Analysis of Panera Bread’s Over Expanding Problem

Abstract：As a leader in fast casual eateries， Panera bread Company is expressing a problem of over expanding nationally and caused insufficient management and inefficient work processes. In order to solve the problem， this analysis used SWOT analysis， Michael Porter’s five forces analysis and Michael Porter’s diamond of national advantage as strategic tools， and found out five alternatives to solve the problem. At the end， this analysis recommended using implementing greater marketing efforts to solve the over expanding problem of Panera Bread and explained how to implement it.

Keywords：Analysis of Panera Bread’s Over Expanding Problem

Introduction

Panera Bread Company （2015）， headquartered in St. Louis， Missouri， was founded as Au Bon Pain Co.， Inc. by Louis Kane and Ron Shaich in 1981， and changed its name to Panera Bread Company in 1998. Panera Bread Company （2015） operated 1，901 bakery-cafes in Ontario and 45 states of the United States as of March 31， 2015. “The company owns， operates， and franchises retail bakery-cafes in the United States and Canada through three segments： Bakery-Café Operations， Franchise Operations， and Fresh Dough and Other Product Operations” （Panera Bread Company， 2015）. In addition to fresh dough， produce， tuna， cream cheese and proprietary sweet goods item， Panera Bread also provides many foods like fresh baked breads， sandwiches， soups， salads， coffees， and catering services （Panera Bread Company， 2015）.

In the restaurant industry， Panera Bread’s mission was “A loaf of bread in every arm” （Panera Bread Company， 2013， p. 1）. From my point of view， the mission means Panera Bread focuses on the development of its employees in order to offer customers the freshest and the healthiest foods. Panera Bread does not have a statement for its vision. In order to complete its mission， the vision should be to keep increasing profits， pay more attention to employee development and provide customers healthier foods.

“We believe our fresh dough facility system and supply chain function provide us with a competitive advantage” （Panera Bread Company， 2014， p. 5）. The comfortable ambiance and well-trained employees also contribute to the competitive advantage of Panera Bread.

The total revenues for Panera Bread were $2，529 million in 2014， $2，385 million in 2013， and $2，130 million in 2012， and the net incomes for 2014， 2013 and 2012 were $179 million， $196 million and $173 million， respectively （Panera Bread Company， 2014， p. 20）. According to Statista （2015）， the number of employees in Panera Bread has increased from 34，000 in 2012 to 42，700 in 2014. The 2014 sales increased 6% from 2013 and 2013 sales increased 12% from 2012， so Panera Bread should increase its sales at least by 10% for this year in order to keep growing sales.

Problem Statement

The problem at Panera Bread Company to be addressed in this analysis is over expanding into new geographic areas nationally. Panera Bread uses franchising to branch out across the nation to introduce its present products and services， and make Panera Bread a nationally recognized brand name. This over expansion has caused Panera to have too many stores to manage and control. If Panera keeps expanding stores but does not have efficient and strong enough management to control them， it can lead them to reduced profit. It is not only hard to manage so many stores throughout the country， but additionally， Panera Bread was expanding in areas that do not have high demand. Some of the new expansion stores also increase business risk， since they are in areas surrounded by competitors. In 2012， Panera Bread added 59 company owned store and 64 franchises， and it added a similar addition in the number of stores in 2013 （Ramadan， 2013）. According to the annual report of Panera Bread Company （2014）， Panera Bread is going to open 55-65 more company owned stores in 2015 （p. 5）. Hanley （2014） said， as a result of inefficient work processes and insufficient manpower in stores， Panera Bread’s mean store profitability slipped during 2013. Panera Bread used to be dominant over most of its competitors for the past few years， but it began to lose dominance over some of the competitors when it expanded too much instead of focusing on developing the products.

Strategic Analysis

In order to improve the problem of Panera Bread， this analysis will consider using five strategic tools： PESTLE analysis， Michael Porter’s value chain analysis， SWOT analysis， Michael Porter’s five forces analysis， and Michael Porter’s diamond of national advantage.

Companies use PESTLE analysis to track the operating environment or the environment they are going to enter， and PESTLE stands for political， economic， social， technological， legal and environmental （PESTLE Analysis， n.d.）. Using PESTLE analysis can help Panera Bread examine the environment it is operating in.

According to Popescu and Dasc?lu （2011）， in order to determine competitive advantage， organizations use “value chain analysis” as a systematic method to study key competences and activities （p. 121）. Applying Michael Porter’s value chain analysis can help Panera bread identify new ways of conducting activities so that it can generate value added.

Through considering the strengths， weaknesses， opportunities and threats， SWOT analysis can help develop a strong business strategy （Berry， n.d.）. Using SWOT analysis can give Panera Bread an overview of its internal strengths and weaknesses， as well as the external opportunities and threats. Financial data can be utilized as part of analyzing Panera Bread’s SWOT. For example， by using data from Panera Bread’s income statements， we can calculate its operating margin is 13.28% in 2012， 12.99% in 2013， and 10.91% in 2014. These ratios indicate one of Panera Bread’s weaknesses is its performance was shrinking.

The five forces， threat of new entrants， power of suppliers， power of buyers， availability of substitutes and competitive rivalry， help analyzing everything from the intensity of competition to the profitability and attractiveness of an industry （Investopedia， n.d.）. This analysis can indicate Panera Bread’s position in the industry while analyzing the intensity of competition.

“The Porter Diamond is a model that helps analyze and improve a nation’s role in a globally competitive field” （Investopedia， n.d.）. As an international company， Panera Bread can use Porter’s diamond model to demonstrate its national advantages in global market by analyzing factor conditions， demand conditions， related and supporting industries， and strategy， structure and rivalry.

The tools this analysis considered but will not use are PESTLE analysis and Michael Porter’s value chain analysis. This analysis will not use PESTLE analysis because the problem of Panera Bread focuses mostly on itself instead of external environment like political and technology. Porter’s value chain analysis is useful to study key competencies and activities， but it is not much useful to improve the over expansion of Panera Bread.

SWOT analysis

Strengths： Panera Bread is the biggest competitor in the fast casual eateries in the America （Tice， 2012）. Panera Bread is famous for its food quality and good service. According to Tracy Minkin and Brittani Renaud （n.d.）， Panera Bread is the No. 1 healthiest fast food restaurant over the American 100 largest fast food chains. Aaker （2013） said Panera Bread has a strong brand based on offering healthy and tasty foods in a comfortable ambiance. Panera Bread also has a good relationship with its customers， and it created a loyal program for customers （Aaker， 2013）. While having over 1，500 stores， Panera Bread has a strong presence in the U.S. When compared to Panera Bread’s competitor Starbucks and McDonald’s， the total debt $100 million of Panera Bread in 2015 is much smaller than Starbucks’s $2.09 billion and McDonald’s 14.29 billion. In addition， Panera Bread’s debt to equity ratio 13.39 is smaller than Starbucks’s 34.81 and McDonald’s 125.33. The data above are received from Yahoo Finance and reflects that Panera Bread has less debt and is able to grow without too much debt.

Weaknesses： Panera Bread only operates in the U.S. and Canada， so it has a poor presence in the global market. What’s more， Panera Bread is much less well known than its competitors like Starbucks and McDonald’s. According to Yahoo Finance， Panera bread’s profit margin is only 6.56% in 2015， while Starbucks has 14.57% profit margin， McDonald’s has 16.35% and Chipotle has 11.3%. The operating margin of Panera Bread is 13.28% in 2012， 12.99% in 2013， 10.91% in 2014， and 10.30% in 2015， which indicates the shrinking performance. In addition， Panera Bread has a lower operating margin than the restaurant industry’s 19.59% in 2014. When comparing the $2.57 billion revenue of Panera Bread， $4.29 billion revenue of Chipotle， $17.7 billion revenue of Starbucks and $26.7 billion revenue of McDonald’s in 2015， Panera Bread has much less revenue than its competitors.

Opportunities： Robert Reich （2000） indicated health care as one of the growth industries， and it is the largest industry in the U.S. Thus， there are more and more people are seeking for a healthier life style with eating healthier foods. Panera Bread’s healthy menu can appeal to more customers who put a high value on their health. Additionally， Panera Bread can produce more foods with organic materials to take the opportunity of growing demand of organic products. The growth of international business also provides an opportunity for Panera Bread’s global expansion. Enabling more stores to have free Wi-Fi， drive- through and delivery services can give Panera Bread the opportunity to attract more customers.

Threats： The major threats to Panera Bread are the strong competition and saturated market. There are many strong competitors such as McDonald’s and Starbucks， and the competition has been increasing. The economic slowdown can also be a threat to Panera Bread， which causes people are more likely to eat at home instead of going out. Other threats include the increase of labor costs and raw material costs， and thus， the total costs of Panera Bread will increase.

The SWOT analysis helps identify Panera Bread’s advantages and disadvantages in the industry， and it is useful for Panera Bread when solving the over expanding problem. Based on the SWOT analysis， Panera Bread can enhance its internal strengths and avoid the internal weaknesses， while seizing external opportunities and avoiding external threats.

Michael Porter’s five forces analysis

Threat of new entrants： Fast food restaurant industry has low barriers， because the capital requirement for entering the restaurant industry is low. Restaurant industry’s growth rate in net income for the last five years is 26.22%， and the growth in revenues for last five years is 6.02% （Damodaran， 2015）. In recent years， the profit margin of restaurant industry in the U.S. also has increased， according to Sageworks （as cited in Biery， 2014）. The growing margins will attract more new entrants. The threat of new entrants in the restaurant industry can be considered as moderate， because the industry is saturated and much more capitals are required when competing with big companies with strong brand like Panera Bread， McDonald’s and Starbucks. As one of the leaders in fast casual eateries， Panera Bread also has a first mover advantage over new entrants.

Bargaining power of suppliers： The bargaining power of suppliers in the restaurant industry tends to be low. Usually， the raw materials required in restaurant industry are very common， so restaurants can buy supplies from different suppliers based on the different prices， especially in the farmers market that contains many suppliers with cheap prices. It is not costly when switching to other suppliers. Moreover， Panera Bread makes its own fresh dough every day， which reduces the bargaining power of suppliers.

Bargaining power of buyers： There are many different restaurants in the industry， and there is no switching cost for consumers to choose other restaurants. Although there are many restaurants， most of them offer the similar menu， so customers can choose to eat at different places for better food quality and cheaper prices. However， the prices of Panera Bread are not cheap when comparing to its competitors. Besides， as the quest of health is growing， more and more people would like to cook by themselves instead of eating in restaurants， especially fast food restaurants. In conclusion， the bargaining power of buyers is pretty high.

Threat of substitutes： As a saturated industry， there are many restaurants available for customers to choose. Other than restaurants， consumers can also buy foods from grocery stores for cheaper prices. Competitors such as McDonald’s offer lower prices to attract customers， and there are more competitors are adding healthy products into their menu to satisfy more customers. Although there are many strong competitors in the industry， Panera Bread is the strongest competitor in fast casual eateries. Panera Bread reduces the threat of substitutes by establishing a comfortable atmosphere in stores and provides good quality products. Thus， the threat of substitutes is moderate.

Rivalry among existing competitors： There is a high rivalry among existing competitors in restaurant industry. As mentioned before， the industry is saturated， so the competition in the industry is relatively strong. Although Panera Bread is the leader in fast casual eateries， there are many restaurants with much stronger and better recognized brand， such as McDonald’s and Starbucks. Additionally， most competitors have similar products in their menus. Many competitors have a greater presence not only in the U.S. market， but also in international markets.

Michael Porter’s five forces analysis analyzed the big intensity of competition in restaurant industry and indicates Panera Bread’s position in the industry is lower than some of its competitors. The moderate threat of new entrants， low bargaining power of suppliers， high bargaining power of buyers， moderate threat of substitutes， and high rivalry of existing competitors display that Panera Bread is in an industry with strong competition. Panera Bread has its own competitive advantages in the industry， but it still need to improve its menu and expand to international markets in order to become more competitive.

Michael Porter’s diamond of national advantage

Company strategy， structure and rivalry： Panera Bread is using market development as its strategy that expanding into new geographic areas to increase sales by franchising. The U.S. is one of the seven countries have individualism as their highest dimension in the countries analyzed in Hofstede’s research （Gallant， 2013）. The decentralized structure of Panera Bread is well demonstrating the U.S. management culture， because American people are more likely to work by themselves. According to Panera Bread’s organizational chart， the authority and decision making of Panera Bread is decentralized， and Panera Bread’s structure is departmentalized by functions （The Official Board， 2014）. There are ten different divisions under the CEO and each of them is responsible for its own areas of expertise （The Official Board， 2014）. The structure contains a lot of control in each area. Since a high local rivalry leads to innovation and improvement so that promotes a national competitive advantage， the U.S. restaurant industry is an industry with high competition will promote a national advantage. Moreover， the growing value of health in the U.S. also contributes to the national advantages of the U.S.

Factor conditions： “The U.S. has the most technologically powerful economy in the world， with a per capita GDP of $54，800” （Central Intelligence Agency， 2015）. The U.S. is famous for its technology development， and the minimum wage is high. Therefore， as a restaurant in the U.S.， Panera Bread does not gain the low labor cost advantage. Whereas， the technology development can be utilized in Panera Bread’s restaurants to improve the facilities， and thus， Panera Bread can produce its bakeries more effectively.

Demand conditions： According to Dugan （2013）， although the number of Americans who eat at fast food restaurants is decreasing， fast food restaurants is still a major part of the American dining experience. As a result， the demand in fast food restaurant in the U.S. gives Panera Bread a national advantage， especially Panera Bread is a strong competitor in fast casual eateries.

Related and supporting industries： According to Central Intelligence Agency， the U.S. is the first import country and the third export country in the world. Hence， the U.S. has a strong presence in global business. Since the import percentage of agriculture products is 4.9% and the export percentage of agriculture products is 9.2%， the supplies of food are abundant. Consequently， Panera Bread has a national advantage of supply.

From the Michael Porter’s diamond of national advantage， Panera Bread can identify the national advantages of the U.S.， and thus it can enhance these advantages when expanding to more international markets.

Alternatives

The alternatives for the problem of Panera Bread are greater marketing efforts， divestiture， product development， global expansion， and doing nothing.

Greater marketing efforts can be increasing advertising and promotions in order to increase sales and market share in present market. As stated in the problem statement， Panera Bread expanded in some areas without high demand or with more competitors， so increasing advertising and promotions can help Panera Bread attract more customers so that increase sales. Since Panera Bread has less debt than most of its competitors， it can afford greater marketing efforts by putting more money into advertising. This alternative will cause Panera Bread’s competitors to increase promotions， too. However， competitors like McDonald’s and Starbucks are more famous than Panera Bread， so Panera Bread should aim to increase the awareness among customers by greater marketing efforts instead of being involved in pricing war. Through advertising and promotions， more customers will be aware of Panera Bread is offering a healthy menu and will like to have a try. Panera Bread can use the alternative to advertise its mission and achieve increase in sales.

Divestiture is selling some existing stores. Since Panera Bread’s stores are concentrated in North American and some of them are in low demand areas， Panera Bread can sell some stores with the poorest performance， which can also increase Panera Bread’s cash flows. If Panera Bread closed stores in areas surrounded by competitors， competitors would like to see the weaker competition. The employees in the stores being sold will lose their jobs， so Panera Bread better find out a solution for the employees， such as providing other job opportunities. Additionally， Panera Bread will lose the customers in those areas. The alternative does not fit with Panera Bread’s culture of focusing employee development， and the divestiture will disappoint certain customers， as well as reduce sales in short-term.

Product development means improving present products or service or developing new ones. Panera Bread is trying to provide the freshest and healthiest foods for its customers， so improving the quality of its present products will be a good choice to achieve the goal. According to the annual report of Panera Bread （2014）， Panera Bread is relying on trucks for the delivery of fresh dough from its facilities， which increased costs that impact on business and operations （p.9）. The weather and distance highly influence the fresh dough when delivering， so Panera Bread should find a way to improve this process so that it can improve the quality of its breads， as well as reduce the costs of trucks. Competitors will develop more healthy food against Panera Bread， so Panera Bread has to ensure its products with the highest quality in order to compete with them. Customers will like to see this change according to the seeking of health， and employees should be better trained for the processes of making products. This alternative fits well with Panera Bread’s mission， which is providing customers with the freshest and the healthiest foods.

Global expansion can be a good choice for Panera Bread to overcome the problem. Although the problem of Panera Bread is over expansion， the problem is based on the concentration in the North American. The demand of healthy foods is increasing globally， and the international business has been increasing. Expanding into more global markets can let Panera Bread have more awareness internationally. However， there are many local competitors in the host country， so Panera Bread has to do enough research before entering the market. Panera Bread can start from expanding to nearby countries like South American countries， or expanding further in Canada， because entering these markets is more affordable than those far away from headquarters. Global expansion will bring Panera Bread new customers and employees while increasing global presence. The alternative fits with the mission of providing Panera Bread’s fresh and healthy foods to its customers， no matter where they are.

Doing nothing could be a reasonable alternative to Panera Bread. Through Panera Bread’s continually expansion， the management of Panera Bread will be improved. During the expansion， Panera Bread will find out a way to solve the inefficient work processes， and it can hire more employees to overcome the insufficient manpower in stores. More stores can give Panera Bread’s customers more convenience， and the sales will be increased. The growth will also fits with Panera Bread’s mission to provide fresh and healthy foods to its customers.

Recommendation

The recommendation in this analysis for Panera Bread’s over expanding problem is making greater marketing efforts， which will increase sales of Panera Bread.

There are several advantages for Panera Bread when implementing greater marketing efforts to solve the over expanding problem. Firstly， greater marketing efforts can gain more customers. According to “Pricing” （2013）， the current price at Panera seems too high. Panera Bread can offer some of its products on the menu at a cheaper price to draw more customers in， so the demand will increase. Secondly， greater marketing efforts will create goodwill among the customers that first purchase the products and then create customer referrals. Thirdly， greater marketing efforts will require more efficiency in order to maintain profitability. Fourthly， threat of new entrants will decrease due to greater marketing efforts. Competitors will not want to enter the market when they see strong competitors. Last， increasing sales will lead to higher product turnover， and then the enthusiasm of Panera Bread’s distributors will be created.

The management department should be first in the implementation process to ensure that Panera Bread is achieving more production efficiency than competitors. The management department should set the basis for how smoothly the marketing efforts are completed by knowing exactly what needs to be changed. This can be done through making a short-term objective. The short-term objective will determine how much time should be used to recover money used in the implementation process.

Accounting and Finance Department should conclude a budget of how much money Panera Bread would spend in the marketing efforts. They should also determine the exact amount of cash that Panera should spend after looking at the ratio analysis. They should also see how much cash is leftover from analyzing the current ratio and quick ratio.

The Marketing department should be in charge of choosing which promotion method should be used to increase the current market share. This can be done from advertising in local newspapers， statewide newspapers， radio and Television， and online. Also， this can be done from discount sales used in personal selling.

Panera Bread can capitalize on the current products with greater marketing efforts. For the areas with lower demand or are surrounded by competitors， greater marketing efforts can help Panera Bread to increase the demand of its current products and thus increase sales and profitability. It is very likely that Panera Bread can be successful implementing the recommendation， because the Panera Bread’s healthy menu is attractive， and all Panera has to do is to advertise its healthy menu and good service to increase its goodwill and awareness among customers.

Conclusion

This analysis identified the over expanding problem of Panera Bread Company， analyzed Panera Bread by using three different strategic tools， found out several alternatives for the problem， and at the end indicated implementing greater marketing efforts would be the best alternative for Panera Bread to solve the over expanding problem. This analysis aims to help Panera Bread improve itself and become more competitive in the restaurant industry.

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