Appendix A: Financial Analysis Profitability and Liquidity (based on data in Exhibit 1, p. C-123): 2013 2012 2011 2009 2002 Net Profit Margin ROA ROE Current Ratio Summary of trends, comparisons: During the past few years, Panera's net profit margin, return on assets, and return on stockholders' equity have steadily improved. Growth % (based on data in Exhibit 1, p. C-123): 2013/2012 (1 yr) 2011/2009 (2 yrs) 2009/2002 (7 yrs) Growth in Sales Growth in Net Income Summary of trends, comparisons: Yearly sales % increase by type of outlet (copy from Exhibit 2, C-124): 2013 Company Owned Franchised Summary of trends, comparisons: 2012 2011 2009 2002 Profitability, by type of outlet (based on data from Exhibit 7, p. C-137) 2013 2012 2011 2009 2002 Company-owned: Operating Profit Margin ROA Franchise Operations: Operating Profit Margin ROA Dough: ROA (Computation for Operating Profit Margin for dough is not meaningful, since most of the revenues are deducted due to intercompany sales eliminations). Summary of trends, comparisons: CASE 09 Panera Bread Company in 2014: Can a Slowdown in the Company's Growth Be Avoided? Arthur A. Thompson The University of Alabama n spring 2014, Panera Bread was widely regarded as the clear leader of the \"fast-casual\" segment of the restaurant industryfast-casual restaurants were viewed as being a cut above traditional quick-service restaurants like McDonald's because of better food quality, limited table service, and, in many instances, often wider and more upscale menu selections. On average, close to 8 million customers patronized Panera Bread restaurants each week, and Panera baked more specialty breads daily than any other bakery-caf enterprise in North America. There were 1,777 company-owned and franchised bakery-cafs in operation in 45 states, the District of Columbia, and Ontario, Canada, under the Panera Bread, Saint Louis Bread Co., and Paradise Bakery & Caf names. In 2013, the company had corporate revenues of $2.4 billion, systemwide store revenues of $4.3 billion, and average sales of almost $2.5 million per store location. The number of Panera Bread locations was up from 1,027 units in 36 states at the end of 2006, but well short of the ambitious target the company set in 2006 to have 2,000 outlets in operation by the end of 2010. While the Great Recession of 2008-2009 had forced management to scale back Panera's expansion plans, the company decided to reinstitute its rapid-growth strategy by opening a net of 76 new company-operated and franchised units in 2010, 88 new units in 2011, 111 new units in 2012, and 125 units in 2013. Plans called for opening 115 to 125 new company-operated and franchised units in 2014. I But despite the recent acceleration of store openings, there were signs in 2014 that the company's revenue growth in 2014 would not match the robust 19.9 percent compound average growth achieved from 2009 through year-end 2013. Top management in February 2014 indicated that it was expecting 2014 sales gains of just 2 to 4 percent at Panera bakery-cafs open at least one year, below the percentage gains in each of the past three years. Moreover, diluted earnings per share in 2014 were projected to increase only 5 to 8 percent, well below the company's targeted long-term EPS growth rate of 15 to 20 percent annually. COMPANY BACKGROUND In 1981, Louis Kane and Ron Shaich founded a bakery-caf 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 operator within the bakery-caf category. In 1993, Au Bon Pain Co. purchased Saint Louis Bread Company, a chain of 20 bakery-cafs located in the St. Louis area. Ron Shaich and a team of Au Bon Pain managers 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 Copyright 2014 by Arthur A. Thompson. All rights reserved. C-122 PART 2 Cases in Crafting and Executing Strategy 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 caf 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-cafs were renamed Panera Bread in all markets outside St. Louis. By 1998, it was clear the reconcepted Panera Bread units had connected with consumers. Au Bon Pain's management concluded that the Panera Bread format had broad market appeal and could be rolled out nationwide. Ron Shaich believed Panera Bread had the potential to become one of the leading \"fastcasual\" restaurant chains in the nation. Shaich also believed that growing Panera Bread into a national chain required significantly more management attention 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 convinced 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 cafs. In August 1998, the company announced the sale of its Au Bon Pain bakery-caf 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-cafs and a debt-free balance sheet. Between January 1999 and December 2006, close to 850 additional Panera Bread bakery-cafs were opened, some company-owned and some franchised. In February 2007, Panera purchased a 51 percent interest in Arizona-based Paradise Bakery & Caf, which operated 70 company-owned and franchised 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 two 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 executive officer and a member of the company's board. Ron Shaich, who had served as Panera's president and CEO since 1994 and as chairman or co-chairman of the board of directors since 1988, transitioned to the role of executive chairman of the board. In addition to handling the normal duties of board chairman, Shaich maintained an active strategic role, with a particular focus on how Panera Bread could continue to be the best competitive alternative in the 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 chairman of the board 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 Bill Moreton's time Shaich became chairman of the board and CEO, and Moreton was named executive vice chairman, with a role of helping oversee Panera's business operations. Over the years, Panera Bread had received a number of honors and awards. In 2011, 2012, and 2013, Harris Poll EquiTrend Rankings named Panera Bread as Casual Dining Restaurant Brand of the Year.1 Zagat's 2012 Fast Food Survey of 10,500 diners ranked Panera as fourth for Top Food, second for Top Decor, and fifth for Top Service among national chains with fewer than 5,000 locations.2 For 9 of the past 12 years (2002-2013), customers had rated Panera Bread as tops on overall satisfaction among large chain restaurants in Sandelman & Associates' 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.3 Panera scored the highest level of customer loyalty among quick-casual restaurants, according to a 2011 research study conducted by TNS Intersearch.4 A summary of Panera Bread's recent financial performance is shown in Exhibit 1. Exhibit 2 provides select operating statistics for Panera's companyowned and franchised bakery-cafs. CASE 09 Panera Bread Company in 2014: Can a Slowdown in the Company's Growth Be Avoided? EXHIBIT 1 C-123 Select Consolidated Financial Data for Panera Bread, 2002-2013 (in thousands, except per share amounts) 2013 Income statement data Revenues: Bakery-caf sales Franchise royalties and fees Fresh-dough and other product sales to franchisees Total revenues Bakery-caf expenses: Food and paper products Labor Occupancy Other operating expenses Total bakery-caf expenses Fresh-dough and other product costs of sales to franchisees Depreciation and amortization General and administrative expenses Preopening expenses Total costs and expenses Operating profit Interest expense Other (income) expense, net Income taxes Less net income (loss) attributable to noncontrolling interest Net income to shareholders Earnings per share Basic Diluted Weighted-average shares outstanding Basic Diluted Balance sheet data Cash and cash equivalents Short-term investments Current assets Total assets Current liabilities Total liabilities Stockholders' equity Cash flow data Net cash provided by operating activities Net cash used in investing activities Net cash (used in) provided by financing activities Net (decrease) increase in cash and cash equivalents $2,108,908 112,641 2012 2011 $1,879,280 $1,592,951 102,076 92,793 2009 2002 $1,153,255 78,367 $212,645 27,892 163,453 2,385,002 148,701 2,130,057 136,288 1,822,032 121,872 1,353,494 41,688 282,225 625,622 625,457 148,816 295,539 1,695,434 552,580 559,446 130,793 256,029 1,498,848 470,398 484,014 115,290 216,237 1,285,939 337,599 370,595 95,996 155,396 959,586 63,370 63,172 15,408 27,971 169,921 142,160 106,523 123,335 7,794 2,075,246 309,756 1,053 (4,017) 116,551 131,006 90,939 117,932 8,462 1,847,187 282,870 1,082 (1,208) 109,548 116,267 79,899 113,083 6,585 1,601,773 220,259 822 (466) 83,951 100,229 67,162 83,169 2,451 1,212,597 140,897 700 273 53,073 38,432 13,794 24,986 1,051 248,184 34,041 32 467 12,242 $ 196,169 $ 173,448 $ 135,952 $ 801 86,050 $ 21,300 $6.85 6.81 $5.94 5.89 $ 4.59 4.55 $2.81 2.78 $0.74 0.71 28,629 28,794 29,217 29,455 29,601 29,903 30,667 30,979 28,923 29,891 $ 297,141 $ 222,640 186 478,842 353,119 1,268,163 1,027,322 277,540 238,334 446,244 372,246 821,919 655,076 $ 246,400 322,084 837,165 142,259 240,129 597,036 $ 29,924 9,149 59,262 195,431 32,325 32,587 151,503 $ 125,245 302,716 1,180,862 303,325 480,970 699,892 $ 348,417 $ 289,456 $ 236,889 $ 214,904 $ 46,323 (188,307) (195,741) (152,194) (49,219) (40,115) (332,006) (19,214) (91,354) 6,005 5,664 (171,896) 74,501 (6,659) 171,690 11,872 Sources: 2013 10-K report, pp. 41-43; 2011 10-K report, pp. 41-43; 2010 10-K report, pp. 29-30, 46-48; and 2003 10-K report, pp. 29-31. C-124 EXHIBIT 2 PART 2 Cases in Crafting and Executing Strategy Select Operating Statistics, Panera Bread Company, 2002-2013 2013 Revenues at company-operated stores (in millions) Revenues at franchised stores (in millions) Systemwide store revenues (in millions) Average annualized revenues per company-operated bakery-caf (in millions) Average annualized revenues per franchised bakery-caf (in millions) Average weekly sales, company-owned cafs Average weekly sales, franchised cafs 2012 2011 2009 2002 $2,108.9 $2,175.2 $4,284.1 $ 212.6 $ 542.6 $ 755.2 $ 2.483 $ 2.435 $ 2.292 $ 2.031 $ 1.764 $ 2.448 $ 47,741 $ 47,079 Comparable-bakery-caf sales percentage increases* Company-owned outlets Franchised outlets $1,879.3 $1,593.0 $1,153.3 $ 1,981.7 $1,828.2 $1,640.3 $ 3,861.0 $ 3,421.2 $2,793.6 $ 2.419 $ 2.315 $ 2.109 $ 46,836 $ 44,071 $ 39,050 $ 46,526 $ 44,527 $ 40,566 $ 1.872 $33,924 $35,997 4.5% 3.9% Company-owned bakery-cafs open at year-end Franchised bakery-cafs open at year-end Total bakery-cafs open 867 910 1,777 6.5% 5.0% 809 843 1,652 4.9% 3.4% 740 801 1,541 2.4% 2.0% 585 795 1,380 4.1% 6.1% 132 346 478 *The percentages for comparable-bakery-caf sales are based on annual changes at bakery-cafs that opened before the first day of the prior fiscal year (meaning that a bakery-caf had to be open for all 12 months of the year to be included in this statistic). Source: Company 10-K reports for 2013, 2011, 2010, and 2003. Panera Bread's Concept and Strategy Panera Bread's identity was rooted in its fresh-baked, artisan breads made with a craftsperson's attention to quality and detail, and its breads and baked products were the platform for the dining experience at its bakery-cafs and a major basis for differentiating Panera from its competitors. The featured menu offerings at Panera locations included breads and pastries baked in-house, breakfast items and smoothies, madeto-order sandwiches, signature soups and salads, and caf beverages. Recognizing that diners chose a dining establishment based on individual food preferences and mood, Panera strived to be the first choice for diners craving fresh-baked goods, a sandwich, soup, a salad, or a beverage served in a warm, friendly, comfortable dining environment. Its target market was urban workers and suburban dwellers looking for a quick-service meal or light snack and an aesthetically pleasing dining experience. Management's longterm objective and strategic intent was to make Panera Bread a nationally recognized brand name and to be the dominant restaurant operator in upscale, quickservice dining. Top management believed that success depended on \"being better than the guys across the street\" and making the experience of dining at Panera so attractive that customers would be willing to pass by the outlets of other fast-casual restaurant competitors to dine at a nearby Panera Bread bakery-caf.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 were handcrafted and baked daily at each caf location. Serving high-quality food at prices that represented a good value. Developing a menu with sufficiently diverse offerings to enable Panera to draw customers from breakfast through the dinner hours each day. Providing courteous, capable, and efficient customer service. Designing bakery-cafs that were aesthetically pleasing and inviting. Offering patrons such a sufficiently satisfying dining experience that they were induced to return again and again. CASE 09 Panera Bread Company in 2014: Can a Slowdown in the Company's Growth Be Avoided? Panera Bread's menu, store design and ambience, and unit location strategies enabled it to compete successfully in multiple segments of the restaurant businessbreakfast, AM \"chill\" (when customers visited to take a break from morning-hour activities), lunch, PM \"chill\" (when customers visited to take a break from afternoon activities), dinner, and take-homethrough both on-premise sales and offpremise catering. It competed with a wide assortment of specialty food, casual-dining, and quick-service establishments operating nationally, regionally, and locally. Its close competitors varied according to the menu item, meal, and time of day. For example, breakfast and AM-chill competitors 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 Caf, 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. Fastcasual restaurants filled the gap between fast-food outlets and casual, full-table-service restaurants. A fast-casual restaurant provided quick-service dining (much like that in fast-food enterprises) but was distinguished by enticing menus, higher food quality, and more inviting dining environments; typical meal costs per guest were in the $7-to-$12 range. Some fast-casual restaurants had full table service, some had partial table service (with orders being delivered to the tables after customers order and pay at the counter), and some were self-service (like fastfood establishments, with orders being taken and delivered at the counter). 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 capitalize on Panera's market potential by opening both company-owned and franchised Panera Bread locations 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 business around company-owned bakery-caf operations, C-125 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 Menu Panera Bread's artisan signature breads were made from four ingredientswater, 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 bakery oven. Breads, as well as bagels, muffins, cookies, and other pastries, were baked fresh throughout the day at each caf location. Exhibit 4 shows Panera's lineup of breads. The Panera Bread menu was designed to provide target customers with products built on the company's bakery expertise, particularly its varieties of breads and bagels. 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, frozen drinks, beverages, and espresso bar selections. Exhibit 5 summarizes the menu offerings at Panera Bread locations as of March 2014. Menu offerings were regularly reviewed and revised to sustain the interest of regular customers, 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 bakery-cafs to determine customer response and verify that preparation and operating procedures resulted in product consistency and high-quality standards. If successful, they were then rolled out systemwide. New product introductions were integrated into periodic or seasonal menu rotations, referred to as \"celebrations.\" Panera introduced 10 new menu items in 2010, added 14 new or improved items in 2011, featured 8 different selections (5 new ones and 3 that had been put back on the menu after being removed in prior periods) in 2012, and introduced 20 new menu items during the course of five celebrations held throughout 2013. PART 2 C-126 EXHIBIT 3 Cases in Crafting and Executing Strategy Representative Fast-Casual Restaurant Chains and Select Full-Service Restaurant Chains in the United States, 2013-2014 Company Number of Locations, 2013 Select Financial Data, 2013-2014 Applebee's Neighborhood Grill and Bar* (a subsidiary of DineEquity) 2,010 locations in 49 states, 1 U.S. territory, and 15 countries outside the U.S. 2013 average annual sales of about $2.4 million per U.S. location Atlanta Bread Company Approximately 100 bakery-cafs in 21 states Not available (privately held company) Au Bon Pain 3001 company-owned and franchised bakerycafs in 23 states and 51 foreign countries 3151 bakery-cafs in 26 states, the District of Columbia, and Canada 2701 locations in 32 states and 10 foreign countries Not available (privately held company) Bruegger's Bagels California Pizza Kitchen* (a subsidiary of Golden Gate Capital) Chili's Grill and Bar* (a subsidiary of Brinker International) 1,265 locations in 50 states and 282 locations in 32 foreign countries and 2 U.S. territories Chipotle Mexican Grill 1,5801 units Corner Bakery Caf (a subsidiary of Roark Capital Group) 130 locations in 10 states and the District of Columbia (planning to double number of locations by 2015 626 combination retail stores and restaurants in 42 states Cracker Barrel* Not available (privately held company) Average annual sales of about $3.2 million per location 2013 average revenues of about $2.9 million per location; average check size per customer of $13.99 2013 revenues of $3.2 billion; average unit sales of $2.2 million Menu price range: $0.99 to $7.99 Restaurant-only sales of $2.1 billion in 2013; average sales per restaurant of $3.4 million; average guest check of $9.68; approximately 6,800 customers served per week per location Key Menu Categories 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) Fresh-baked breads, salads, sandwiches, soups, woodfired pizza and pasta (select locations only), baked goods, and desserts Baked goods (with a focus on croissants and bagels), soups, salads, sandwiches and wraps, and coffee drinks Fresh-baked bagels and breads, sandwiches, salads, soups, and desserts Signature California-style hearth-baked pizzas, plus salads, pastas, soups, sandwiches, appetizers, desserts, beer, wine, coffees, teas, and assorted beverages Chicken, beef, and seafood entrees, plus steaks, appetizers, salads, sandwiches, desserts, and alcoholic beverages (13.6 percent of sales) Gourmet burritos and tacos, salads, beverages (including margaritas and beers) Specialty breads, hot breakfasts, signature sandwiches, grilled panini, pastas, soups and chili, salads, sweets, coffees, and teas Two menus (breakfast and lunch/dinner; rated in Zagat's 2010 Consumer Survey as \"Best Breakfast\" among family-dining chains and by Technomics as \"Top of the Full-Service Restaurants in family and casual dining\" CASE 09 Panera Bread Company in 2014: Can a Slowdown in the Company's Growth Be Avoided? Number of Locations, 2013 Select Financial Data, 2013-2014 Culver's 450 locations in 19 states Not available (a privately held company) Einstein Noah Restaurant Group (Einstein Bros. Bagels, Noah's New York Bagels, Manhattan Bagel) Approximately 850 company-owned, franchised, and licensed locations in 40 states Annual sales revenues of $434 million; annual sales per company-owned unit of about $850,000 Fazoli's (a subsidiary of Sun Capital Partners) 2201 locations in 26 states Revenues of $226 million (2012) Firehouse Subs 7301 locations in 38 1 states 1,2001 locations in 46 states and 6 Canadian provinces Approximately 200 locations in 32 states, the District of Columbia, Puerto Rico, and Canada 2401 locations in 28 states Average unit sales of about $750,000 Not available (a privately held company) Not available (a privately held company) Company Five Guys Burgers and Fries Fuddruckers Jason's Deli Not available (a privately held company) Moe's Southwest Grill (a subsidiary of Roark Capital Group) 5001 locations in 37 states and the District of Columbia 2013 sales of $526 million; average annual sales per restaurant of about $1.05 million McAlister's Deli (a subsidiary of Roark Capital Group) 3101 locations in 23 states Not available (a privately held company) Noodles & Company 3801 urban and suburban locations in 29 states and the District of Columbia 2013 sales of $351 million; comparablestore sales growth of 3% in 2013 C-127 Key Menu Categories 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 Fresh-baked bagels, hot breakfast sandwiches, madeto-order lunch sandwiches, creamed cheeses and other spreads, salads, soups, and gourmet coffees and teas Spaghetti and meatballs, fettuccine alfredo, lasagna, ravioli, submarinos and panini sandwiches, pizza, entre salads, garlic breadsticks, and desserts Hot and cold subs, salads, sides, and drinks, plus catering Hamburgers (with choice of 15 toppings), hot dogs, fries, CocaCola, and beverages Exotic hamburgers (the feature menu item), chicken and fish sandwiches, french fries and other sides, soups, salads, and desserts Sandwiches, extensive salad bar, soups, loaded potatoes, and desserts, plus catering services, party trays, and box lunches Burritos, quesadillas, fajitas, tacos, nachos, rice bowls (chicken, pork, or tofu), salads with a choice of two homemade dressings, a kid's menu, five side items (including queso and guacamole), two desserts (cookie or brownie), soft drinks, iced tea, and bottled water, plus catering Deli sandwiches, loaded baked potatoes, soups, salads, and desserts, plus sandwich trays, lunch boxes, and catering Customizable Asian, Mediterranean, and American noodle/pasta entres, soups, salads, sandwiches, and alcoholic beverages (Continued) PART 2 C-128 EXHIBIT 3 Cases in Crafting and Executing Strategy (Concluded) Number of Locations, 2013 Select Financial Data, 2013-2014 Qdoba Mexican Grill (a subsidiary of Jack in the Box, Inc.) 615 company-owned and franchised locations in 46 states, the District of Columbia, and Canada Average unit sales per location of $1,017,000 in 2013 Ruby Tuesday* 783 company-owned and franchised locations in 45 states, 11 foreign countries, and Guam Starbucks Approximately11,500 company-operated and licensed locations in the U.S. and 8,3001 international locations T.G.I. Friday's* (a subsidiary of Carlson's Restaurants) 930 locations in 60 foreign countries and territories Fiscal 2013 sales of $1.39 billion; average restaurant sales of $1.73 million; typical entre price ranges of $7.49 to $19.99 2013 global revenues of $14.9 billion; sales of $1.36 million per company-operated location in the Americas Not available (a privately held company) Company Key Menu Categories Signature burritos, tacos, taco salads, quesadillas, threecheese nachos, Mexican gumbo, tortilla soup, and five signature salsas, plus breakfast selections at some locations Appetizers, handcrafted burgers, 35-item salad bar, steaks, fresh chicken, crab cakes, lobster, salmon, tilapia, ribs, desserts, and nonalcoholic and alcoholic beverages, plus catering Italian-style espresso beverages, teas, sodas, juices, and assorted pastries and confections, plus sandwiches and salads at some locations Appetizers, salads, soups, burgers and other sandwiches, chicken, seafood, steaks, pasta, desserts, and nonalcoholic and alcoholic beverages, plus party platters *A full-service restaurant. Sources: Company websites; and FastCasual.com's \"2013 Top 100 Movers and Shakers,\" www.fastcasual.com (accessed March 3, 2014). Over the past 10 years, Panera had responded to growing consumer interest in healthier, more nutritious menu offerings. In 2004, whole grain breads were introduced, and in 2005 Panera switched to the use of natural, antibiotic-free chicken in all of its chicken-related sandwiches and salads. Other recent health-related changes included using organic and allnatural ingredients in select items, using unbleached flours in 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 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-cafs 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 to the workplace, schools, and parties and gatherings held in homes and to grow its breakfast-, lunch-, and dinner-hour sales without making capital investments in additional physical facilities. The first menu consisted of items appearing on the regular menu and was posted for viewing at the company's website. A catering coordinator was available to help customers make menu selections, choose between assortments or boxed meals, determine appropriate order quantities, and arrange pickup or delivery times. Orders came complete with plates, napkins, and utensils, all packaged and presented in convenient, ready-to-serve-from packaging. In 2010, Panera boosted the size of its catering sales staff and introduced sales training programs and other toolsfactors that helped drive a 26 percent increase in catering sales in 2010. In 2011, Panera introduced an online catering system that catering customers CASE 09 Panera Bread Company in 2014: Can a Slowdown in the Company's Growth Be Avoided? EXHIBIT 4 C-129 Panera's Line of Fresh-Baked Breads, March 2014 Artisan Breads Specialty Breads Country A crisp crust and nutty flavor. Available in Loaf, Miche. Sourdough Panera's signature sourdough bread with no fat, oil, sugar, or cholesterol. Available in Loaf, XL Loaf, Roll, Bread Bowl. French Slightly blistered crust, wine-like aroma. Available in Baguette, Miche. Ciabatta A moist, chewy crumb with a thin crust and light olive oil flavor. Available in Loaf. Asiago Cheese Standard sourdough recipe with Asiago cheese baked in and sprinkled on top. Available in Demi, Loaf. Honey Wheat Sweet and hearty with honey and molasses. Available in Loaf. Focaccia Italian flatbread baked with olive oil and topped with either Asiago Cheese or Sea Salt. Available in Loaf. All-Natural White Bread Soft and tender white sandwich bread. Available in Loaf. Rye With chopped rye kernels and caraway seeds. Available in Loaf, Miche. Tomato Basil Sourdough bread made with tomatoes and basil, and sweet streusel topping. Available in Loaf. Three Cheese Made with Parmesan, Romano, and Asiago cheeses. Available in Demi, Loaf, Miche. Cinnamon Raisin Swirl Fresh 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. Three Seed Sesame, poppy, and fennel seeds. Available in Demi. Whole Grain Moist and hearty, sweetened with honey. Available in Loaf, Miche, Baguette. Sesame Semolina Delicate and moist, topped with sesame seeds. Available in Loaf, Miche. Source: www.panerabread.com (accessed March 5, 2014). could use to view the catering menu, place orders, specify whether the order was to be picked up or delivered to a particular location, and pay for purchases. The catering menu in 2014 included breakfast assortments, sandwiches, salads, soups, pasta dishes, drinks, and bakery items. 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 Program In 2010, Panera initiated a loyalty program to reward customers who dined frequently at Panera Bread locations. The introduction of the MyPanera program was completed systemwide in November, and by the end of December about 4.5 million customers had signed up and become registered card members. 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-caf 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 for their next visit. Going into 2014, the company's MyPanera program had over 16 million members, and during 2013 approximately 50 percent of the transactions at Panera Bread bakery-cafs were attached to a MyPanera loyalty card. PART 2 C-130 EXHIBIT 5 Cases in Crafting and Executing Strategy Panera Bread's Menu Selections, March 2014 Bakery Artisan and Specialty Breads (15 varieties) - Bagels (10 varieties) - Scones (4 varieties) - Sweet Rolls (3 varieties) - Muffins and Muffies (6 varieties) - Artisan Pastries (7 varieties) - Brownies - Cookies (6 varieties) Bagels & Cream Cheese Spreads (10 varieties of bagels, 5 varieties of spreads) Hot Breakfast Breakfast Sandwiches (9 varieties) Baked Egg Souffls (4 varieties) Strawberry Granola Parfait Steel Cut Oatmeal Fruit Smoothies (5 varieties) Fruit Cup Signature Hot Paninis Frontega Chicken - Chipotle Chicken - Smokehouse Turkey - Tomato and Mozzarella Signature Sandwiches Napa Almond Chicken Salad - Asiago Roast Beef - Italian Combo - Bacon Turkey Bravo - Fontina Grilled Cheese Caf Sandwiches Smoked Ham and Swiss - Roasted Turkey and Avocado BLT - Tuna Salad - Mediterranean Veggie - Sierra Turkey - Classic Grilled Cheese Signature Pastas Chicken Sorrentina - Chicken Tortellini Alfredo - Mac & Cheese - Basil Pesto Sacchettini - Tortellini Alfredo Soups (5 selections varying daily, plus seasonal specialties) Options include: Broccoli Cheddar - Bistro French Onion - Baked Potato - Low Fat All-Natural Chicken Noodle - Cream of Chicken and Wild Rice - New England Clam Chowder - Low Fat Vegetarian Garden Vegetable with Pesto - Low Fat Vegetarian Black Bean - Low Fat Chicken Tortilla - Vegetarian Creamy Tomato - Turkey Chili Caf Salads Caesar - Classic - Greek Signature Salads Chicken Cobb - Chicken Cobb with Avocado -Chicken Caesar - Asian Sesame Chicken - Fuji Apple Chicken - Thai Chicken - Spinach Power Salad - Mediterranean Shrimp Couscous - Greek with Shrimp - Classic with Chicken - Greek with Chicken Panera Kids Grilled Cheese Sandwich - Peanut Butter and Jelly Sandwich - Smoked Ham Sandwich - Smoked Turkey Sandwich - Mac & Cheese - Buttered Ribbon Noodles - 10 varieties of regular and seasonal soups - 3 salads Beverages Coffee (4 varieties) - Hot Teas - Iced Tea - Iced Green Tea - Pepsi beverages - Bottled Water - Organic Milk or Chocolate Milk - Orange Juice - Organic Apple Juice - Lemonade Frozen Drinks Frozen Caramel - Frozen Mocha Espresso Bar Espresso - Cappuccino - Caffe Latte - Caffe Mocha - Vanilla Latte - Caramel Latte - Skinny Caffe Mocha - Chai Tea Latte (hot or iced) - Hot Chocolate Source: www.panerabread.com (accessed March 5, 2014). 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's management with better marketing research data on the purchasing behavior of customers and enable Panera to \"get as close to one on one marketing with our customers as possible.\"6 Panera's Nonprofit Pay-What-You-Want Bakery-Caf Locations In May 2010, Panera Bread converted one of its restaurants in a wealthy St. Louis suburb into a nonprofit pay-what-youwant Saint Louis Bread Cares bakery-caf with the idea of helping to feed the needy and raising money for charitable work. A sign in the bakerycaf 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 funding levels,\" not prices. Payments went into a donation 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 levels 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. CASE 09 Panera Bread Company in 2014: Can a Slowdown in the Company's Growth Be Avoided? After several months of operation, the Saint Louis Bread Cares store was judged to be successful enough that Ron Shaich, who headed the Panera Bread Foundation, opted to open two similar Panera Cares cafsone in the Detroit suburb of Dearborn, Michigan, and one in Portland, Oregon. At one juncture, Panera statistics indicated that roughly 60 percent of store patrons left the suggested amount; 20 percent left more, and 20 percent less.7 Of course, there were occasional instances in which a patron tried to game the system. Ron Shaich cited the case of a college student who ordered more than $40 worth of food and charged only $3 to his father's credit card; Shaich, who happened to be working in the store behind the counter, had to restrain himself and later said, \"I wanted to jump over the counter.\"8 One person paid $500 for a meal, the largest single payment. Although in May 2011 Panera had intentions to open a new pay-what-you-want store every three months or so, the company still had only three pay-what-you-want caf locations as of April 2012, but two locations were added in the next nine monthsone in Chicago and one in Boston. Panera expected to serve over 1 million people at the five pay-what-you-can locations in 2013.9 The latest statistics continued to indicate that 60 percent of store patrons left the suggested amount, 20 percent left more, and 20 percent less, often significantly less.10 In March 2013, Panera introduced its special \"Meal of Shared Responsibility\"turkey chili in a bread bowlat a suggested retail price of $5.89 (tax included) at 48 locations in the St. Louis area. The idea was that the needy could get a nutritious 850-calorie meal for whatever they could afford to pay, while those who paid above the company's cost made up the difference.11 The program was supported by heavy media coverage at launch, extensive in-store signage, and employees explaining how the meal worked. For the first three weeks, customers on average paid above the retail value, but then payments dropped off to an average of around 75 percent of retail value. After six weeks, in-store signage was taken down to promote other meal options, and conversation about the Meal of Shared Responsibility faded into the background. Then, in July 2013, after serving about 15,000 of the turkey chili meals, Panera canceled the program, chiefly because few needy people were participatingan outcome attributed largely to the fact that most Panera cafs in the St. Louis area were located in middle-class and affluent neighborhoods. Management indicated it would rethink its approach to social C-131 responsibility and possibly retool the program and bring it back as a seasonal offering in winter 2014 (but that had not occurred as of March 2014). Nonetheless, the five Panera Cares locations remained open in 2014 and were continuing to generate enough revenues to cover operating costs on average. Marketing In the company's early years, marketing had played only a small role in Panera's success. Brand awareness had been built on customers' satisfaction with their dining experience at Panera and their tendency to share their positive experiences with friends and neighbors. From time to time, Panera had utilized focus groups to determine customer food and drink preferences and price points. In 2006, Panera's marketing research indicated that about 85 percent of consumers who were aware that there was a Panera Bread bakery-caf in their community or neighborhood had dined at Panera on at least one occasion; 57 percent of consumers who had \"ever tried\" dining at Panera Bread had been customers in the past 30 days.12 Panera's research also showed that people who dined at Panera Bread very frequently or moderately frequently typically did so for only one part of the day, although 81 percent indicated \"considerable willingness\" to try dining at Panera Bread at other parts of the day. This data prompted management to pursue three marketing initiatives during 2006-2007. One aimed at raising the quality of awareness about Panera by continuing to feature the caliber and appeal of its breads and baked goods, by hammering home the theme \"food you crave, food you can trust,\" and by enhancing the appeal of its bakery-cafs as neighborhood gathering places. The second initiative sought to raise awareness and boost customer trials of dining at Panera Bread at multiple meal times (breakfast, lunch, \"chill out\" times, and dinner). The third initiative aimed to increase perception of Panera Bread as a viable evening-meal option by introducing a number of new entre menu selections. Panera avoided hard-sell or \"in-your-face\" marketing approaches, preferring instead to employ a range of ways to softly drop the Panera Bread name into the midst of consumers as they moved through their lives and let them \"gently collide\" with the brand. The idea was to let consumers \"discover\" Panera Bread and then convert them into loyal repeat customers by providing a very satisfying dining experience when they tried Panera bakery-cafs for the first time or opted to try C-132 PART 2 Cases in Crafting and Executing Strategy dining at Panera at a different part of the day, particularly during breakfast or dinner as opposed to the busier lunchtime hours. These initiatives were only partially successful, partly because of the difficult economic environment that emerged in 2008-2009 and partly because the new dinner entres that were introduced did not prove popular enough to significantly boost dinner-hour traffic and were dropped from the menuin 2011-2012, the only hot entre on the menu was Mac & Cheese. But a variety of new pasta entres began appearing on the menu in 2012-2013 (see Exhibit 5). Panera management was committed to growing sales at existing and new unit locations, continuously improving the customer experience at its restaurants, and encouraging frequent customer visits via the new menu items featured during the periodic celebrations, increased enrollment of patrons in the MyPanera loyalty programs, and efforts to strengthen relationships 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 marketing in 2010; both had considerable consumer marketing experience and were playing an important role in crafting the company's long-term marketing strategy to increase awareness of the Panera brand, develop and promote appealing new menu selections, expand customer participation in the MyPanera loyalty program, and otherwise make dining at Panera bakery-cafs a pleasant and satisfying experience. To promote the Panera brand and menu offerings to target customer groups, Panera employed a mix of radio, billboard, social networking, Internet, and periodic cable television advertising campaigns. In recent years, Panera had put considerable effort into (1) improving its advertising messages to better capture the points of difference and the soul of the Panera concept and (2) doing a better job of optimizing the media mix in each geographic market. Whereas it was the practice at many national restaurant 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 companyowned and franchised bakery-cafs 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 percent of systemwide bakery-caf sales), $44.5 million in 2012 (1.15 percent of systemwide bakerycaf sales), and $55.6 million in 2013 (1.3 percent of systemwide bakery-caf sales). In 2014, advertising expenses were scheduled to climb further to support Panera's first-ever national television advertising campaign. This new initiative was being financed by both Panera and its franchisees. Panera's franchise agreements required franchisees to contribute a specified percentage of their net sales to advertising. In 2013, Panera's franchiseoperated bakery-cafs were required to contribute 1.8 percent of their sales to a national advertising fund and to pay Panera a marketing administration fee equal to 0.4 percent of their salesPanera contributed the same net sales percentages from company-owned bakery-cafs toward the national advertising fund and the marketing administration fee. Franchisees were also required in 2013 to spend amounts equal to 1.6 percent of their net sales on advertising in their local markets. Over the past eight years, Panera had raised the contribution of both companyowned and franchised bakery cafs to the national advertising fundfrom 0.4 percent of net sales prior to 2006 to 0.7 percent beginning January 2006 to 1.2 percent beginning July 2010 to 1.6 percent starting April 2012. However, to help offset these increases, the amounts franchisees were expected to spend for local advertising had been reduced from 2 percent of net sales beginning July 2010 to 1.6 percent of net sales beginning April 2012. Under the terms of its franchise agreements, Panera had the right to increase national advertising fund contributions to a maximum of 2.6 percent of net sales. To support its new national advertising campaign beginning in 2014, Panera exercised its right to require franchisees to pay the maximum 2.6 percent of net sales to the company's national advertising fund. However, the marketing administration fee of 0.4 percent of net sales remained unchanged, and the required percentage franchisees had to spend on advertising in their respective local market areas was reduced from 1.6 percent to 0.8 percent beginning January 2014. Franchise Operations Opening additional franchised bakery-cafs was a core element of Panera Bread's strategy and management's initiatives to achieve the company's revenue CASE 09 Panera Bread Company in 2014: Can a Slowdown in the Company's Growth Be Avoided? growth and earnings targets. Panera Bread did not grant single-unit franchises, so a prospective franchisee could not open just one bakery-caf. 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-cafs in a period of six years. Franchisee candidates 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. EXHIBIT 6 C-133 Infrastructure and resources to meet Panera's development schedule for the market area the franchisee was applying to develop. 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 the estimated costs of opening a new franchised Panera Bread bakery-caf. The franchise agreement typically required the payment of a $5,000 development fee for each bakery-caf contracted for in a franchisee's \"area development agreement,\" a franchise fee of $30,000 per bakerycaf (payable in a lump sum at least 30 days prior to the scheduled opening of a new bakery-caf), and continuing royalties of 5 percent on gross sales at each franchised bakery-caf. Franchise-operated Estimated Initial Investment for a Franchised Panera Bread Bakery-Caf, 2012 Investment Category Actual or Estimated Amount To Whom Paid Development fee $5,000 per bakery-caf contracted for in the franchisee's area development agreement $35,000 ($5,000 of the development fee was applied to the $35,000 franchise fee when a new bakery-caf was opened) Varies according to site and local real estate market conditions $334,000 to $938,500 $198,000 to $310,000 $32,000 to $54,000 $28,500 to $62,000 $51,500 to $200,250 Panera $19,150 to $24,350 $24,000 to $29,000 $15,000 to $84,000 $175,000 to $245,000 Panera, other suppliers Suppliers Suppliers Vendors, suppliers, employees, utilities, landlord, others Franchise fee Real property Leasehold improvements Equipment Fixtures Furniture Consultant fees and municipal impact fees (if any) Supplies and inventory Smallwares Signage Additional funds (for working capital and general operating expenses for 3 months) Total $917,150 to $1,984,100, plus real estate and related costs Source: www.panerabread.com (accessed April 5, 2012). Panera Contractors Equipment vendors, Panera Vendors Vendors Architect, engineer, expeditor, others C-134 PART 2 Cases in Crafting and Executing Strategy bakery-cafs followed the same standards for in-store operations, product quality, menu, site selection, and building construction as did company-owned bakery-cafs. Franchisees were required to purchase all of their dough products from sources approved by Panera Bread. Panera's fresh-dough facility system supplied fresh-dough products to substantially all franchise-operated bakery-cafs. Panera did not finance franchisee construction or area development agreement payments or hold an equity interest in any of the franchise-operated bakery-cafs. All area development agreements executed after March 2003 included a clause allowing Panera Bread the right to purchase all bakery-cafs opened by the franchisee at a defined purchase price, at any time five years after the execution of the franchise agreement. In 2010, Panera purchased 37 bakery-cafs from the franchisee in the New Jersey market and sold 3 bakery-cafs in the Mobile, Alabama, market to an existing franchisee. In 2011, Panera completed the purchase of 25 bakery-cafs owned by its Milwaukee franchisee and 5 bakery-cafs owned by an Indiana franchisee; also in 2011, Panera sold 2 Paradise Bakery & Caf units to a Texas franchisee and terminated the franchise agreements for 13 Paradise bakery-cafs that were subsequently rebranded by the former franchisee. In 2012, Panera acquired 16 bakery-cafs from a North Carolina franchisee, and in 2013 it acquired 1 bakery-caf from a Florida franchisee. As of January 2014, Panera Bread had agreements with 37 franchise groups that operated 910 bakery-cafs. Panera's largest franchisee operated nearly 200 bakery-cafs in Ohio, Pennsylvania, West Virginia, Kentucky, and Florida. The company's franchise groups had committed to open an additional 117 bakery-cafs. If a franchisee failed to develop bakery-cafs 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 franchisees to open new locations when unfavorable market conditions or other circumstances warranted the postponement 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 bakery-caf opening assistance, a comprehensive 10-week initial training program, a training program for hourly employees, manager and baker certification, bakery-caf certification, continuing education classes, benchmarking data regarding costs and profit margins, access to company-developed marketing and advertising programs, neighborhood marketing assistance, and calendar planning assistance. Site Selection and Caf Environment Bakery-cafs were typically located in suburban, strip mall, and regional mall locations. In evaluating a potential location, Panera studied the surrounding trade area, demographic information within that area, and information on nearby competitors. Based on analysis of this information, including utilization of predictive modeling using proprietary software, Panera developed projections of sales and return on investment for candidate sites. Cafs had proved successful as free-standing units and as both inline and end-cap locations in strip malls and large regional malls. The average Panera bakery-caf size was approximately 4,500 square feet. Almost 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 63 company-owned bakery-cafs opened in 2013 was $1,050,000 (excluding capitalized development overhead expenses), compared to average costs of $750,000 for 42 company-owned bakery-cafs opened in 2010 and $920,000 for 66 company-owned bakery-cafs opened in 2005. Each bakery-caf sought to provide a distinctive and engaging environment (what management referred to as \"Panera Warmth\"), in many cases using fixtures and materials complementary to the neighborhood location of the bakery-caf. All Panera cafs used real china and stainless silverware, instead of paper plates and plastic utensils. In 2005-2006, the company had introduced a new caf design aimed at further refining and enhancing the appeal of Panera bakery-cafs as a warm CASE 09 Panera Bread Company in 2014: Can a Slowdown in the Company's Growth Be Avoided? and appealing neighborhood gathering place. The design incorporated higher-quality furniture, cozier seating, comfortable gathering areas, and relaxing decor. A number of locations had fireplaces to further create an alluring and hospitable atmosphere that patrons would flock to on a regular basis, sometimes for a meal with or without friends and acquaintances and sometimes to take a break for a light snack or beverage. Many locations had outdoor seating, and all company-operated and most franchised locations had free wireless Internet to help make the bakery-cafs 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). In 2006, Panera began working on store designs and operating systems that would enable free-standing and end-cap locations to incorporate a drive-thru window. In 2010-2011, increasing numbers of newly opened locations, both company-owned and franchised, featured drive-thru windows. Some existing units had undergone renovation to add a drive-thru window. Going into 2012, about 50 Panera Bread locations had drive-thru windows. Sales at these locations were running about 20 percent higher on average than units without drive-thru capability. Bakery-Caf Operations Panera's top executives believed that operating excellence was the most important element of Panera Warmth and that without strong execution and operational skills and energized caf 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-cafs. Additionally, top management believed that high-quality restaurant management was critical to the company's long-term success. Bakery-caf managers were provided with detailed operations manuals, and all caf personnel received hands-on training, both in small-group and individual settings. The company had created systems to educate and prepare caf personnel to respond to a customer's questions and do their part to create a better dining experience. Management strived to maintain adequate staffing at each caf and had instituted competitive compensation for caf managers and both full-time and part-time caf personnel (who were called associates). C-135 Panera executives had established the Joint Venture Program, whereby selected general managers and multiunit managers of company-operated bakerycafs could participate in a bonus program based on a percentage of the store profit of the bakery-cafs 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's management believed that the program's multiyear approach (1) improved operator quality and management retention, (2) created team stability that generally resulted in a higher level of operating consistency and customer service for a particular bakery-caf, (3) fostered a low rate of management turnover, and (4) helped drive operating improvements at the company's bakery-cafs. In 2013, approximately 45 percent of the bakery-caf operators at Panera's company-owned locations participated in the Joint Venture Program. Going into 2014, Panera Bread had approximately 40,100 employees. Approximately 37,700 were employed in Panera's bakery-caf operations as bakers, managers, and associates; approximately 1,300 were employed in the fresh-dough facility operations; and approximately 1,100 were employed in general or administrative functions, principally in the company's support centers. Roughly 22,700 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-Caf Supply Chain Panera operated a network of 24 facilities (22 company-owned and 2 franchise-operated) to supply fresh dough for breads and bagels on a daily basis to almost all of its company-owned and franchised bakery-cafsone of the company's 22 facilities was a limited-production operation colocated at a company-owned bakery-caf in Ontario, Canada, that supplied dough to 12 Panera bakery-cafs in that market. All of the company's facilities were leased. Most of the 1,300 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 C-136 PART 2 Cases in Crafting and Executing Strategy 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 freshdough facilities. Trained bakers at each bakery-caf performed all of the baking activities, using the fresh doughs delivered daily. Distribution of the fresh bread and bagel doughs (along with tuna, cream cheese spreads, and certain fresh fruits and vegetables) was accomplished through a leased fleet of about 220 temperaturecontrolled trucks operated by Panera personnel. The optimal maximum distribution route was approximately 300 miles; however, routes as long as 500 miles were sometimes necessary to supply cafs in outlying locations. In 2013, the various distribution routes for regional facilities entailed making daily deliveries to an average of eight bakery-cafs. Panera obtained ingredients for its doughs and other products manufactured at its regional facilities from suppliers. 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 the manufacture and distribution of sweet goods to its bakery-cafs. After delivery, sweet-goods products were finished with fresh toppings and other ingredients (based on Panera's own recipes) and baked to Panera's artisan standards by professionally trained bakers at each caf location. Panera had arrangements with several independent distributors to handle the delivery of sweetgoods products and other items to its bakery-cafs, but the company had contracted with a single supplier to deliver the majority of ingredients and other products to its bakery-cafs two or three times weekly. Virtually all other food products and supplies for the bakery-cafs, 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-cafs. Individual bakery-cafs placed orders for the needed supplies directly with a distributor; distributors made deliveries to bakery-cafs two or three times per week. Panera maintained a list of approved suppliers and distributors that all company-owned and franchised cafs 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 available 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 relatively few producers of meat products from animals raised without antibioticsas 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-doughmaking capability provided a competitive advantage by ensuring consistent quality and dough-making efficiency (it was more economical to concentrate the dough-making operations in a few facilities dedicated to that function than it was to have each bakery-caf equipped and staffed to do all of its baking from scratch). Management also believed that the company's growing size and scale of operations gave it increased bargaining power and leverage with suppliers to improve ingredient quality and cost and that its various supply chain arrangements entailed little risk that its bakery-cafs would experience significant delivery interruptions from weather conditions or other factors that would adversely affect caf operations. The fresh dough made at the regional facilities was sold to both company-owned and franchised bakery-cafs 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 business segments: company-operated bakerycafs, franchise 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-cafs. The company classified any operating profits of the regional facilities stemming from supplying fresh dough and other products to CASE 09 Panera Bread Company in 2014: Can a Slowdown in the Company's Growth Be Avoided? EXHIBIT 7 C-137 Business Segment Information, Panera Bread Company, 2009-2013 (in thousands) 2013 Segment revenues Company bakery-caf operations Franchise operations Fresh-dough and other-product operations at regional facilities Intercompany sales eliminations Total revenues Segment operating profit Company bakery-caf operations Franchise operations Fresh-dough and other-product operations at regional facilities Total segment operating profit Depreciation and amortization Company bakery-caf operations Fresh-dough and other-product operations at regional facilities Corporate administration Total Capital expenditures Company bakery-caf operations Fresh-dough and other-product operations at regional f