Panera readies price hike, menu revamp to combat soft sales

Nation's Restaurant News,  Nov 12, 2007  by Carolyn Walkup

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RICHMOND HEIGHTS, MO. -- Bakery-cafe segment leader Panera Bread Co. is striving to strengthen softening profit margins and ease investor dissatisfaction by employing a variety of initiatives to increase transactions and overall sales.

Restaurant margins fell 2.6 percent in the third quarter ended Sept. 25, and earnings before interest and tax margins fell 2 percent. Though same-store sales rose 2.6 percent compared with the same quarter last year, that modest gain represented a sharp drop from the 9-percent increase in the first quarter of 2006.

Investors reacted to the margin slippage by selling Panera holdings, and its stock price fell 10 percent the day the quarterly results were released. That happened despite the company's 10-percent rise in third-quarter net income to $11.9 million on a 33-percent jump in revenue to $273.2 million, compared with year-earlier results.

Ron Shaich, chairman and chief executive of the 1,168-unit chain, told securities analysts of the company's plans for fixing the problems blamed for those disappointing results.

"Is the weakness we are seeing now going to be repeated, or is it an anomaly?" he asked in introducing his prepared remarks.

Among the hoped-for solutions Shaich outlined are menu price increases, by an average of 2.5 percent for the cafe menu and 5 percent for baked goods, primarily to offset rising commodity costs. In addition to the price hikes set to take effect Nov. 14, the chain is revamping its menu boards, starting in franchisor-owned outlets, in a bid to steer customers toward purchase of higher-profit items. Panera also is cutting back on opening in so-called "greenfield" strip mall locations, where stores often open before population growth reaches optimum levels.

Additionally, the chain is reevaluating its first dinner-focused product line, the introduced Crispani flat-bread pizzas, and testing a new breakfast sandwich for a possible spring 2008 rollout.

Shaich said Panera had not anticipated that sales in the beginning of this year would be so much weaker than expected, especially in the lunch daypart. He conceded that increasing salad offerings, which rekindled lunch traffic later in the year, had cannibalized sales of higher-profit sandwiches and soups and the chain's You Pick Two combo meals.

He expects to correct that problem with a total revamp of menu boards. The restructured menus will list higher-profit items first and be easier to navigate. The emphasis will steer customers toward ordering combo meals and sandwiches, he said.

The new menu boards also will reflect the new prices, which will have a broader spread than in the past to satisfy a range of budgets, Shaich said, adding that most other sandwich chains already have broader pricing spreads.

"We will focus on doing fewer products at higher profits," he said.

A related focus will be to promote bulk sales of certain items for customers to take home.

Securities analyst John Glass of CIBC World Markets in Boston said in a statement that he expects Panera's price increases, as well as an expected positive customer reception to the new menu board and new limited-time offers, to partly offset rising food commodity and labor costs.

Despite a 3-percent hike in wages, mostly due to mandated minimum-wage increases, Panera does not plan to cut back on labor, Shaich said.

"We think we have to continue to put dollars into the quality of our people if we are going to grow transactions," he said.

He did not dwell on the higher costs resulting from a shift away from self-manufactured breads to the outsourcing of dough preparation, one reason for the quarter's higher food costs. However, a spokesman said the new menu boards would lead customers toward the lower-food-cost, commissary-produced dough products.

All of Panera's bread and pastry items would continue to be baked off in the stores.

Panera also is re-evaluating its much-touted Crispani, which has not consistently sold well in all markets. The initial expectation was that the pizza would create more traffic during dinner hours.

"Sales are not growing. The answer on Crispani is more sales or pull the program," Shaich said.

Panera expects to make a determination about the possibility following analysis of results of its October direct-mail advertising campaign for the Crispani line.

Hoping to grow its traditionally strong breakfast daypart even more, Panera is testing breakfast sandwiches that contain eggs cracked in the stores, applewood-smoked bacon and Vermont white Cheddar on ciabatta bread, priced between $3 and $3.50.

"There are a lot of egg sandwiches out there, but none like this one," Shaich said.

In the coming quarter, Panera expects its catering to increase, due to holiday business and social events, and is introducing some limited-time retail holiday breads, including an Italian panettone and a gingerbread bagel seasoned with cinnamon and nutmeg and containing white chocolate and cinnamon chips.