News

Sales up, margins down as Panera continues 2.0 transformation

Comps for company stores increased 2.1 percent and 0.7 percent for franchise stores while margins declined 2 percent due to food costs and costs related to Panera's 2.0 initiative.

October 30, 2014

Sales ticked upward and margins declined for Panera in Q3, and company leaders expect the trend to continue through 2015.

Comps for company stores increased 2.1 percent 0.7 percent for franchise stores, while margins declined 2 percent due to food costs and costs related to Panera's 2.0 initiative. Panera leaders are painting a similar picture for Q4 and 2015.

"Panera has begun to turn the direction of our business," CEO Ron Shaich said during an investor call this week. "While we are in the early stages of the journey, we are excited about how far we have come, and we are excited about the future unfolding in front of us. Sure, there will be short-term pain as we transform Panera, but we are confident these enhancements are the right things to do for the business, and that they will ultimately yield expanded earning growth well into the future."

Transaction growth

Balanced transaction growth across dayparts is one of the key drivers behind Panera's 2.1 percent company store comps, said Shaich. Panera saw transactions increase by 1.4 percent in Q3, its highest quarterly transaction growth since Q1 2012.

Transactions evened out across dayparts in Q3, with breakfast growing at 2.6 percent and 0.9 percent after 11 a.m., a turnaround from earlier in the year when post-11 a.m. transactions were flat or declining.

The even transaction growth across dayparts lifted the average check 0.7 percent in Q3, an improvement over Q2 when strong breakfast sales dragged down average check by 0.3 percent.

Throughput also improved in Q3, with company stores posting a 30-second improvement in average full day production speed compared to last year. Crews also improved peak throughput year-over-year by an average of 4 percent, with the busiest cafes in the system pushing an entrée order through every 5 seconds.

Shaich again pointed to the success of Panera's flatbread platform, including the most recent addition, the Turkey Cranberry Flatbread. Overall, entrée purchases grew 3.5 percent this quarter compared to the same quarter last year, reported Shaich.

Panera is also hoping food innovation will drive more people through its doors in 2015, when it rolls out a line of broth bowls, including a soba noodle bowl with chicken and a lentil quinoa bowl.

Decreasing margin

Even as sales increased, margins declined due to labor and food costs, according to Mike Bufano, SVP of Planning. Panera added 35 labor hours a week in its bakery cafes and increased manager pay.

The company also plans to add a new position in its 2.0 cafes. The Expo will be stationed on the customer side of the counter, and will verbally and visually check orders for accuracy, a necessary addition since approximately half of all Panera orders are customized in some way.

Butter and dairy costs also hit Panera this quarter, up $2.5 million over the same period last year, said Bufano, with butter at a 16-year high. The high butter and dairy costs are expected to continue through Q4.

Margin will continue to take a hit in Q4 and into 2015 as Panera steps up store conversions to the 2.0 model and the addition of hubs, Shaich cautioned.

Panera 2.0

A total of 43 cafes have been converted to the Panera 2.0 model, and preliminary results are encouraging, said Shaich. While he would not give specific numbers, Shaich indicated that same-store sales from 2.0 stores outpace traditional cafes. With 5 percent of all company sales placed through web, mobile or kiosk, Shaich indicated he's encouraged by the potential for the 2.0 model.

The company aims to have a total of 100 stores converted to 2.0 by the close of 2014. The initiative comes at a cost of about $125,000 in capital per store conversion, plus additional transition and training costs of around $20,000 to $30,000 as well as ongoing operations costs. Though margins will take an early hit, the impact will be mitigated over time by increased sales, particularly digital orders, said Shaich.

Catering

Catering orders now comprise around 8 percent of total annual sales, according the Shaich, or approximately $300 million in business.

Panera has been beefing up its catering capabilities with the opening of new delivery hubs. The company has opened six hubs so far in 2014, and will have a total of 25 hubs opened by the end of the year.

Just as with the 2.0 conversions, the addition of catering hubs is a capital investment and will negatively impact margins in the immediate future, said Shaich.