Panera Bread's Apple Strategy

Posted by: Michael Arndt on March 19, 2009

Panera Bread is the Apple of fast food. While even Starbucks has jumped on the cheap-eats bandwagon—a 12-oz. coffee and hot breakfast sandwich for just $3.95!—Panera continues with its pre-recession strategy of charging premium prices for its sandwiches and salads as if they were iPhones.

Yes, the jobless rate has surged to 8.1% and 2.6 million people were booted out of work in just the past four months. But Chief Executive Ron Shaich sees no reason to alter his course. “We prefer to focus on the 92% of the country who still have jobs,” he tells me.

Shaich is spending as if the Dow were still at 12,000, too. He plans to add at least 80 locations to the 1,325-unit chain in 2009, not far behind its pace last year. Meantime, he’s upping Panera’s investment in its distribution system.

How smart is this?

The company's expansion seems sharp actually. The value of commercial real estate has collapsed along with home prices. Shaich says he's been able to bargain down lease rates by 20% to 25% from 2008 levels. Plus, Panera can lock in these low terms for the next 20 years.

The supply-chain outlays look more like an extravagance. Today, the produce in Panera's salads is 12 to 18 days old. (That's pretty typical in restaurants.) Shaich aims to cut a week off that by having Panera itself truck lettuce from farm fields to its fresh-dough distribution centers and then deliver them together every morning.

The fresher greens will show up first in a new chopped Cobb salad across the chain in June. By hauling its own lettuce, Panera will have to spend 7% to 10% more. Shaich vows Panera will eat that cost, leaving entree salads priced at $6.99 or less--and pinching margins.

So far, selling high-quality, high-priced fast food has worked just fine for Panera. Its same-store sales increased 3.6% in 2008, vs. declines at many other chains including Starbucks. Its average check rose to $8.50, and each restaurant is now pulling in $2 million on average, putting Panera just behind McDonald's and double what a typical Arby's and KFC unit grosses.

But times are tough. Many of the 92% of Americans who still are employed are trading down from Whole Foods to Safeway or Costco to play it safe. As the recession drags on, they might trade down from Panera, too, even if the lettuce is crisper.