Franchise Operations of Panera Bread - Site Selection and CAFÉ Environment

In 1981, Louis Kane and Ron Shaich founded a bakery-café enterprise named Au Bon Pain Company Inc. In 1993, Au Bon Pain Company purchased Saint Louis Bread Company, a chain of 20 bakery-cafés located in the St. Louis, Missouri area. Ron Shaich and a team of Au Bon Pain managers then spent consider- able time in 1994 and 1995 traveling the country and studying the market for fast-food and quick-service meals. In 1997, the Saint Louis Bread bakery-cafés were renamed Panera Bread in all markets outside St. Louis. In May 1999 with the sale of the Au Bon Pain division, the company changed its name to Panera Bread Company.

The last reported new investments of Panera Bread was to open 155 new company-owned and franchised bakery- cafés in 2010, bringing its total to 2000 units in 36 states. Panera Bread is widely recognized as the nationwide leader in the specialty bread segment.

FRANCHISE OPERATIONS

Opening additional franchised bakery-cafés was a core element of Panera Bread’s strategy and management’s initiatives to achieve the company’s growth targets. Panera Bread did not grant single-unit franchises, so a prospective franchisee could not open just one bakery-café. 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-cafés in six years. Franchisee candidates had to be well capitalized, have a proven track record as excellent multi- unit 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 multi-unit restaurant operator.

• ·          Recognition as a top restaurant operator. 
•        Net worth of $7.5 million.
• ·          Liquid assets of $3 million.
• ·          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.

 The franchise agreement typically required the payment of a franchise fee of $35,000 per bakery- café (broken down into $5,000 at the signing of the area development agreement and $30,000 at or be- fore a bakery-café opened) and continuing royal- ties of 4–5 percent on sales from each bakery-café. Franchise-operated bakery-cafés followed the same standards for in store operating standards, product quality, menu, site selection, and bakery-café construction as did company-owned bakery-cafés. Franchisees were required to purchase all of their dough products from sources approved by Panera Bread. Panera’s fresh dough facility system sup- plied fresh dough products to substantially all franchise-operated bakery-cafés. Panera did not finance franchisee construction or area development agreement payments or hold an equity interest in any of the franchise-operated bakery-cafés. 

All area development agreements executed after March 2003 included a clause allowing Panera Bread the right to purchase all bakery-cafés opened by the franchisee at a defined purchase price, at any time five years after the execution of the franchise agreement. As of 2006, the typical franchise-operated bakery-café averaged somewhat higher average weekly and annual sales volumes than company-operated cafés was equal to or slightly more profitable, and produced a slightly higher return on equity investment than company-operated cafés (partly because many franchisees made greater use of debt in financing their operations than did Panera, which had no long-term debt at all).5 During the 2003– 2006 period, in four unrelated transactions, Panera purchased 38 bakery-cafés from franchisees. 

Panera provided its franchisees with market analysis and site selection assistance, lease review, design services and new store opening assistance, a comprehensive 10-week initial training program, a training program for hourly employees, manager and baker certification, bakery-café certification, continuing education classes, benchmarking data regarding costs and profit margins, access to company developed marketing and advertising programs, neighbourhood marketing assistance, and calendar planning assistance. Panera’s surveys of its franchisees indicated high satisfaction with the Panera Bread concept, the overall support received from Panera Bread, and the company’s leadership. The biggest franchisee is- sue was the desire for more territory. In turn, Panera management expressed satisfaction with the quality of franchisee operations, the pace and quality of new bakery-café openings, and franchisees’ adoption of Panera Bread initiatives.6 As of April 2006, Panera had entered into area development agreements with 42 franchisee groups covering 54 markets in 34 states; these franchisees had commitments to open 423 additional franchise- operated bakery-cafés. If a franchisee failed to develop bakery-cafés on schedule, Panera had the right to terminate the franchise agreement and develop its own company-operated locations or develop locations through new area developers in that market.

SITE SELECTION AND CAFÉ ENVIRONMENT

Bakery-cafés 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 competitors. Based on analysis of this information, including the use of predictive modelling using proprietary software, Panera developed projections of sales and return on investment for candidate sites. Cafés had proved successful as freestanding units, as both in-line and end-cap locations in strip malls, and in large regional malls. The average Panera bakery-café was approximately 4,600 square feet. The great majority of the locations were leased. Lease terms were typically for 10 years with one, two, or three 5-year renewal option periods thereafter. 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 sales level. 

The average construction, equipment, furniture and fixture, and signage cost for the 66 company-owned bakery-cafés opened in 2005 was $920,000 per bakery-café after landlord allowances. Each bakery-café 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 neighbourhood location of the bakery-café. In 2005–2006, the company had introduced a new G2 café design aimed at further refining and enhancing the appeal of Panera bakery-cafés as a warm and appealing neighborhood gathering place (a strategy that Starbucks had used with great success). The G2 design incorporated higher-quality furniture, cozier seating areas and groupings, and a brighter, more open display case. 

Many locations had fireplaces to further create an alluring and hospitable atmosphere that patrons would flock to on a regular basis, sometimes for a meal, sometimes to meet friends and acquaintances for a meal, sometimes to take a break for a light snack or beverage, and sometimes to just hang out with friends and acquaintances.

Many of Panera’s bakery-cafés had outdoor seating, and virtually all cafés featured free wireless high-speed (Wi-Fi) Internet access—Panera considered free Wi-Fi part of its commitment to making its bakery-cafés open community gathering places where people could catch up on some work, hang out with friends, read the paper, or just relax. All Panera cafés used real china and stainless silverware instead of paper plates and plastic utensils.

As of mid-2006, Panera Bread did not have any international franchise development agreements but was considering entering into franchise agreements for several Canadian locations (Toronto and Vancouver).