Panera Bread has an opportunity for growth within a challenging industry in two key areas – increased sales of specialty drinks and opening international locations – that will enable the company to spread its mission of fresh bread for everyone while increasing the bottom line for shareholders. By utilizing many frameworks for thought and projecting the estimated financials of the company, we are able to empirically show that these two strategies will be beneficial to the customer.

Utilize Historically High Margins on Specialty Drinks to Drive Bottom Line Growth

While Panera's core business revolves around fresh bread, the style of the locations suggests that there is substantial revenue in selling coffee and related drinks, similar to Starbucks. Looking at the coffee market, estimated real growth is 2.7% or roughly 5.7% given a 3% inflation rate while the number of establishments, the actual coffee shops, is expected to grow only 1.6%, meaning that each shop on average will see increased revenue, due in part to a 3.5% growth in domestic demand (See Appendix A). Further, profit in specialty drinks is estimated at 19.8%, much higher than Panera's 6.4% profit margin. This means that increasing the sales of specialty drinks will have a positive impact on Panera's bottom line – clearly the industry is growing and is a good industry to be in for Panera. According to Buffalo Wild Wings' franchise disclosure document, more than 40% of revenue is generated via alcohol and specialty drinks sales. If Panera were able to generate this level of sales with a 19.3% profit margin, its bottom line would increase by nearly 7.8% to 14.2%, abnormally high for the restaurant industry (which averages 4-5% margins). Although this profit margin level is probably not sustainable, the short-term boost in profit margin will help Panera expand its operations internationally to capture economies of scale with its suppliers.

Look to Industry Incumbents for Knowledge and Re-arrange Menu Locations

Visually, the layout of a Starbuck's, Dunkin 'Dunuts, or Caribou Coffee are much more fluid than Panera Bread with respect to the coffee ordering location. This analysis draws heavily on the Eden Prairie Mall and Downtown Minneapolis Nicollet Mall locations. The customer flow for Eden Prairie and Downtown is awkward; the customer must enter the store, walk past the bakery and coffee areas, and then order at the registers. The issue is that the coffee menus are located above the bakery items, not in clear view of the customer at the time of ordering. By the time the customer is ready to order, he or she has forgotten what drink to order; furthermore, the drinks are creatively named which is positive for brand identity, but awkward for the average male customer to order. At the very least, the coffee and specialty drinks need to undergo the following changes:

· Move the menus to the same wall face as the meal menus to ensure customers know what coffee is offered when ordering

· Arrange the bakery display cases closer to the registrants to entice more impulse purchases

· Remove queue line markers during non-rush times, especially in front of the bakery display cases

· Increase the offerings of specialty drinks, including researching alcoholic beverages, to attract coffee shop regulars into Panera

By focusing on combining the café design with a coffee shop atmosphere, Panera can become a "chill out" spot as well as a premier location for both lunch and dinner. Furthermore, this change can be transported to the international markets where café atmospheres, such as those in France, are more prevalent.

Expand Internally to Build Brand Image and Diversify Economic Risks

Given that Panera is pursuing Canadian locations, it is safe to assume that the international market for fresh bread is growing. Indeed, the international market breakdown of industry revenues can be found in Appendix B. Clearly, the European market is a large market for fresh bread. However, IBIS World estimates that 135,000 bakeries operate in Europe, meaning the market is fragmented. A brand with a large marketing budget behind it could quickly enter the market and take a key position (See Appendix C). Given that the culture and preferences of European customers may differ from Americans, it would be best to test new products in Canada prior to the overseas launch of the Panera brand. An interesting facet of the European market is the strong relationship between the industrial agricultural and milling companies and the industrial bakeries. The largest bakeries are owned by the largest milling and agricultural firms in the UK, Sweden, and Austria. This may cause supply chain issues in these countries, though Panera could pursue a partnership or joint venture approach to these markets.

Leverage on Existing Assets to Increase Shareholder Return and Expand

According to Panera's 2009 10-K, the company had an interest coverage ratio of 200.9x, with EBIT of $ 140m and interest payments of $ 700k. Additionally, distance-to-default, a key metric for risk of debt, is quite large (larger is better) as the cash on hand of Panera is $ 77.1m and the debt / equity ratio is 0.0%. Retained earnings and total equity are $ 346m and $ 495m, respectively. This suggests a large cushion prior to debt default in an extreme situation. In Appendix D, the large difference between Panera and its rivals in terms of debt load is clearly seen. Given that Panera has $ 153.2m in FCF, it is safe to assume that Panera could issue at the very least 1.0x FCF, though a safe debt load for a company can be as low as 2x EBITDA, or $ 400m in debt. With the average café costing $ 1.6m, Panera would be able to finance the expansion of its brand across approximately 250 corporate-owned locations internationally. As seen in Appendix E, Panera would be in the top three of its main competition with these new locations.

As with all public companies, Panera must return value to its shareholders while not ignoring the braveer array of stakeholders with whatever it concerns. FactSet estimates Panera's 2010 sales growth at 10.4% with EPS of $ 3.41 per share, a 20.6% increase over 2009. Our proposed strategy would benefit the company both in the short term and long term. In the short term, sales would have increased and profit margin would increase by 500 bps to 770 bps based on specialty drink sales. If the international expansion plan is pursued, Panera would see sales growth in 2011 beyond the estimated 10.3% and EPS well beyond the projected $ 3.98. Although the increase in debt may force management to pay more attention to the cash flow of the company, the increased leverage will allow Panera to increase its ROE substantially. If Panera wishes to remain competitive, it must utilize its economies of scale to grow faster than competition and continuously innovate, becoming the "fast follower" by utilizing adherent industry innovations in its café atmosphere.

Appendicies can be found at Liekos Group's website.