pro-ceeded to open a net of 76 new company-operated

Arthur A. ThompsonThe University of Alabama

Panera Bread Company in 2016—Is the Company’s Strategy to Rejuvenate Its Growth Working?


Copyright © 2016 by Arthur A. Thompson. All rights reserved.

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By 1998, it was clear the re-concepted Panera Bread units had connected with consumers. Au Bon Pain management concluded the Panera Bread for-mat had broad market appeal and could be rolled out nationwide. Ron Shaich believed Panera Bread had the potential to become one of the leading “fast-casual” restaurant chains in the nation. Shaich also believed that growing Panera Bread into a national chain required significantly more management atten-tion and financial resources than the company could marshal if it continued to pursue expansion of both the Au Bon Pain and Panera Bread chains. He con-vinced the Au Bon Pain board of directors that the best course of action was for the company to go exclusively with the Panera Bread concept and divest the Au Bon Pain cafés. In August 1998, the company announced the sale of its Au Bon Pain bakery-café division for $73 million in cash to ABP Corp.; the transaction was completed in May 1999. With the sale of the Au Bon Pain division, the company changed its name to Panera Bread Company. The restructured company had 180 Saint Louis and Panera Bread bakery-cafés and a debt-free balance sheet.

Between January 1999 and December 2006, close to 850 additional Panera Bread bakery-cafés were opened, some company-owned and some fran-chised. In February 2007, Panera purchased a 51 per-cent interest in Arizona-based Paradise Bakery & Café, which operated 70 company-owned and fran-chised units in 10 states (primarily in the west and southwest) and had sales close to $100 million. At the time, Paradise Bakery units had average weekly sales of about $40,000 and an average check size of $8 to $9. Panera purchased the remaining 49 percent ownership of Paradise Bakery in June 2009. In 2008, Panera expanded into Canada, opening 2 locations in Ontario; since then, 10 additional units in Canada had been opened.

In May 2010, William W. Moreton, Panera’s executive vice president and co-chief operating officer, was appointed president and chief execu-tive officer and a member of the company’s board. Ron Shaich, who had served as Panera’s president and CEO since 1994 and as board chair or co-chair since 1988, transitioned to the role of executive board chair. In addition to the normal duties of board chair, Shaich maintained an active strategic role, with a particular focus on how Panera Bread could continue to be the best competitive alternative in the

earnings growth in 2016, accelerating further in 2017. In announcing the company’s financial results for Q4 and full-year 2015 on February 9, 2016, Ron Shaich, Panera’s chair and CEO, said:

Our strategic plan is working. Our comps [company-owned store sales growth] of 3.6% in Q4 2015 and 6.4% in the first 41 days of Q1 2016 are leading indicators of the impact our initiatives are having. Further, we are confident that our results will continue to strengthen as the startup and transition costs associated with our initiatives begin to crest and our sales continue to grow. We now expect the EPS growth we saw in Q4 2015 will improve in 2016 and further accelerate in 2017. Today, we are confident we are on a path to return to sustained double-digit earnings growth.1

Panera indicated it was expecting EPS growth of 2–5 percent in 2016.

COMPaNY BaCKGROUNDIn 1981, Louis Kane and Ron Shaich founded a bakery-café enterprise named Au Bon Pain Co., Inc. Units were opened in malls, shopping centers, and airports along the east coast of the United States and internationally throughout the 1980s and 1990s; the company prospered and became the dominant opera-tor within the bakery-café category. In 1993, Au Bon Pain Co. purchased Saint Louis Bread Company, a chain of 20 bakery-cafés located in the St. Louis area. Ron Shaich and a team of Au Bon Pain man-agers then spent considerable time in 1994 and 1995 traveling the country and studying the market for fast food and quick-service meals. They concluded that many patrons of fast-food chains like McDonald’s, Wendy’s, Burger King, Subway, Taco Bell, Pizza Hut, and KFC could be attracted to a higher-quality quick dining experience. Top management at Au Bon Pain then instituted a comprehensive overhaul of the newly acquired Saint Louis Bread locations, altering the menu and the dining atmosphere. The vision was to create a specialty café anchored by an authentic, fresh dough, artisan bakery and upscale, quick- service menu selections. Between 1993 and 1997, average unit volumes at the revamped Saint Louis Bread units increased by 75 percent, and over 100 additional Saint Louis Bread units were opened. In 1997, the Saint Louis Bread bakery-cafés were renamed Panera Bread in all markets outside St. Louis.

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signature soups and salads, and café beverages. Rec-ognizing that diners chose a dining establishment based on individual food preferences and mood, Panera strived to be the first choice for diners crav-ing fresh-baked goods, a sandwich, soup, a salad, or a beverage served in a warm, friendly, comfortable din-ing environment. Its target market was urban work-ers and suburban dwellers looking for a quick-service meal or light snack and an aesthetically pleasing dining experience. Management’s long-term objec-tive and strategic intent was to make Panera Bread a nationally recognized brand name and to be the domi-nant restaurant operator in upscale, quick-service din-ing. Top management believed that success depended on “being better than the guys across the street” and making the experience of dining at Panera so attrac-tive that customers would be willing to pass by the outlets of other fast-casual restaurant competitors to dine at a nearby Panera Bread bakery-café.5

Panera management’s blueprint for attracting and retaining customers was called Concept Essence. Concept Essence underpinned Panera’s strategy and embraced several themes that, taken together, acted to differentiate Panera from its competitors:

∙ Offering an appealing selection of artisan breads, bagels, and pastry products that are handcrafted and baked daily at each café location.

∙ Serving high-quality food at prices that represent a good value.

∙ Developing a menu with sufficiently diverse offer-ings to enable Panera to draw customers from breakfast through the dinner hours each day.

∙ Providing courteous, capable, and efficient cus-tomer service.

∙ Designing bakery cafés that are aesthetically pleasing and inviting.

∙ Offering patrons such a sufficiently satisfying dining experience that they are induced to return again and again.

Panera Bread’s menu, store design and ambi-ence, and unit location strategies enabled it to compete successfully in multiple segments of the restaurant business: breakfast, AM “chill” (when customers visited to take a break from morning-hour activities), lunch, PM “chill” (when customers vis-ited to take a break from afternoon activities), din-ner, and take-home, through both on-premise sales and off-premise catering. It competed with a wide

market segments the company served. However, on March 15, 2012, the company announced that Ron Shaich and Bill Moreton would become co-CEOs, effective immediately; Shaich’s formal title was changed to board chair and co-CEO and Moreton’s title became president and co-CEO. In August 2013, Shaich and Moreton took on new titles because of family-related issues that required more of More-ton’s time—Shaich became board chair and CEO and Moreton was named executive vice chair, with a role of helping oversee Panera’s business opera-tions. In February 2015, Moreton also held the title of interim chief financial officer.

Over the years, Panera Bread had received a number of honors and awards. In 2015, Fast Com-pany named Panera Bread as the Most Innovative Company in Food. In 2011, 2012, and 2013, Har-ris Poll EquiTrend® Rankings named Panera Bread as Casual Dining Restaurant Brand of the Year.2 Zagat’s 2012 Fast Food Survey of 10,500 diners ranked Panera as fourth for Top Food, second for Top Décor, and fifth for Top Service among national chains with fewer than 5,000 locations.3 For nine of the past 12 years (2002–2013), customers had rated Panera Bread tops on overall satisfaction among large chain restaurants in Sandelman & Associates’s Quick-Track study “Awards of Excellence” surveys; in Sandelman’s 2012 Quick-Track study of more than 110,000 customers of quick-service restaurants, Panera ranked number one in the Attractive/Inviting restaurant category.4

A summary of Panera Bread’s recent finan-cial performance is shown in Exhibit 1. Exhibit 2 provides selected operating statistics for Panera’s company-owned and franchised bakery-cafés.

PaNeRa BReaD’s CONCePT aND sTRaTeGYPanera Bread’s identity was rooted in its fresh-baked artisan breads handcrafted with attention to quality and detail. The company’s breads and baked products were a major basis for differentiating Panera from its competitors. According to Panera management, “bread is our passion, soul, and expertise, and serves as the platform that makes all of our other food spe-cial.” The featured menu offerings at Panera locations included breads and pastries baked in-house, break-fast items and smoothies, made-to-order sandwiches,

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EXHIBIT 1 selected Consolidated Financial Data for Panera Bread, 2011–2015 (in thousands, except for per-share amounts)

2015 2014 2013 2012 2011

Income Statement Data

Revenues: Bakery-café sales $ 2,358,794 $2,230,370 $2,108,908 $1,879,280 $1,592,951 Franchise royalties and fees 138,563 123,686 112,641 102,076 92,793 Fresh dough and other product sales to franchisees 184,223 175,139 163,453 148,701 136,288 Total revenues 2,681,580 2,529,195 2,385,002 2,130,057 1,822,032Bakery-café expenses: Food and paper products 715,502 669,860 625,622 552,580 470,398 Labor 754,646 685,576 625,457 559,446 484,014 Occupancy 169,998 159,794 148,816 130,793 115,290 Other operating expenses 334,635 314,879 295,539 256,029 216,237 Total bakery-café expenses 1,974,781 1,830,109 1,695,434 1,498,848 1,285,939Fresh dough and other product cost of sales to franchisees 160,706 152,267 142,160 131,006 116,267Depreciation and amortization 135,398 124,109 106,523 90,939 79,899General and administrative expenses 142,904 138,060 123,335 117,932 113,083Pre-opening expenses 9,089 8,707 7,794 8,462 6,585 Total costs and expenses 2,439,986 2,253,252 2,075,246 1,847,187 1,601,773Operating profit 241,594 275,943 309,756 282,870 220,259Interest expense 3,830 1,824 1,053 1,082 822Other (income) expense, net 1,192 (3,175) (4,017) (1,208) (466)Income taxes 87,247 98,001 116,551 109,548 83,951Less net income (loss) attributable to non-controlling interest (17) — — — —Net income to shareholders $ 149,325 $ 179,293 $ 196,169 $ 173,448 $ 135,952Earnings per share Basic $5.81 $6.67 $6.85 $5.94 $4.59

Diluted 5.79 6.64 6.81 5.89 4.55Weighted average shares outstandingBasic 25,685 26,881 28,629 29,217 29,601Diluted 25,788 26,999 28,794 29,455 29,903

Balance Sheet Data

Cash and cash equivalents $ 241,886 $ 196,493 $ 125,245 $ 297,141 $ 222,640Current assets 502,789 406,166 302,716 478,842 353,119Total assets 1,475,318 1,390,686 1,180,862 1,268,163 1,027,322Current liabilities 399,443 352,712 303,325 277,540 238,334Total liabilities 654,718 654,718 177,645 168,704 372,246Stockholders’ equity 497,300 736,184 699,892 821,919 655,076

Cash Flow Data

Net cash provided by operating activities $ 318,045 $ 335,079 $ 348,417 $ 289,456 $ 236,889Net cash used in investing activities (165,415) (211,317) (188,307) (195,741) (152,194)Net cash (used in) provided by financing activities (107,237) (52,514) (332,006) (19,214) (91,354)Net (decrease) increase in cash and cash equivalents 45,393 71,248 (171,896) 74,501 (6,659)

Sources: 2015 10-K report, pp. 43–46; 2014 10-K report, pp. 41–43; 2013 10-K report, pp. 41–43; 2011 10-K report, pp. 41–43.

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(much like fast-food enterprises) but is distinguished by enticing menus, higher food quality, and more inviting dining environments; typical meal costs per guest are in the $7–$12 range. Some fast-casual restaurants have full table service, some have par-tial table service (with orders being delivered to the table after ordering and paying at the counter), and some are self-service (like fast-food establishments, with orders being taken and delivered at the coun-ter). Exhibit 3 provides information on prominent national and regional dining chains that competed against Panera Bread in some or many geographic locations.

Panera Bread’s growth strategy was to capital-ize on Panera’s market potential by opening both company-owned and franchised Panera Bread loca-tions as fast as was prudent. So far, working closely with franchisees to open new locations had been a key component of the company’s efforts to broaden its market penetration. Panera Bread had organized its

assortment of specialty food, casual dining, and quick-service establishments operating nationally, regionally, and locally. Its close competitors var-ied according to the menu item, meal, and time of day. For example, breakfast and AM “chill” com-petitors included Starbucks and McDonald’s; close lunch and dinner competitors included such chains as Chili’s, Applebee’s, California Pizza Kitchen, Jason’s Deli, Cracker Barrel, Ruby Tuesday, T.G.I. Friday’s, Chipotle Mexican Grill, and Five Guys Burgers and Fries. In the bread and pastry segment, Panera competed with Corner Bakery Café, Atlanta Bread Company, Au Bon Pain, local bakeries, and supermarket bakeries.

Except for bread and pastry products, Panera’s strongest competitors were dining establishments in the so-called fast-casual restaurant category. Fast-casual restaurants fill the gap between fast-food outlets and casual, full table service restaurants. A fast-casual restaurant provides quick-service dining

EXHIBIT 2 selected Operating statistics, Panera Bread Company, 2010–2015

2015 2014 2013 2012 2011 2010

Revenues at company-operated stores (in millions) $ 2,358.8 $ 2,230.4 $ 2,108.9 $ 1,879.3 $ 1,593.0 $ 1,321.2

Revenues at franchised stores (in millions) $ 2,478.0 $ 2,282.0 $ 2,175.2 $ 1,981.7 $ 1,828.2 $ 1,802.1

Systemwide store revenues (in millions) $ 4,836.8 $ 4,512.4 $ 4,284.1 $ 3,861.0 $ 3,421.2 $ 3,123.3

Average annualized revenues per company- operated bakery-café (in millions) $ 2.552 $ 12.502 $ 2.483 $ 2.435 $ 2.292 $ 2.179

Average annualized revenues per franchised bakery-café (in millions) $ 2.479 $ 2.455 $ 2.448 $ 2.419 $ 2.315 $ 2,266

Average weekly sales, company-owned cafés $ 49,090 $ 48,114 $ 47,741 $ 46,836 $ 44,071 $ 41,899

Average weekly sales, franchised cafés $ 47,680 $ 47,215 $ 47,079 $ 46,526 $ 44,527 $ 43,578

Comparable bakery-café sales percentage increases*

Company-owned outlets 3.0% 1.4% 2.6% 6.5% 4.9% 7.5%

Franchised outlets 1.0% 0.9% 2.0% 5.0% 3.4% 8.2%

System-wide 1.9% 1.1% 2.3% 5.7% 4.0% 7.9%

Company-owned bakery-cafés open at year-end 901 925 867 809 740 662

Franchised bakery-cafés open at year-end 1,071 955 910 843 801 791

Total bakery-cafés open 1,972 1,880 1,777 1,652 1,541 1,453

*The percentages for comparable store sales are based on annual changes at stores with an open date prior to the first day of the prior fiscal year (meaning that a store had to be open for all 12 months of the year to be included in this statistic).

Sources: Company 10-K reports for 2015, 2014, 2013, 2011, and 2010.

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EXHIBIT 3 Representative Fast-Casual Restaurant Chains and selected Full-service Restaurant Chains in the United states, 2014–2015

CompanyNumber of Locations, 2013

Select 2014–2015 Financial Data Key Menu Categories

Atlanta Bread Company

~100 company-owned and franchised bakery- cafés in 21 states

Not available (privately held company)

Fresh-baked breads, salads, sandwiches, soups, wood-fired pizza and pasta (select locations only), baked goods, desserts

Applebee’s Neighborhood Grill and Bar* (a subsidiary of DineEquity)

2,000+ franchised locations in 49 states, two U.S. territories, and 16 countries outside the U.S.

2015 average annual sales of about $2.5 million per U.S. location

Beef, chicken, pork, seafood, and pasta entrees, plus appetizers, salads, sandwiches, a selection of under-500-calorie Weight Watchers–branded menu alternatives, desserts, and alcoholic beverages (about 12 percent of total sales)

Au Bon Pain 300+ company-owned and franchised bakery- cafés in 26 states and 5+ foreign countries

Not available (privately held company)

A focus on healthful, nutritious selections with superfood ingredients, including hot cereals, bagels, soups, salads, sandwiches and wraps, and coffee drinks

Buffalo Wild Wings* 1,170 locations in the U.S., Mexico, Canada, and Philippines

2015 revenues of $1.8 billion; average sales of $3.25 million per location

Chicken wings, chicken tenders, specialty hamburgers, sandwiches, flatbreads, salads, full bar

California Pizza Kitchen*(a subsidiary of Golden Gate Capital)

~300 locations in ~32 states, 16 countries, and 218 cities

Average annual sales of about $3.2 million per location

Signature California-style hearth-baked pizzas, plus salads, pastas, soups, sandwiches, appetizers, desserts, beer, wine, coffees, teas, and assorted beverages

Chili’s Grill and Bar* (a subsidiary of Brinker International)

1,580 locations in 50 states and 307 locations in 30 foreign countries and territories

2015 average revenues of ~$2.9 million per location; 2015 average check size per customer of $14.52

Chicken, beef, and seafood entrees, steaks, appetizers, salads, sandwiches, desserts, and alcoholic beverages (14.1 percent of sales)

Chipotle Mexican Grill

2,000+ units 2015 revenues of $4.5 billion; average unit sales of ~$2.5 million; average check size $10.17

Gourmet burritos and tacos, salads, beverages (including margaritas and beers)

Corner Bakery Café 202 locations in 22 states and District of Columbia

2014 sales per location of $2.33 million; menu price range: $0.99 to $8.99

Specialty breads, hot breakfasts, signature sandwiches, grilled panini, pastas, seasonal soups and chili, made-to-order salads, sweets, coffees, and teas

Cracker Barrel* 637 combination retail stores and restaurants in 42 states

Restaurant-only sales of $2.27 billion in 2015; average sales per restaurant of $3.6 million; average guest check of $10.23; serves an average of ~1,000 customers per day per location

Two menus (all-day breakfast and lunch/dinner); named by Technomics in both 2013 and 2015 as the full restaurant category winner of its “Chain Restaurant Consumers’ Choice Award”


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CompanyNumber of Locations, 2013

Select 2014–2015 Financial Data Key Menu Categories

Culver’s 540+ locations in 22 states

2014 revenues of $1+ billion; average sales per location of $2.0 million

Signature hamburgers served on buttered buns, fried battered cheese curds, value dinners (chicken, shrimp, cod with potato and slaw), salads, frozen custard, milkshakes, sundaes, and fountain drinks

Einstein Noah Restaurant Group (Einstein Bros. Bagels, Noah’s New York Bagels, Manhattan Bagel)

~850 company-owned, franchised, and licensed locations in 40 states

Annual revenue per company-owned unit of ~$850,000

Fresh-baked bagels, hot breakfast sandwiches, made-to-order lunch sandwiches, creamed cheeses and other spreads, salads, soups, and gourmet coffees and teas

Fazoli’s (a subsidiary of Sun Capital Partners)

220+ locations in 26 states

2014 sales of ~$260 million

Spaghetti and meatballs, fettuccine alfredo, lasagna, ravioli, submarinos and panini sandwiches, pizza, entrée salads, garlic breadsticks, and desserts

Firehouse Subs 970+ locations in 42+ states (plans for 2,000 locations by 2020

Average unit sales of ~$800,000

Hot and cold subs, salads, sides, drinks, catering

Five Guys Burgers and Fries

1,500+ locations in 47 states and 6 Canadian provinces

2014 revenues of $1.2 billion

Hamburgers (with choice of 15 toppings), hot dogs, fries, and beverages

Jason’s Deli 268+ locations in 29 states

2014 sales per unit of $2.66 million

Sandwiches, extensive salad bar, soups, loaded potatoes, desserts, catering services, party trays, and box lunches

Moe’s Southwest Grill (a subsidiary of Focus Brands)

600+ locations in 37 states and the District of Columbia

Average annual sales per restaurant of ~$1.1 million

Burritos, quesadillas, fajitas, tacos, nachos, rice bowls (chicken, pork, or tofu), salads, a kid’s menu, five side items, two desserts, soft drinks, iced tea, bottled water, and catering

McAlister’s Deli (a subsidiary of Focus Brands)

350 locations in 26 states

Annual sales of $505 million; sales of $1.4 per location

Deli sandwiches, loaded baked potatoes, soups, salads, and desserts, plus sandwich trays, lunch boxes, and catering

Noodles & Company ~500 urban and suburban locations in 32 states and District of Columbia

2014 sales of $465 million; comparable store sales growth of 0.2% in 2014; average check size $8.00

Customizable Asian, Mediterranean, and American noodle/pasta entrees, soups, salads, sandwiches, alcoholic beverages

Olive Garden* 846 locations 2015 revenues of $3.8 billion; average sales per location of $4.5 million

Full Italian menu of appetizers (15), flatbreads (3), soups and salads (6), pastas (11), beef, chicken, and seafood entrees (20), desserts (8), kid’s menu, wide beverage assortment

Panda Express ~1,500 locations across the U.S.

2014 revenues of $2.2 billion

A variety of Chinese entrées, including orange chicken, Kung Pao chicken, broccoli beef, eggplant tofu, angus steak (and 9 others), rice, steamed vegetables, beverages

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CompanyNumber of Locations, 2013

Select 2014–2015 Financial Data Key Menu Categories

Qdoba Mexican Grill (a subsidiary of Jack-in-the-Box, Inc.)

661 company-owned and franchised locations in 47 states, District of Columbia, and Canada

2015 average unit sales per location of $1.2 million; 2015 comparable store sales growth of 9.3%; 2015 average check size of $11.82

Signature burritos, tacos, taco salads, quesadillas, three-cheese nachos, Mexican gumbo, tortilla soup, five signature salsas, and breakfast selections at some locations

Ruby Tuesday* 692 company-owned and franchised locations in 44 states, plus 44 international locations in 13 foreign countries and Guam

Fiscal 2015 sales of $1.13 billion; average restaurant sales of $1.7 million; typical entrée price ranges of $8.99 to $20.99

Appetizers, handcrafted burgers, 35-item salad bar, steaks, chicken, crab cakes, lobster, salmon, tilapia, ribs, desserts, nonalcoholic and alcoholic beverages, and catering

Starbucks ~12,600 company-operated and licensed locations in the U.S. and 10,500+ international locations

2015 global revenues of $19.2 billion; sales of $1.38 million per company-operated location in the Americas

Italian-style espresso beverages, teas, sodas, juices, assorted pastries and confections; some locations offer sandwiches and salads

T.G.I. Friday’s* 967 locations in 48 states and District of Columbia; 22 locations in 6 foreign countries

2014 annual revenues of ~$1.8 billion

Appetizers, salads, soups, burgers and other sandwiches, chicken, seafood, steaks, pasta, desserts, nonalcoholic and alcoholic beverages, party platters

*Denotes a full-service restaurant.

Sources: Company websites, accessed February 16, 2016; Nation’s Restaurant News, “Top 100 Restaurant Chains and Companies,” June 15, 2015, www.nrn.com (accessed February 16, 2016).

business around company-owned bakery-café opera-tions, franchise operations, and fresh dough operations; the fresh bread unit supplied dough and other products to all Panera Bread stores, both company-owned and franchised.

Panera Bread’s Product Offerings and MenuPanera Bread’s artisan signature breads were made from four ingredients—water, natural yeast, flour, and salt; no preservatives or chemicals were used. Carefully trained bakers shaped every step of the process, from mixing the ingredients, to kneading the dough, to placing the loaves on hot stone slabs to bake in a traditional European-style stone deck bak-ery oven. Breads, as well as bagels, muffins, cook-ies, and other pastries, were baked fresh throughout the day at each café location. Exhibit 4 shows Pane-ra’s lineup of breads.

The Panera Bread menu was designed to pro-vide target customers with products built on the company’s bakery expertise, particularly its variet-ies of breads and bagels baked fresh throughout the day at each café location. The key menu groups were fresh-baked goods, hot breakfast selections, bagels and cream cheese spreads, hot Panini, made-to-order sandwiches and salads, soups, fruit smoothies, fro-zen drinks, beverages, and Espresso bar selections. Exhibit 5 summarizes the menu offerings at Panera Bread locations as of March 2015.

Menu offerings were regularly reviewed and revised to sustain the interest of regular custom-ers, satisfy changing consumer preferences, and be responsive to various seasons of the year. Special soup offerings, for example, appeared seasonally. Product development was focused on providing food that customers would crave and trust to be tasty. New menu items were developed in test kitchens and then introduced in a limited number of the bakery-cafés to

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lettuces and tomatoes), and revising ingredients and preparation methods to yield 0 grams of artificial trans fat per serving. All of the menu boards and printed menus at company-owned Panera bakery-cafés included the calories for each food item. Also, Panera’s website had a nutritional calculator showing detailed nutritional information for each individual menu item or combination of menu selections.

Off-Premises Catering In 2004–2005, Panera Bread introduced a catering program to extend its market reach into the workplace, schools, and par-ties and gatherings held in homes, and grow its breakfast-, lunch-, and dinner-hour sales without making capital investments in additional physical facilities. The first menu consisted of items appear-ing on the regular menu and was posted for view-ing at the company’s website. A catering coordinator was available to help customers make menu selec-tions, choose between assortments or boxed meals, determine appropriate order quantities, and arrange

determine customer response and verify that prepa-ration and operating procedures result in product consistency and high quality standards. If successful, they were then rolled out systemwide. New product introductions were integrated into periodic or sea-sonal menu rotations, referred to as “Celebrations.” From 2013 through 2015, between 20 and 25 new and reintroduced menu items appeared on Panera’s menu each year during the course of five Celebrations.

Over the past 10 years, Panera had responded to growing consumer interest in healthier, more nutri-tious menu offerings. In 2004, whole grain breads were introduced, and in 2005 Panera switched to the use of natural antibiotic chicken in all of Pane-ra’s chicken-related sandwiches and salads. Other recent health-related changes included using organic and all-natural ingredients in selected items, using unbleached flours in its breads, adding a yogurt- granola-fruit parfait and reduced-fat spreads for bagels to the menu, introducing fruit smoothies, increasing the use of fresh ingredients (like fresh-from-the-farm

EXHIBIT 4 Panera’s Line of Fresh-Baked Breads, February 2016Artisan Breads Specialty Breads

CountryA crisp crust and nutty flavor. Available in loaf.

Whole GrainMoist and hearty, sweetened with honey. Available in loaf.

RyeWith chopped rye kernels and caraway seeds. Available in loaf.

FrenchSlightly blistered crust, wine-like aroma. Available in baguette; also served in portions as a side with many food selections.

CiabattaA moist, chewy crumb with a thin crust and light olive oil flavor. Available in loaf.

FocacciaItalian flatbread baked with olive oil and topped with either Asiago cheese or sea salt. Available in loaf.

Sprouted Whole Grain RollAvailable as single or pack of 6.

Soft Dinner RollAvailable as single or pack of 6.

SourdoughPanera’s signature sourdough bread with no fat, oil, sugar, or cholesterol. Available in loaf.

Asiago CheeseStandard sourdough recipe with Asiago cheese baked in and sprinkled on top. Available in loaf.

Honey WheatSweet and hearty with honey and molasses. Available in loaf.

All-Natural White BreadSoft and tender white sandwich bread. Available in loaf.

Tomato BasilSourdough bread made with tomatoes and basil, and sweet streusel topping. Available in XL loaf.

Cinnamon Raisin SwirlFresh dough made with flour, whole butter, and eggs, swirled with Vietnamese and Indonesian cinnamons, raisins, and brown sugar, topped with Panera’s cinnamon crunch topping. Available in loaf.

Source: www.panerabread.com (accessed February 12, 2016).

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EXHIBIT 5 Panera Bread’s Menu selections, March 2015

Bakery and Sweets Soups (5 selections varying daily, plus seasonal specialties)

Artisan and Specialty Breads (14 varieties) Options include:

Bagels (11 varieties) Broccoli Cheddar

Scones (5 varieties) Bistro French Onion

Sweet Rolls (3 varieties) Baked Potato

Muffins and Muffies (6 varieties) Low Fat All-Natural Chicken Noodle

Artisan Pastries (7 varieties) Cream of Chicken and Wild Rice

Brownie New England Clam Chowder

Cookies (8 varieties) Low Fat Vegetarian Garden Vegetable with Pesto

Cinnamon Crumb Coffee Cake Low Fat Vegetarian Black Bean

Carrot Cake Vegetarian Creamy Tomato

All-Natural Turkey Chili

Bagels & Cream Cheese Spreads

11 varieties of bagels, 7 varieties of spreads Café Salads

Caesar: Classic, Greek

Hot Breakfast

Breakfast Sandwiches (9 varieties) Signature Salads

Baked Egg Soufflés (3 varieties) Chicken Cobb

Spinach Mushroom and Sofrito Chicken Cobb with Avocado

Chicken Caesar

Strawberry Granola Parfait Asian Sesame Chicken

Fuji Apple Chicken

Honey Almond Greek Yogurt Parfait Thai Chicken

BBQ Chicken

Steel Cut Oatmeal Mediterranean Quinoa with Almonds

Greek with Shrimp

Power Almond Quinoa Oatmeal Classic with Chicken

Greek with Chicken

Fruit Smoothies (6 varieties) Power Kale Caesar with Chicken

Chicken Soba Noodle

Fresh Fruit Cup

Broth Bowls

Signature Hot Paninis Thai Garden Chicken Wonton

Frontega Chicken Ricotta Sacchettini with Chicken

Roast Turkey and Caramelized Kale Lentil Quinoa with Chicken

Steak and White Cheddar Lentil Quinoa with Cage-Free Egg

Signature Sandwiches Café Sandwiches

Napa Almond Chicken Salad Smoked Ham and Swiss

Steak and Arugula Roasted Turkey and Avocado BLT

Italian Combo Tuna Salad

Bacon Turkey Bravo Mediterranean Veggie


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salads, soups, pasta dishes, pastries and sweets, and a selection of beverages. In large geographic loca-tions with multiple bakery-cafés, Panera operated catering-only “delivery hubs” to expedite deliveries of customer orders. Going forward, top executives at Panera believed that off-premise catering was an important revenue growth opportunity for both company-operated and franchised locations.

The MyPanera Loyalty ProgramIn 2010, Panera initiated a loyalty program to reward customers who dined frequently at Panera Bread locations. The introduction of the MyPanera program

pickup or delivery times. Orders came complete with plates, napkins, and utensils, all packaged and pre-sented in convenient, ready-to-serve-from packaging.

In 2010, Panera boosted the size of its cater-ing sales staff and introduced sales training pro-grams and other tools—factors that helped drive a 26 percent increase in catering sales in 2010. In 2011, Panera introduced an online catering sys-tem that catering customers could use to view the catering menu, place orders, specify whether the order was to be picked up or delivered to a specified location, and pay for purchases. The 65-item cater-ing menu in 2015 included breakfast assortments, bagels and spreads, sandwiches and boxed lunches,

Café Sandwiches Continued Beverages

Italian Combo Coffee (hot or iced)Fontina Grilled Cheese Hot TeasClassic Grilled Cheese Iced TeaSierra Turkey Iced Green TeaSmoked Turkey Pepsi beverages

Dr PepperFlatbread Sandwiches Bottled WaterTurkey Cranberry San Pellegrino

Mediterranean Chicken Organic Milk or Chocolate MilkThai Chicken Orange JuiceTomato Mozzarella Organic Apple Juice

Chicken Ham and Swiss LemonadeFruit Punch

Signature Pastas Sierra Mist fountain soda

Chicken Sorrentina Assorted other bottled beverages (5)Chicken Tortellini AlfredoMac & Cheese Frozen DrinksPesto Sacchettini Frozen CaramelTortellini Alfredo Frozen MochaPasta Primavera

Espresso Bar

Panera Kids EspressoGrilled Cheese Sandwich CappuccinoPeanut Butter and Jelly Sandwich Caffe Latte

Smoked Ham Sandwich Caffe MochaSmoked Turkey Sandwich Vanilla Latte

Mac & Cheese Caramel Latte

10 varieties of regular and seasonal soups Skinny Caffe Mocha3 salads Chai Tea Latte (hot or iced)2 squeezable varieties of yogurt Signature Hot Chocolate

Source: Menu posted at www.panerabread.com (accessed February 12, 2016).

EXHIBIT 5 Continued

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complete in 2017. The company had converted 106 of its company-owned bakery-cafés to Panera 2.0 by year-end 2014 and another 304 were fully converted to Panera 2.0 by year-end 2015.

CEO Ron Shaich was pleased with the results in the bakery-cafés that had converted to Panera 2.0—sales growth was higher in the converted store loca-tions than in the nonconverted locations and metrics relating to labor costs, operating improvements, and guest friction/complaints were also noticeably better in the converted locations. The data further indicated that it took three to four quarters for the effects of sales growth and operating efficiencies to gain full momentum in the converted Panera 2.0 cafés. Intro-duction of the “Rapid Pickup” component of Panera 2.0, which featured mobile ordering and payment for customers picking up orders at a particular bakery-café, was completed systemwide in early 2015. By year-end 2015, sales that were digitally placed and paid for were averaging 16 percent of total sales companywide but were averaging 22 percent of total sales at cafés that had converted to Panera 2.0 and approaching 25 percent of total sales at growing numbers of Panera bakery-cafés.

While Panera’s rollout of Panera 2.0 was intended to speed service and checkout, as well as enable other operating efficiencies, some of Panera’s big-gest shareholders had expressed their concern to Ron Shaich that Panera 2.0 was being implemented too slowly and were also skeptical whether the new soft-ware would actually improve internal operating effi-ciency and boost customer traffic outside the lunch hour by as much as Panera executives hoped.

The “Panera at Home” Strategic InitiativeIn 2013 Panera began selling Panera-branded soups (15 varieties), mac and cheese, salad dressings, packaged meats (roast pork, roast turkey, and roast beef), Panera coffee (7 varieties), and frozen breads through other retailers, primarily grocery chains. In 2015, Panera food products were available at select grocery locations in 48 states and its coffees could be purchased at Amazon.com. In 2015, sales of these products (roughly 49 items) totaled about $150 million and were growing about 50 percent annually. Panera’s goal was to build Panera at Home into a business generating $1 billion in retail sales and over $300 million in wholesale revenues over time. In

was completed systemwide in November and, by the end of December, some 4.5 million customers had signed up and become registered card mem-bers. Members presented their MyPanera card when ordering. When the card was swiped, the specific items being purchased were automatically recorded to learn what items a member liked. As Panera got an idea of a member’s preferences over the course of several visits, a member’s card was “loaded” with such “surprises” as complimentary bakery-café items, exclusive previews and tastings, cooking and baking tips, invitations to special events, ideas for entertaining, or recipe books. On a member’s next visit, when an order was placed and the card swiped, order-taking personnel informed the member of the surprise award. Members could also go online at www.MyPanera.com and see if a reward was waiting on their next visit. At year-end 2015, the company’s MyPanera program had over 22 million members, and in 2013, 2014, and 2015 approximately 50 per-cent of the transactions at Panera Bread bakery-cafés were attached to a MyPanera loyalty card.

Management believed that the loyalty program had two primary benefits. One was to entice members to dine at Panera more frequently and thereby deepen the bond between Panera Bread and its most loyal customers. The second was to provide Panera man-agement with better marketing research data on the purchasing behavior of customers and enable Panera to refine its menu selections and market messages.

The Panera 2.0 Strategic InitiativeIn 2012, Panera began testing a newly developed Panera 2.0 app that enabled digital ordering and payment by customers and that included capabili-ties store employees and managers could use to per-form an assortment of internal operating activities. The app was adaptable to the differentiated needs of dine-in, to-go, and large-order delivery customers. The objectives of the Panera 2.0 technology were to enhance the guest experience, aid the introduction of marketing innovations, permit cost-efficient han-dling of a growing number of customer transactions volumes, and pave the way for greater operating effi-ciencies in its bakery-cafés. The tests in 14 bakery-cafés were such a huge success that Panera began rolling out the full Panera 2.0 experience to its entire network of company-operated and franchised bakery cafés in 2013, a process that management planned to

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production systems, integrated as they are, are already in place to enable [Panera] 2.0 and rapid pickup, and can be uniquely leveraged to support our Delivery business. Given our existing technology, Delivery appears to our cafe managers as just another to-go order. Orders come in over the same app, go through our existing kitchen display systems and are produced by the same staff for our drivers to bring to our cus-tomers. Thus, there’s little material incremental capital investment beyond routing software required to sup-port our Delivery business.

Panera had studied using third-party delivery services instead of building its own driver network. But management was not convinced outsourcing delivery drivers was the best way for Panera to go. Ron Shaich gave several reasons:7

First, we don’t want to be confined by the limited mass coverage presently offered by external delivery resources.

And, second, we found that using our own drivers ensures a faster delivery time with more consistent quality of delivery for a better customer experience. We know this matters to our customer and we believe we can build a formidable competitive advantage on this.

No third-party delivery operator offers the cover-age to unlock the market potential we see out there and want to attack now. We’ve talked with every meaning-ful third-party provider out there and tested with many, and at best no single third-party delivery organization can support more than 15 percent of our markets.

Further, in the markets they do operate within, their average coverage is below 50% of our cafés’  delivery zones. That is to say, if you take an individual store, they only offer delivery to about 50% of the real estate we’re trying to deliver to. So, as of today, using third-party drivers would allow us to serve less than 7% of what we perceive to be our potential delivery customers.

We also are committed to offering a better deliv-ery experience, one of consistent quality. Our goal is a 30- to 35-minute order-to-door time, which we have found possible, at least at this point—which we have not found possible, at least at this point, through third-party drivers.

. . .  given the size of the opportunity and our desire to move quickly, we cannot wait for third-party provid-ers to expand their capabilities, nor are we willing to put up with present limitation of third-party services. Simply put, we will initially move forward with in-house drivers, believing this will lead to a more rapid rollout of delivery, making for a competitively more attractive experience for our customers, and lead to significantly more incremental profitability.

2016 Panera expected to begin transitioning catego-ries within its Panera at Home food portfolio from a licensed model to what it termed a “co-pack model” in which Panera managed the customer.

Panera’s Latest Strategic Initiative: Delivering Orders to CustomersPanera management began working on prototyping and testing delivering orders to customers in 2012–2013. By year-end 2015, Panera had come up with a go-forward delivery model which it was testing at 25 cafés in two geographic markets. While the test was still in the early stages, Panera was generating deliv-ery orders in the 25 test cafés averaging $5,000 per week, against a breakeven volume of $3,000 (exclu-sive of startup, training, and initial awareness costs).

In February 2016, Shaich explained why he was excited about the potential for order delivery to be a powerful new channel for sales and profit growth at Panera:6

First, we believe we have the perfect product for Deliv-ery. Salads and sandwiches are generally not heated and, therefore, travel well, especially at lunch. We also have brand credibility. Our foods are the preferred choice for many office meetings and gatherings. Deliv-ery also uses our production capabilities without tax-ing lunchtime seats which are at or nearly at capacity.

Second, our testing to date indicates delivery sales are highly incremental, which means we are reach-ing Panera users not already served through other channels. Third, our testing indicates delivery has the potential to [boost sales growth at existing stores] for multiple years at rates significantly higher than the rate of [growth without delivery]. Simply put, the trajec-tory of delivery sales growth is different than the tra-jectory of sales growth [without delivery].

Fourth, steady state Delivery margins are particu-larly attractive since there’s no order input cost asso-ciated with Delivery—all orders are indeed placed digitally—and no cost for heating and lighting the space in which the customer consumes the product. Indeed, customers consume the delivered product in their own space. The only relevant costs when we do delivery are production and the net cost of delivery, which in turn is very much a function of the level of sales per hour offset by the modest delivery fee we charge.

Fifth, startup and transition costs are modest, very modest. We simply have to hire and train drivers and build awareness to reach our initial sales goals.

And sixth, delivery leverages the tech capabilities we’ve already built. The digital ordering, payment, and

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and one in Boston. Panera expected to serve over 1 million people at the five pay-what-you-want loca-tions in 2013.8 Statistics showed that in 2013 about 60 percent of store patrons left the suggested amount, 20 percent left more, and 20 percent less, often significantly less.9

In March 2013, Panera introduced a special “Meal of Shared Responsibility”—turkey chili in a bread bowl—at a suggested retail price of $5.89 (tax included) at 48 locations in the St. Louis area. The idea was that those in need could get a nutritious 850-calorie meal for whatever they could afford to pay, while those who pay above the company’s cost make up the difference.10 The program was sup-ported by heavy media coverage at launch, exten-sive in-store signage, and employees explaining how the meal worked. In July 2013, after serving about 15,000 of the turkey chili meals, Panera canceled the program, chiefly because few people in need were participating—an outcome attributed largely to most Panera locations in the St. Louis area being located in middle-class and affluent neighborhoods. Management indicated it would rethink its approach to social responsibility and possibly retool the pro-gram. Later in 2014, the Chicago location of Panera Cares was closed.

In 2016, the four locations in St. Louis, Dear-born, Boston, and Portland were still open, operat-ing under the name Panera Cares Community Cafés. Since 2010, some 4 million guests had been served meals. In order to achieve the goal of feeding peo-ple with dignity and also sustain their operation, the Panera Bread Foundation had established four guidelines that guests at these Community Cafés were asked to observe:11

1. The suggested donation listed on the menu panel is the retail value of the meal and reflects the amount we need to cover our operating costs while also covering the cost of the meals for those who come in and are unable to contribute for their meal. We ask that those who are able contribute that amount do so.

2. For guests who cannot meet our suggested dona-tion amount or donate your fair share, we ask that you limit yourself to one entreé and a beverage per week.

3. If you are unable to contribute for your meal, you may earn a meal voucher by volunteering for 1 hour per week in our community cafés. We are

All that said, let me state that we respect the third-party model and we’ll continue to talk with any and all third-party providers relative to our markets. We are rigid in our commitment to build a real delivery busi-ness at Panera but flexible in execution, as we know the capabilities of independent delivery firms will con-tinue to evolve rapidly.

But, today, [using] in-house drivers allows us to move quickly to offer delivery at scale across the coun-try with a better experience that serves as a competi-tive advantage for our guests.

Panera franchisees were as excited about deliv-ering orders as was Panera management, chiefly because of the incremental sales and profit potential and the relatively small costs associated with add-ing delivery capability. As a consequence, the strat-egy was to roll out delivery simultaneously at both company-owned and franchised locations. In 2016, Panera expected to introduce order delivery at 200 to 300 company and franchised locations.

Panera’s Nonprofit Pay-What-You-Want Bakery-Café LocationsIn May 2010, Panera Bread converted one of its res-taurants in a wealthy St. Louis suburb into a non-profit “pay-what-you-want” Saint Louis Bread Cares bakery-café with the idea of helping to feed people in need and raising money for charitable work. A sign in the bakery-café said, “We encourage those with the means to leave the requested amount or more if you’re able. And we encourage those with a real need to take a discount.” The menu board listed “suggested fund-ing levels,” not prices. Payments went into a dona-tion box, with the cashiers providing change and handling credit card payments. The hope was that enough generous customers would donate money above and beyond the menu’s suggested funding lev-els to subsidize discounted meals for those who were experiencing economic hardship and needed help. The restaurant was operated by Panera’s charitable Panera Bread Foundation; all profits from the store were donated to community programs.

After several months of operation, the Saint Louis Bread Cares store was judged to be success-ful enough that Ron Shaich, who headed the Panera Bread Foundation, opted to open two similar Panera Cares cafés—one in the Detroit suburb of Dearborn, Michigan, and one in Portland, Oregon. Two more locations were opened in 2012—one in Chicago

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systemwide bakery-café sales), $44.5 million in 2012 (1.15 percent of systemwide bakery-café sales), $55.6 million in 2013 (1.30 percent of system-ide bakery-café sales), $65.5 million in 2014 (1.45 percent of systemwide bakery-café sales), and $68.5 million in 2015 (1.41 percent of systemwide bakery-café sales). The increased advertising expenses in 2014 were to support Panera’s first-ever national television adver-tising campaign, an initiative that was financed by both Panera and its franchisees and that was contin-ued in 2015.

Panera’s franchise agreements required fran-chisees to contribute a specified percentage of their net sales to advertising. In 2014 and 2015, Panera’s franchise-operated bakery-cafés were required to con-tribute 1.8 percent of their sales to a national advertis-ing fund and to pay Panera a marketing administration fee equal to 0.4 percent of their sales—Panera contrib-uted the same net sales percentages from company-owned bakery-cafés toward the national advertising fund and the marketing administration fee. Franchisees were also required in 2014 and 2015 to spend amounts equal to 0.8 percent of their net sales on advertising in their respective local markets.

FRaNCHIse OPeRaTIONsOpening additional franchised bakery-cafés was a core element of Panera Bread’s strategy and manage-ment’s initiatives to achieve the company’s revenue growth and earnings targets. Panera Bread did not grant single-unit franchises, so a prospective fran-chisee could not open just one bakery-café. Rather, Panera Bread’s franchising strategy was to enter into franchise agreements that required the franchise developer to open a number of units, typically 15 bakery-cafés in a period of six years. Franchisee can-didates had to be well-capitalized, have a proven track record as excellent multiunit restaurant operators, and agree to meet an aggressive development schedule. Applicants had to meet eight stringent criteria to gain consideration for a Panera Bread franchise:

∙ Experience as a multiunit restaurant operator ∙ Recognition as a top restaurant operator ∙ Net worth of $7.5 million ∙ Liquid assets of $3 million ∙ Infrastructure and resources to meet Panera’s

development schedule for the market area the franchisee was applying to develop

not designed to be a permanent solution for those facing food insecurity, so if you are in need of additional services, please visit our resource area for more information.

4. We also ask that, as a general matter, meals provided to those who cannot contribute the full suggested donation amount are consumed in our community cafes as a means of building community.

Panera’s Marketing StrategyPanera management was committed to growing sales at existing and new unit locations, continuously improving the customer experience at its restau-rants, and stimulating more frequent customer visits to its bakery-cafés. The core strategic initiatives to achieve these outcomes included periodically intro-ducing new menu items during the Celebrations, increasing the enrollment of patrons in the MyPanera loyalty programs, and efforts to strengthen relation-ships with customers who, management believed, would then recommend dining at Panera to their friends and acquaintances. Panera hired a new chief marketing officer and a new vice president of mar-keting in 2010; both had considerable consumer marketing experience and were playing an important role in crafting the company’s marketing strategy to increase awareness of the Panera brand, develop and promote appealing new menu selections, expand customer participation in the MyPanera loyalty pro-gram, and otherwise make dining at Panera bakery-cafés a pleasant and satisfying experience.

To promote the Panera brand and menu offer-ings to target customer groups, Panera employed a mix of radio, billboards, social networking, the Inter-net, and periodic cable television advertising cam-paigns. In recent years, Panera had put considerable effort into (a) improving its advertising messages to better capture the points of difference and the soul of the Panera concept and (b) doing a better job of optimizing the media mix in each geographic market.

Whereas it was the practice at many national res-taurant chains to spend 3 to 5 percent of revenues on media advertising, Panera’s advertising expenses had typically been substantially lower, running as low as 0.6 percent of systemwide sales at company-owned and franchised bakery-cafés in 2008. But in the past five years, Panera had started upping its advertising effort to help spur sales growth. Advertising expenses totaled $33.2 million in 2011 (1.00 percent of

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all of their dough products from sources approved by Panera Bread. Panera’s fresh dough facility sys-tem supplied fresh dough products to substantially all franchise-operated bakery-cafés. Panera did not finance franchisee construction or area development agreement payments or hold an equity interest in any of the franchise-operated bakery-cafés. All area development agreements executed after March 2003 included a clause allowing Panera Bread the right to purchase all bakery-cafés opened by the franchisee at a defined purchase price, at any time five years after the execution of the franchise agreement. During the 2010–2014 period, Panera purchased 84 bakery-cafés from the franchisees and had sold 5 company-owned stores to franchisees.

But in mid-April 2015, following a February announcement that Panera’s expected earnings per share in 2015 would, at best, be flat in compari-son to the $6.64 the company earned in 2014 and

∙ Real estate experience in the market to be developed ∙ Total commitment to the development of the

Panera Bread brand ∙ Cultural fit and a passion for fresh bread

Exhibit 6 shows estimated costs of opening a new franchised Panera Bread bakery-café. The fran-chise agreement typically required the payment of a $5,000 development fee for each bakery-café con-tracted for in a franchisee’s “area development agree-ment,” a franchise fee of $30,000 per bakery-café (payable in a lump sum at least 30 days prior to the scheduled opening of a new bakery-café), and con-tinuing royalties of 5 percent on gross sales at each franchised bakery-café. Franchise-operated bakery-cafés followed the same standards for in-store oper-ating standards, product quality, menu, site selection, and bakery-café construction as did company-owned bakery-cafés. Franchisees were required to purchase

EXHIBIT 6 estimated Initial Investment for a Franchised Panera Bread Bakery-Café, 2012

Investment Category Actual or Estimated Amount To Whom Paid

Development fee $5,000 per bakery-café contracted for in the franchisee’s Area

Development Agreement


Franchise fee $35,000 ($5,000 of the development fee was applied to the $35,000

franchise fee when a new bakery-café was opened)


Real property Varies according to site and local real estate market conditions

Leasehold improvements $334,000 to $ 938,500 Contractors

Equipment $198,000 to $ 310,000 Equipment vendors, Panera

Fixtures $ 32,000 to $ 54,000 Vendors

Furniture $ 28,500 to $ 62,000 Vendors

Consultant fees and municipal impact fees (if any)

$ 51,500 to $ 200,250 Architect, engineer, expeditor, others

Supplies and inventory $ 19,150 to $ 24,350 Panera, other suppliers

Smallwares $ 24,000 to $ 29,000 Suppliers

Signage $ 15,000 to $ 84,000 Suppliers

Additional funds (for working capital and general operating

expenses for 3 months)

$175,000 to $ 245,000 Vendors, suppliers, employees, utilities, landlord, others

Total $917,150 to $1,984,100, plus real estate andrelated costs

Source: www.panerabread.com (accessed April 5, 2012).

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area, and information on nearby competitors. Based on analysis of this information, including utiliza-tion of predictive modeling using proprietary soft-ware, Panera developed projections of sales and return on investment for candidate sites. Cafés had proven successful as freestanding units and as both in-line and end-cap locations in strip malls and large regional malls. A number of the Panera Bread cafca-fés that were free-standing or had suitable end-cap locations had installed drive-thru windows, a feature that tended to boost sales by about 20 percent.

The average Panera bakery-café size was approx-imately 4,500 square feet. Most all company-operated locations were leased. Lease terms were typically for 10 years, with one, two, or three 5-year renewal option periods. Leases typically entailed charges for minimum base occupancy, a proportionate share of building and common area operating expenses and real estate taxes, and a contingent percentage rent based on sales above a stipulated amount. Some lease agreements provided for scheduled rent increases during the lease term. The average construction, equipment, furniture and fixture, and signage cost for the 65 company-owned bakery-cafés opened in 2014 and the 57 bakery-cafés was $1,400,000 (excluding capitalized development overhead expenses), com-pared to average costs of $750,000 for 42 company-owned bakery-cafés opened in 2010 and $920,000 for 66 company-owned bakery-cafés opened in 2005.

Each bakery-café sought to provide a distinc-tive and engaging environment (what management referred to as “Panera Warmth”), in many cases using fixtures and materials complementary to the neighbor-hood location of the bakery-café. All Panera cafés used real china and stainless silverware, instead of paper plates and plastic utensils. Periodically, the company introduced new café designs aimed at further refining and enhancing the appeal of Panera bakery-cafés as a warm and appealing neighborhood gathering place. These designs tended to feature newly available fur-niture, cozier seating, and modernized décor. Some locations had fireplaces to further create an alluring and hospitable atmosphere. Many locations had out-door seating, and all company-operated and most franchised locations had free wireless Internet to help make the bakery-cafés community gathering places where people could catch up on some work, hang out with friends, read the paper, or just relax (a strategy that Starbucks had used with great success).

shortly after Panera’s executives had a “constructive dialogue” with activist shareholder Luxor Capital Group, Panera Bread announced that it would (a) expand its share-repurchase plan from $600 mil-lion to $750 million, (b) sell 73 of its 925 company-owned bakery-cafés to franchisees to raise money to help fund the added expenditures on repurchasing outstanding shares of the company’s common stock, and (c) borrow $500 million to help fund the share-buyback plan. As things turned out, Panera ended up selling 75 company-owned bakery-cafés to fran-chisees by year-end 2015 and expected to sell about 35 additional company-owned stores to franchisees in 2016.

As of January 2016, Panera Bread had agree-ments with 33 franchise groups that operated 1,071 bakery-cafés. Panera’s largest franchisee operated nearly 200 bakery-cafés in Ohio, Pennsylvania, West Virginia, Kentucky, and Florida. The company’s fran-chise groups had committed to open an additional 128 bakery-cafés. If a franchisee failed to develop bakery-cafés on schedule, Panera had the right to terminate the franchise agreement and develop its own company-operated locations or develop locations through new franchisees in that market. However, Panera from time to time agreed to modify the commitments of franchi-sees to open new locations when unfavorable market conditions or other circumstances warranted -ponement or cancellation of new unit openings.

Panera provided its franchisees with support in a number of areas: market analysis and site selection assistance, lease review, design services and new store opening assistance, a comprehensive 10-week initial training program, a training program for hourly employ-ees, manager and baker certification, bakery-café certi-fication, continuing education classes, benchmarking data regarding costs and profit margins, access to company-developed marketing and advertising pro-grams, neighborhood marketing assistance, and cal-endar planning assistance.

PaNeRa BReaD OPeRaTIONsSite Selection and Café EnvironmentBakery-cafés were typically located in suburban, strip mall, and regional mall locations. In evaluating a potential location, Panera studied the surround-ing trade area, demographic information within that

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and approximately 1,300 were employed in general or administrative functions, principally in the company’s support centers. Roughly 23,800 employees worked, on average, at least 25 hours per week. Panera had no collective bargaining agreements with its associates and considered its employee relations to be good.

Panera’s Bakery-Café Supply ChainPanera operated a network of 24 facilities (22 company-owned and 2 franchise-operated) to sup-ply fresh dough for breads and bagels on a daily basis to almost all of its company-owned and franchised bakery-cafés—one of the company’s 22 facilities was a limited production operation co-located at a company-owned bakery-café in Ontario, Canada, that supplied dough to 17 Panera bakery-cafés in that market. All of the company’s facilities were leased. Most of the 1,500 employees at these facilities were engaged in preparing dough for breads and bagels, a process that took about 48 hours. The dough- making process began with the preparation and mixing of starter dough, which then was given time to rise; other all-natural ingredients were then added to create the dough for each of the different bread and bagel varieties (no chemicals or preservatives were used). Another period of rising then took place. Next, the dough was cut into pieces, shaped into loaves or bagels, and readied for shipment in fresh dough form. There was no freezing of the dough, and no partial baking was done at the fresh dough facilities. Trained bakers at each bakery-café performed all of the bak-ing activities, using the fresh doughs delivered daily.

Distribution of the fresh bread and bagel doughs (along with tuna, cream cheese spreads, and cer-tain fresh fruits and vegetables) was accomplished through a leased fleet of about 225 temperature-controlled trucks operated by Panera personnel. The optimal maximum distribution route was approxi-mately 300 miles; however, routes as long as 500 miles were sometimes necessary to supply cafés in outlying locations. In 2013–2014, the various distri-bution routes for regional facilities entailed making daily deliveries to 8–9 bakery-cafés.

Panera obtained ingredients for its doughs and other products manufactured at its regional facilities. While a few ingredients used at these facilities were sourced from a single supplier, there were numerous suppliers of each ingredient needed for fresh dough and cheese spreads. Panera contracted externally for

Bakery-Café OperationsPanera’s top executives believed that operating excellence was the most important element of Panera Warmth and that without strong execution and oper-ational skills and energized café personnel who were motivated to provide pleasing service, it would be difficult to build and maintain a strong relationship with the customers patronizing its bakery-cafés. Additionally, top management believed high-quality restaurant management was critical to the company’s long-term success. Bakery-café managers were pro-vided with detailed operations manuals and all café personnel received hands-on training, both in small group and individual settings. The company had cre-ated systems to educate and prepare café personnel to respond to a customer’s questions and do their part to create a better dining experience. Manage-ment strived to maintain adequate staffing at each café and had instituted competitive compensation for café managers and both full-time and part-time café personnel (who were called associates). Man-agers at cafés that had converted to Panera 2.0 were aggressively using the tool to improve a variety of operating metrics—and with demonstrated results.

Panera executives had established a “Joint Ven-ture Program,” whereby selected general managers and multiunit managers of company-operated bak-ery cafés could participate in a bonus program based upon a percentage of the store profit of the bakery-cafés they operated. The bonuses were based on store profit percentages generally covering a period of five years, and the percentages were subject to annual minimums and maximums. Panera manage-ment believed the program’s multiyear approach (a) improved operator quality and management retention, (b) created team stability that generally resulted in a higher level of operating consistency and customer service for a particular bakery-café, (c) fostered a low rate of management turnover, and (d) helped drive operating improvements at the com-pany’s bakery-cafés. In 2013–2014, approximately 45 percent of the bakery-café operators Panera’s company-owned locations participated in the Joint Venture Program.

Going into 2016, Panera Bread had approxi-mately 47,200 employees. Approximately 44,400 were employed in Panera’s bakery-cafe operations as bakers, managers, and associates, approximately 1,400 were employed in the fresh dough facility operations,

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suppliers to improve ingredient quality and cost and that its various supply-chain arrangements entailed little risk that its bakery-cafés would experience sig-nificant delivery interruptions from weather condi-tions or other factors that would adversely affect café operations.

The fresh dough made at the regional facilities was sold to both company-owned and franchised bakery-cafés at a delivered cost not to exceed 27 percent of the retail value of the product. Exhibit 7 provides financial data relating to each of Panera’s three busi-ness segments: company-operated bakery-cafés, fran-chise operations, and the operations of the regional facilities that supplied fresh dough and other products. The sales and operating profits of the fresh dough and other products segment shown in Exhibit 7 represent only those transactions with franchised bakery-cafés. The company classified any operat-ing profit of the regional facilities stemming from supplying fresh dough and other products to com-pany-owned bakery-cafés as a reduction in the cost of food and paper products. The costs of food and paper products for company-operated bakery-cafés are shown in Exhibit 1.

Panera Bread’s Management Information SystemsEach company-owned bakery-café had programmed point-of-sale registers that collected transaction data used to generate transaction counts, product mix, average check size, and other pertinent statistics. The prices of menu selections at all company-owned bakery-cafés were programmed into the point-of-sale registers from the company’s data support centers. Franchisees were allowed access to certain parts of Panera’s proprietary bakery-café systems and systems support; they were responsible for pro-viding the appropriate menu prices, discount rates, and tax rates for system programming.

The company used in-store enterprise appli-cation tools and the capabilities of the Panera 2.0 app to (1) assist café managers in scheduling work hours for café personnel and controlling food costs, in order to provide corporate and retail opera-tions management with quick access to retail data; (2)  enable café managers to place online orders with distributors; and (3) to reduce the time café managers spent on administrative activities. The information collected electronically at café registers

the manufacture and distribution of sweet goods to its bakery-cafés. After delivery, sweet good products were finished with fresh toppings and other ingredi-ents (based on Panera’s own recipes) and baked to Panera’s artisan standards by professionally trained bakers at each café location.

Panera had arrangements with several indepen-dent distributors to handle the delivery of sweet goods products and other items to its bakery-cafés, but the company had contracted with a single supplier to deliver the majority of ingredients and other products to its bakery-cafés two or three times weekly. Virtually all other food products and supplies for their bakery-cafés, including paper goods, coffee, and smallwares, were contracted for by Panera and delivered by the vendors to designated independent distributors for delivery to the bakery-cafés. Individual bakery-cafés placed orders for the needed supplies directly with a distributor; distributors made deliveries to bakery-cafés two or three times per week. Panera maintained a list of approved suppliers and distributors that all company-owned and franchised cafés could select from in obtaining food products and other supplies not sourced from the company’s regional facilities or delivered directly by contract suppliers.

Although many of the ingredients and menu items sourced from outside vendors were prepared to Panera’s specifications, the ingredients for a big majority of menu selections were generally avail-able and could be obtained from alternative sources when necessary. In a number of instances, Panera had entered into annual and multiyear contracts for certain ingredients in order to decrease the risks of supply interruptions and cost fluctuation. However, Panera had only a limited number of suppliers of antibiotic-free chicken; because there were rela-tively few producers of meat products raised with-out antibiotics—as well as certain other organically grown items—it was difficult or more costly for Panera to find alternative suppliers.

Management believed the company’s fresh dough-making capability provided a competitive advantage by ensuring consistent quality and dough-making efficiency (it was more economical to concen-trate the dough-making operations in a few facilities dedicated to that function than it was to have each bakery-café equipped and staffed to do all of its bak-ing from scratch). Management also believed that the company’s growing size and scale of operations gave it increased bargaining power and leverage with

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EXHIBIT 7 Business segment Information, Panera Bread Company, 2011–2015 (in thousands of dollars)

2015 2014 2013 2012 2011

Segment revenues:

Company bakery-café operations $ 2,358,794 $ 2,230,370 $ 2,108,908 $ 1,879,280 $ 1,592,951

Franchise operations 138,563 123,686 112,641 102,076 92,793

Fresh dough and other product operations at regional facilities 382,110 370,004 347,922 312,308 275,096

Intercompany sales eliminations (197,887) (194,865) (184,469) (163,607) (138,808)

Total revenues $ 2,681,580 $ 2,529,195 $ 2,385,002 $ 2,130,057 $ 1,822,032

Segment operating profit:

Company bakery-café operations $ 366,905 $ 400,261 $ 413,474 $ 380,432 $ 307,012

Franchise operations 133,449 117,770 106,395 95,420 86,148

Fresh dough and other product operations at regional facilities 23,517 22,872 21,293 17,695 20,021

Total segment operating profit $ 523,871 $ 540,903 $ 541,162 $ 493,547 $ 413,181

Depreciation and amortization:

Company bakery-café operations $ 105,535 $ 103,239 $ 90,872 $ 78,198 $ 68,651

Fresh dough and other product operations at regional facilities 9,367 8,613 8,239 6,793 6,777

Corporate administration 20,496 12,257 7,412 5,948 4,471

Total $ 135,398 $ 124,109 $ 106,523 $ 90,939 $ 79,899

Capital expenditures:

Company bakery-café operations $ 174,633 $ 167,856 $ 153,584 $ 122,868 $ 94,873

Fresh dough and other product operations at regional facilities 12,175 12,178 11,461 13,434 6,483

Corporate administration 37,124 44,183 26,965 16,026 6,576

Total capital expenditures $ 223,932 $ 224,217 $ 192,010 $ 152,328 $ 107,932

Segment assets

Company bakery-café operations $ 953,717 $ 953,896 $ 867,093 $ 807,681 $ 682,246

Franchise operations 13,049 13,145 10,156 10,285 7,502

Fresh dough and other product operations at regional facilities _75,634 _65,219 62,854 60,069 47,710

Total segment assets $ 1,475,318 $ 1,390,902 $ 940,103 $ 878,035 $ 737,458

Sources: Panera Bread’s 2015 10-K report, p. 73; 2014 10-K report, p. 66; 2013 10-K report, p. 67; 2011 10-K report, p. 69.

was used to generate daily and weekly consolidated reports regarding sales, transaction counts, aver-age check size, product mix, sales trends, and other operating metrics, as well as detailed profit-and-loss statements for company-owned bakery-cafés.

These data were incorporated into the company’s “exception-based reporting” tools.

Panera’s regional facilities had software that accepted electronic orders from bakery-cafés and monitored delivery of the ordered products back to

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another, seeking to set themselves apart from rivals via pricing, food quality, menu theme, signature menu selections, dining ambiance and atmosphere, service, convenience, and location. To further enhance their appeal, some restaurants tried to promote greater cus-tomer traffic via happy hours, lunch and dinner spe-cials, children’s menus, innovative or trendy dishes, diet-conscious menu selections, and beverage/appe-tizer specials during televised sporting events (impor-tant at restaurants/bars with big-screen TVs). Most restaurants were quick to adapt their menu offer-ings to changing consumer tastes and eating prefer-ences, frequently featuring heart-healthy, vegetarian, organic, low-calorie, and/or low-carb items on their menus. Research conducted by the National Restau-rant Association indicated in 2015 that:14

∙ 68 percent of consumers were more likely to visit a restaurant that offered locally produced food items.

∙ 70 percent of consumers were more likely to visit a restaurant that offered healthy menu options.

∙ 72 percent of consumers believe restaurant tech-nology increases convenience, while 42 percent said technology makes restaurant visits and ordering more complicated.

It was the norm at many restaurants to rotate some menu selections seasonally and to periodically introduce creative dishes in an effort to keep regu-lar patrons coming back, attract more patrons, and remain competitive.

The profitability of a restaurant location ranged from exceptional to good to average to marginal to money-losing. Consumers (especially those that ate out often) were prone to give newly opened eating establishments a trial, and if they were pleased with their experience might return, sometimes frequently—loyalty to existing restaurants was low when consum-ers perceived there were better dining alternatives. It was also common for a once-hot restaurant to lose favor and confront the stark realities of a dwindling clientele, forcing it to either re-concept its menu and dining environment or go out of business. Many res-taurants had fairly short lives. There were multiple causes for a restaurant’s failure—a lack of enthusiasm for the menu or dining experience, inconsistent food quality, poor service, a poor location, meal prices that patrons deemed too high, and being outcompeted by rivals with more appealing menu offerings.

the bakery-cafés. Panera also had developed pro-prietary digital software to provide online training to employees at bakery-cafés, and online baking instructions for the baking personnel at each café.

THe ResTaURaNT INDUsTRY IN THe UNITeD sTaTes IN 2016According to the National Restaurant Association, total food-and-drink sales at some 1.1 million food-service locations of all types in the United States were projected to reach a record $783 billion in 2016, up from $587 billion in 2010.12 Of the pro-jected $783 billion in food-and-drink sales industry-wide in 2015, about $536 billion were expected to occur in commercial restaurants, with the remainder divided among bars and taverns, lodging place res-taurants, managed food service locations, military restaurants, and other types of retail, vending, rec-reational, and mobile operations with foodservice capability. In 2013, unit sales averaged $966,000 at full-service restaurants and $834,000 at quick- service restaurants; however, very popular restau-rant locations achieved annual sales volumes in the $2.5 million to $5 million range.

Restaurants were the nation’s second-largest pri-vate employer in 2015 with about 14 million employ-ees; employment in 2016 was expected to rise to 14.4  million people. Nearly half of all adults in the United States had worked in the restaurant industry at some point in their lives, and one out of three adults got their first job experience in a restaurant. More than 90 percent of all eating-and-drinking-place busi-nesses had fewer than 50 employees, and more than 70 percent of these places were single-unit operations.

Even though the average U.S. consumer ate 76 percent of their meals at home, on a typical day, about 130 million U.S. consumers were foodservice patrons at an eating establishment—sales at com-mercial eating places were projected to average about $1.9 billion on a typical day in 2015. Average household expenditures for food away from home in 2014 were $2,787, equal to about 40 percent of total household expenditures for food.13

The restaurant business was labor-intensive, extremely competitive, and risky. Industry members pursued differentiation strategies of one variety of

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eNDNOTes6 Transcript of Panera Bread’s conference call to discuss its 4th Quarter and full-year 2015 earning and performance, February 10, 2016, www.seekingalpha.com (accessed February 13, 2016).7 Ibid.8 Annie Gasparro, “A New Test for Panera’s Pay-What-You-Can,” The Wall Street Journal, June 4, 2013, www.wsj.com (accessed March 7, 2014).9 Ibid.10 Jim Salter, “Panera Suspends Latest Pay-What-You-Can Experiment in Stores,” July 10, 2013, www.huffingtonpost.com (accessed March 7, 2014).

1 Company press release, February 9, 2016.2 Harris Interactive press releases, March 16, 2011, and May 10, 2012, and information, www.harrisinteractive.com (accessed March 7, 2014).3 “Zagat Announces 2012 Fast-Food Survey Results,” September 27, 2012, www.prnews wire.com (accessed March 7, 2014).4 Sandelman and Associates Quick-Track Surveys and Fast-Food Awards of Excellence Winners, and information included in “Press Kit,” www.panerabread.com (accessed March 7, 2014).5 As stated in a presentation to securities analysts, May 5, 2006.

11 Information posted at www.paneracares.org (accessed February 15, 2016).12 The statistical data in this section is based on information posted at www.restaurant.org (accessed February 21, 2016).13 Bureau of Labor Statistics, news release, September 3, 2015, www.bls.gov (accessed February 15, 2016).14 National Restaurant Industry, “2016 Restaurant Industry Pocket Factbook,” www.restaurant.org, (accessed February 21, 2016).

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