Panera Bread Case Study PDF

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1 Patel

Panera Bread Case Study

FIN 4596-003

02/02/20

Prepared by: Parth Patel

2 Patel Over the course of the next five years, it is projected that Panera Breads sales will continue to grow each year but the rate of growth will decrease to 25% in 2008 and 2009 (down from an average of 30.38% yearly growth in the previous 4 years) and level off at a 5% growth rate from 2010-2012. To calculate costs, I determined the percentage each cost was out of total revenue and observed whether there was an upward or downward trend during 2003-2007. I calculated the average percentage for all the categories and in doing so discovered that following the average would have disrupted either the growth or declining rates, so I used the trend instead of the mean. Otherwise, in the case that the percentage was relatively constant, I found the average percentage of sales for 2003-2007 and used that to predict the 2008-2012 rates. While dough sold to franchisees and general/ administrative costs followed a downward trend decreasing from 6.5% to 3.25% and 7.2% to 5.7%, respectively, bakery café had an upward trend increasing from 72% to 77% and depreciation remained fairly constant averaging at 5.3% of sales (Appendix A). I also calculated the percentage of sales for assets and liabilities to determine whether there was an upward, downward, or relatively constant/ no particular sloping trend change year to year. For property, plant and equipment I used an average of 40.41% of sales and goodwill and for other assets I used 9.54% (Appendix A). On the liability end, current liabilities averaged 12.67% of sales while deferred rent and others came to 4.67% (Appendix A). This strategy was also used to determine a tax rate of 36.41%. It was appropriate to use an average percent to forecast the 2008-2012 trends within the company for all values except for current assets. Current assets never deviated from its downward trend, so I continued to use that pattern for our predictions. From 2008 to 2012 I predicted that current assets decreased from 12.2% of sales to 10.5% (Appendix A).

3 Patel The company should seek out short term debt, to finance the operational activity over the next two years or each year’s interest expense, I used the given 6% interest rate for outstanding long-term debt. Even though the sales growth rate has slowed it’s still growing as a company and the introduction of outside debt will allow Panera to expand even more. Long term debt financing makes more sense because Panera is given a longer payback period with more structure and predictable interest expenses. Additionally, in order to counteract the increase in external costs Panera needs to use long term financing to continue operating/ expanding with lower margins. Although Panera plans to repurchase $75 million of stock and incur debt, I predict that Panera will still have a profit margin trending upward. While short term debt generally carries lower interest expenses, it’s only appropriate to use short term debt for accounts payable, short term loans, etc. Under the cost of goods sold, bakery cafe from 2003-2007 had an average annual percentage of total revenue increase of 3.08% and was forecasted to increase in this amount until 2009, when sales growth became fixed. Other Key Success factors of Panera Bread: Distinctive Menu, great location and unique operating system: Panera Bread’s distinctive menu, signature café design, inviting ambience, operating systems, and unit location strategy allowed it to successfully compete in the restaurant industry especially for breakfast, lunch, daytime chill out dinner, light evening fare for eat-in or take-out, and take home bread. After 2009, bakery cafe’s expense as a total percentage of revenue was fixed at 77.17%. Dough sold to franchisees decreased an average of 1.7307% as a percentage of total revenue and was fixed at 4.73% in 2009. Also, Panera could increase their dinner offerings to increase their sales and customers at off peak hours. Panera should increase their marketing efforts to gain more awareness of the healthy chicken. Panera Bread is currently in the need of external financing in order to meet the

4 Patel forecasted growth rate and repurchase $75 million in stock. General and administrative expenses decreased at an average 0.31% of total revenue annually and becomes fixed at 5.39% in 2009. Panera uses all-natural antibiotic-free chicken in their menu offerings, however there is not much awareness of this to the general public (Thompson). Panera should also continue to the healthy brand image by offering a wider selection of fruit choices on the menu. Panera could increase their focus on catering to expand the restaurant’s brand. Deferred rent and other liabilities were averaged at 4.67% of total revenue and by the end of 2012 totaled, $55,518,000. If more people knew they could get it from Panera at a good value, then the restaurant could increase their sales. If Panera continues to expand their catering the company could essentially double the catering sales. If they added more dinner options, Panera could expect the evening-hour sales to double. Panera could increase the awareness of the use of all-natural ingredients to attract new customers. Panera Bread, an American chain of bakery-café fast casual restaurant in the United States and Canada, is operating with positive profit annually. But recently, for the first time in the history of operations, would have to rely on means of financing their growth other than through retained earnings and stock options. The company’s growth rate went from 25% to 5% annually and the company is struggling to increase its growth rate. Due to the rising cost of wheat, decreasing margins, and sustaining their projected growth rates, Panera needed to access external capital markets. There are several reasons why Panera has financed their growth through longterm debt as opposed to short-term debt (current liabilities) or equity financing. To begin, an EFN around $51 million dollars was calculated. This number represents the financing necessary to support Panera’s projected growth rates. Financing Panera’s growth through current liabilities

5 Patel is not an ideal because this is a large sum of money to pay within one year, especially when added to Panera’s existing current liabilities....