Grave business - my financial world

No one at Panera Bread Co. seems to have noticed the biggest financial crisis since the Great Depression.

While the rest of the restaurant industry has been hustling to slash prices and offer two-for-one deals to lure customers, the Richmond Heights-based company has instead been rolling out new higher-priced salmon salads and a Cuban chicken panini.

And as other chains have halted or slowed the opening of new stores, Panera has continued to aggressively expand. This year, it’s on pace to launch a new restaurant every 4 or 5 days.

"We took a position going into the recession which was contrarian to what most people did," said Ron Shaich, the company’s chief executive. "The strategy was to stay consistent and not to react to the recession … most of our competitors were reacting by cutting corners, pulling cost out of their menu, cheapening their food, and pulling labor out of their stores."

Instead of shortchanging customers and losing them, Panera has been able to draw more traffic by continually adding more value into its products, he said.

Panera has recently upgraded everything from the lettuce to the coffee to the bread at its 1,380 outlets. It has increased radio and billboard advertising, provided better bonuses and incentives to employees, and rolled out a host of new salads and sandwiches.

So far, the strategy has been paying off handsomely for Panera, which operates locally under the name of St. Louis Bread Co.

Panera’s revenue was up 4 percent last year to $1.35 billion. Net income soared 28 percent to $86 million. And same-store sales, a key measure of a retailer’s health, were up 6.8 percent in the last three months of 2009 and have been hovering around 8 to 9 percent this year.

"I think Panera has taken share from a lot of the competition," said Christopher O’Cull, an analyst with SunTrust Robinson Humphrey. "The restaurant industry is getting smaller in terms of demand, but Panera’s slice is getting bigger."

Shaich added that the company is building on a decade of blockbuster growth in which Panera has been the best-performing restaurant stock. Panera’s stock price has grown 35.2 percent annually over that time.

Panera may have lost some customers to the recession, he acknowledged. But it gained more new customers than it lost.

"For most people, life went on," said Shaich, who will step down next month when Bill Moreton, the chief operating officer, will take the company’s reins. "I think Panera is very different than not buying a new car this year. It’s lunch!"

Lunch is still the company’s bread and butter. But its breakfast business has been growing, too, buoyed in part by the introduction of breakfast sandwiches over the last couple of years.

Panera is keeping ahead of the curve in other ways, too. At the end of last month, it started posting calorie information on menu boards in all of its company-owned stores, becoming the first major chain to voluntarily do so. Franchises are expected to follow suit by the end of the year. Eventually, all chains will have to post this information due to the new federal health care law.

The restaurant industry has been hit hard by the recession. Restaurant traffic was down 3 percent overall in the last year, with fine dining taking the biggest nosedive with a 12-percent drop, said Bonnie Riggs, an analyst with retail research firm NPD Group.

"This is the weakest we’ve ever seen the restaurant industry for this period of time," she said.

But the fast-casual segment into which Panera falls was the one bright spot. That category was up 4 percent last year and up 6 percent the year before.

"This is a category that has grown, expanded, and increased sales in the last 10 years at a very fast pace," said Darren Tristano, executive vice president of Technomic, a Chicago-based food consultant group. "And it’s being led by Panera."

With the right mix of price, experience and quality, many families are "trading down" from more traditional sit-down restaurants and opting to eat at places like Panera, Tristano said.

"Good value" does not always mean the cheapest place, Riggs added. She found in a recent study that customers said they wanted not only reasonable prices, but also fresh ingredients and a good taste.

In the last year or so, Panera taken steps to upgrade its coffee — changing the blends and making sure it doesn’t sit around as long. And last summer, Panera began contracting its own lettuce fields in California.

"We felt the lettuce we were buying was good, but it wasn’t as good as it could be," said Scott Davis, Panera’s chief concept officer. "So now we grow it. We cut it. We ship it."

The result is fresher, more consistent quality lettuce for sandwiches and salads, Davis said.

But Panera’s success hasn’t come without some missteps. Remember the Crispani? Panera hoped its take on pizza would help boost dinnertime sales, but it ended up pulling the product two years ago.

"I think they spent a lot of time on one product to drive dinner usage when it would have been better if they focused on lots of items and not so much on the Crispani," O’Cull said.

Steve West, an analyst with St. Louis-based Stifel Nicolaus, said Panera has been good at quickly learning from its mistakes.

For several years, it had been adding new stores at such a rapid pace that it had begun to lose focus, he said.

But in the last couple of years, the company has slowed down its unit growth and is being more selective in where it opens new stores, West said.

"The traffic was down for awhile, but now it’s back and it’s back with a vengeance," he said.

Analysts and industry experts also give Panera high marks for rolling out the calorie counts on its menu boards.

"Those that are ahead of the game are doing it because they are already well-positioned, so they are trying to leverage that," Tristano said. "It’s not like a triple Whopper with cheese. We’re talking about baked items and soups and salads."

Still, Panera executives weren’t quite sure if customers realized that a bagel has 300-plus calories or that its paninis have 700-plus calories. So the company put up calorie information in about 100 test locations last year — including some in the St. Louis region.

What the company found is that customers seemed to like the information. And they used it to make some different choices.

For example, there was a five percent drop in sales of the Italian combo sandwich, which has 1,040 calories versus a Big Mac’s 540 calories.

However, overall sales weren’t affected because many customers chose lower-calorie options or paired a half sandwich with a half soup or salad.

"It was pretty much a wash," Davis said.

So the company doesn’t expect any significant impact as result of the national rollout.

Besides, he added, "We are experiencing some of the best sales we’ve ever experienced, so it isn’t hurting us."

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