Participants differentiate themselves in the areas of pricing, food quality, food offerings, and ability to adapt to changing consumer needs, use of tech nology, tmosphere, and service in order to stay competitive. Panera Bread (“Panera”), a bakery-caf??, has been effective in differentiating itself in product quality, service and ambiance, but still remains a small player with $1. 8 billion annual sales.
After our of external environment analysis of the restaurant industry and Panera’s internal analysis we have identified that Panera’s main issue has been to successfully launch and expand its lunch and dinner options and attract customers, especially during the dinner hours to increase sales revenues and market share. Analysis The competition in the fast casual industry is fierce with companies ompeting across various categories such as breakfast, lunch, dinner, take- away, and off-premise catering.
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The fast casual segment of the industry is growing at a slightly faster pace than the other segments and is expected to reach sales revenues of $425 billion in 2012. The fast casual industry is made up of two major groups, those with a narrow product breadth and those with a much broader product category. Among these groups is Starbucks with a narrow product breadth that offers mainly beverages and assorted pastries. Starbucks has 1 7,000 stores worldwide and annual sales revenues Of $11. 7 illion a year.
At the other end of the spectrum is Applebee’s, Chilli’s Grill, Bar and Chipotle Mexican Grill, and Cracker Barrel that offer full meal options that include breakfast, lunch and dinners. These four companies combined have annual sales revenue of $13. 2 billion and 5,394 stores altogether. We conclude that restaurants that offer a more comprehensive menu selection generate higher sales revenues per store than companies with a narrow product line. Average sales revenues per store at Starbucks are Sl . 2 million a year, while average sales revenues per store at Applebee’s, Chilli’s Grill and
Bar, Chipotle Mexican and Cracker Barrel are $2. 4 million per year. Sales revenues at full menu establishments range from a low of $2. 2 million a year as in the case of Applebee’s, all the way to $3. 2 million sales revenue per year as in the case of Cracker Barrel. Panera is in between the narrow and broad menu category offering fresh baked goods, hot and cold beverages, sandwiches, fruit, soups and salads. Panera’s average sales revenues per store are $2. 3 million, annually. Panera’s total annual revenue in 2011 was $1. billion, which makes it a small player in the fast casual dining industry, artly due to the fact that its product selections have not yet been fully developed into a comprehensive menu offering. There are two factors that might have hampered Panera’s ability to expand its menu selection into a broader product category that includes dinner: (1) where the industry is positioned at the moment in its life cycle, and (2) the current economic conditions. First, the industry growth rate is one of the indicators of where the industry is positioned in its life cycle.
The industry grew by an annual compound rate of 4. 42% from 2000 to 2011 annually and is expected to grow by 3. 5% in 2012. These figures indicate that the industry is still growing but at a slightly declining rate, which leads us to believe that the restaurant industry is reaching its early maturity stage, or that the market is slowing down due to weakened economic conditions (as a result of the 2008 recession), or both. Current economic conditions could be a factor affecting Panera’s successful launch of its dinner menu and expansion of its lunch offerings.
The economic situation has not yet fully recovered after the 2008-2009 recession. In July 2011 there was a drop of 7% in the S and the Dow Jones Industrial Average. Also, in July 2011, Panera had to scale back its sales growth forecast for the remainder of the year, which prompted a drop in its stock price. Unemployment is still high at 8%, affecting consumer spending on non-essentials. As a result, during recessionary times, people tend to spend less on food away from home, spend on substitutes instead, or hold back on restaurant spending altogether.
Substitutes constitute lunch meals, which range from $7 to $12 as opposed a full dinner meal, which costs approximately $20 per entr??e, take-out food or home-cooked meals. These factors might have exacerbated Panera’s failure to successfully launch its inner menu. Panera’s brand identi??y’ is tied up to breads and fresh baked goods, which has made it difficult for customer’s to associate Panera’s restaurants with a full dining establishment. Panera failed to re-orient its word-of-mouth marketing strategy towards its dinner menu options, and chose instead to focus on its “fresh baked goods” marketing strategy.
This situation has been aggravated by the fact that Panera has to compete against major players such as: Chilli’s Grill and Bar, Chipotle Mexican and Cracker Barrel, who have the experience, expertise and marketing skills in “all day dining” operations. Panera didn’t devote enough financial resources to the marketing of its dinner entrees and spent only 1 % of system-wide sales on direct media advertising in 2010-2011, while the industry average expenditure on marketing and advertising is between 3% to 5%. Finally, Panera’s supply management strategy might have hampered its ability to expand its dinner menu selection.
Panera’s supply chain is highly involved and time-sensitive with the operation of 24 dough-manufacturing facilities and 200 temperature controlled trucks to make daily, fresh deliveries. Panera’s core competence lies with the use Of fresh ingredient, seasonal and rganic produce, relying heavily on outside vendors to supply these ingredients. Many factors can jeopardize Panera’s daily operations such as weather conditions that can damage crops, cause transport interruptions, or limited availability of organic products, such as antibiotic-free chicken.
Therefore, these factors might affect Panera’s ability to handle larger volumes of menus, including dinners, because some ingredients are already in limited supply, such as organic produce and meats. Alternatives There are three main alternatives Panera could proceed with, each of which rovides different pros and cons: (1 ) expand product offering and/or meal options, (2) narrow product offering and/or meal options or (3) expand ca tering segment. The first alternative is for Panera to continue broadening their product scope.
By adding more items to their menu, Panera would to cater to all meals of the day, and not just breakfast. Panera would reach more consumers and increase their target market resulting in higher sales revenue. The downside to this option is that by continuing to over-expand their product offering they will continue to intensify their direct costs (e. g. ngredients and labour) and overhead costs (e. g. hydro costs) for meal-time offerings which have yet to be proven successful in their bakery-cafes.
Moreover, by continuing to increase meal options, they will move further away from their brand image, as a leading artisan fresh bread bakery, which is not necessarily a con, but a required risk if they wish to expand their business to other products. The second alternative is for Panera to narrow their product scope, focusing only on breakfast and lunchtime men us. Panera could strictly focus on maintaining their brand identity and building their core competence, roviding daily fresh-baked goods, sandwiches, salads, breakfast items, coffee and smoothies.
The advantage is to capitalize on an already proven business model, which helped Panera grow into a $1. 8 billion company, with 1,541 locations in North America, and retain loyal followers who appreciate the style and ambiance of a bakery-cafe. The disadvantage of this option is the potential lost revenue by foregoing dinnertime market. Panera runs the risk of reaching stagnant growth at which point it would need to find new ways to increase revenue to satisfy their shareholders, such as continuing to expand ts bakery-cafe presence globally by opening more locations.
The third alternative is for Panera to increase its catering business and drive-through services. By increasing catering services, Panera can achieve economies of scale by making full utilization of their production capacity, especially during idle times of the day. There would be a minimal need to make immediate capital investments for new equipment. Customers of catering include corporate consumers who use catering for business meetings, and lunchtime deliveries for employees, or further target personal events such as birthdays, bridal showers, etc.
The downside of the catering business include increased overhead cost (e. g. gasoline, car rentals, delivery drivers) and increased pressure of maintaining their freshly baked business model, which might prove challenging to keep up with large catering orders. For drive-through, Panera would have to hire designated staff and invest in renovation and reconfiguration to implement such services. Recommendation After weighing in the pros and cons of each alternative, we conclude that Panera would be best suited with the second option: narrowing its product offering and/or meal options.
This allows Panera to maintain their brand dentity and build on their core competence, while capitalizing on their already proven business model. EXTERNAL ANALYSIS: Companys External Environment: Industry: The restaurant industry (quick-service restaurants) Eating place establishment industry has a size of approximately $425 billion. Quick-service sector that represents $175 billion of the restaurant industry has a faster growth than the full-service restaurant sector. PESTEL ANALYSIS POLITICAL FACTORS: N/A ECONOMIC CONDITIONS The 2008-2009, recession had an impact on the expansionary objectives of food retail outlets in the U.
S. s consumer spending declines during recessionary periods. Restaurants were the second largest employer in the U. S. in 201 2, with about 12. 9 million employees. During the 2008-2009 recession, 366,000 people in the industry lost their jobs. By mid-July 201 1 weaker economic conditions still persist underpinned by a 7% decline in the S 500 and the Dow Jones Industrial Average. For example, Panera’s bread stock price dropped sharply from $1 29 to $112. Unemployment rate still remains at a high 8% affecting consumer spending.
SOCIO/CULTURAL Growing demand for healthier, nutritional, low-calorie, low-carb and heart- ealthy meals. People are becoming more environmentally conscious and are choosing to eat more at restaurants that offer organic, seasonal and locally grown food. DEMOGRAPHICS The average consumer is the working age consumer and older adults. The targeted consumer group are children through the offering of children’s menus. Average consumer in the U. S. consumes 76% of his/her meals at home and 24% at restaurants. TECHNOLOGICAL FACTORS Increased use of media advertising and social networks to expand brand and product awareness.
Availability of WI-FI complements the services provided y restaurants. Online presence, online menu selection and the use of the Internet as an additional retail channel are becoming increasingly common. Use of information technology to improve operational activities such as scheduling work hours, registering points of sales data, communicating pricing with head office, determining reordering points of supplies and monitoring order deliveries. Loyalty program cards register customer information that is used to tailor menus to customer’s preferences.
This information is used to improve efficiencies in operations and reduce waste. ENVIRONMENTAL FORCES The weather can affect crops of produce such as grains, wheat, fruits and vegetables, thus causing shortage or interruption of supplies resulting in increase in the cost of inputs. Bad weather can interrupt the transport of supplies having an impact on businesses that rely on daily deliveries of fresh ingredients and other products. Costs of energy, gas and electricity can have an impact on operational costs and costs of transportation affecting revenues.
LEGAL AND REGULATORY Companies operating in the restaurant industry must observe health and safety food regulations. Companies operating in the restaurant industry must lso observe minimum wage legislation. INDUSTRIES STRATEGY-SHAPING ECONOMIC FEATURES Market Size and growth rate There are 970,000 eating outlets in the U. S. and about 1 30 million patrons visit an eating establishment every day. Average expenditure for “food away from home” is $2,505 annually, which is equivalent to 48% of total annual expenditure in food and drinks. The market size is estimated to reach $632 billion in 201 2, an increase of 3. % over 2011. The market size was $239 billion in 1990 and $379 billion in 2000. The industry grew an average of 4. 71% annually from 1990 to 2000 and 4. 2% annually from 2000 to 2011. These numbers indicate that the rate of industry growth is slightly declining determining that the industry could be becoming saturated. Number of buyers There is very large number of small buyers in the restaurant industry. In 201 1, 130 million American consumers visited eating establishments every day averaging sales of Sl . 65 billion per day. This presents an opportunity in the restaurant business in the U.
S. , as competition is less severe when there is very large number of small buyers. Buyer’s needs and requirements Patron’s choice of restaurants is based on pricing, food quality, menu elections, restaurant locations, ambiance, dining experience, product innovation and service. Patrons are becoming more health and environmentally conscious. Number of rivals There are 970,000 eating establishments operating in the United States. The fact that the market is overcrowded with eating outlets and that competition is fierce, poses the possibility that the industry will consolidate.
The industry is large and still growing to attract new entrants, but they will face some risks given that the growth rate of the industry is slightly declining. Scope of competitive rivalry Competitors are competing locally, nationally and globally. The largest competitors have locations both in the United States and in many other countries abroad, serving different demographics and ethnic groups. Having a presence in foreign countries is becoming more crucial to company’s survival. Degree of product differentiation Restaurant operators seek to differentiate themselves via product offerings, product quality, pricing and dining experience.
Restaurant operators continuously try to innovate their menu selection with trendy dishes, seasonal items, special beverages and diet and health conscious products. Product Innovation Since competition is fierce, product innovation is very important in the industry. Restaurant operators have to quickly adapt to changing customer’s needs, featuring heart-healthy, low-carb, low-calorie and organic meals. Since consumers are becoming more environmentally conscious, restaurant operators are creative in featuring menus that carry seasonal and locally grown items.
Production capacity By expanding their services into the catering business, restaurant operators can make greater use of their production capacity, especially during the idle times of the day. Vertical integration The industry is characterized mainly by forward integration as, for the most part, companies operate with a combination of store owned, licensed and franchised stores. Company owned stores guarantee the integrity of the products/brand image. The supply side of the operation is partially integrated, as some items are prepared in-house and others outsourced to third-party outlets.
Products prepared in-house guarantee the quality of the items. PORTER’S 5-FORCE ANALYSIS (HIGH, MODERATE, LOW) Competition from rivals: High Rivalry in the restaurant industry is very high. There are 970,000 dining stablishments just in United States also gives us an idea of how competitive the industry actually is. Customers can switch from one rival to another because of the high number of competitors and also they are not bound to any one of them. Some competitors are quicker than others to rotate their menus and products to serve the customers’ needs.
Competition from potential new entrants: Moderate to Low Even though the market is congested with so many eating outlets, the industry is still growing. Starting up a new restaurant is expensive and profit margins might be low at the beginning. It is difficult to start up or sustain in such an industry due to really high competition. Competition from producers of substitute products: High Customers might find a cheaper alternative at a grocery store people might make meals at home to save money Local bakeries, cafes, or any other stores that sell similar products served in these restaurants.
Supplier bargaining power: Low to Moderate Basic ingredients like dough, water, and salt can be bought from number of different suppliers, and does not bind these restaurants to anyone of the suppliers. Even though this industry has large amount of suppliers, however ngredients that are sourced from a single supplier can have higher bargaining power Organic products such as antibiotic-free chickens have more limited availability, thus increasing bargaining power of suppliers. Buyers: Low to Moderate Individual Buyers have very limited bargaining power because individually they don’t large amount of products.
Institutions which buy products in large amounts will have a higher bargaining power compare to individual customers. KEY DRIVING FORCES: Changing lifestyles and attitudes: Growing consumer interest in healthier, more nutritious food selection. There s evidence to this phenomenon in the research by the Natural Restaurant Industry (2010-201 1 75% of surveyed adults were trying to eat healthier than they were in 2008 and 2009 and they were also more likely to choose to dine at a restaurant that served locally produced food. Customers look for all- natural ingredients, whole grain, fresh products and detailed nutritional information. 5% of surveyed adults were more likely to dine at a restaurant that offered food grown at an organic or environmentally friendly way. Various restaurants are catering to healthy demands, such as Applebee’s election of under-500 calorie Weight Watchers-branded menu alternatives and Panera, who provides freshly baked breads, free of preservatives and chemicals. Urban workers and suburban residents are looking for quick service meals (“fast casual” restaurants) and/or light snacks at an aesthetically pleasing, comfortable dining experience.
New Internet capabilities: The growth of Internet and e-commerce result in increased restaurant presence, which helped increase Panera’s catering business. Convenience and ease to order catered food online, helping expansion of market from individual customers to corporate businesses. Complimentary’ WI-A at several restaurants helps improve dining experience. Technology Advancement: Point of sale registry to collect useful information through the MyPanera loyalty card program. In-store enterprise application helps managers be more efficient in scheduling staff hours, controlling food costs, and ordering supplies from distributors online.
Panera Bread competes in various segments Of the restaurant industry: The main competitors are those in the so-called “fast casual” restaurant category which fills the gap between the fast-food outlets and casual, full-service restaurants; these competitors consist of: Breakfast, AM “chill”: Starbucks, McDonalds Lunch, PM “chill” and dinner: Applebee’s, Chili’s Grill and Bar, Chipotle Mexican Grill, California Pizza Kitchen, Jason’s Deli, Cracker Barrel, Ruby Tuesday, T. G. I. Fridays, and Five Guys Burgers and Fries.
Other competitors provide speciality foods with focus on bread and pastry: Corner Bakery Cafe, Atlanta Bread Company, Au Bon Pain, local bakeries and supermarket bakeries. Approximately 72% of the market share is comprised of four companies. Based on the number of stores, Starbucks is the leader with 55% geographic market share, greatly outperforming all the other competitors. Applebee’s represents 6. 5% of the geographic market share, followed by Chili’s Grill and Bar and Panera Bread each representing 5%. The remaining 28% of the market share consists of 20 restaurants provided in the case.
Observing the number of stores, Starbucks has significant presence, with 10,800 stores in the U. S and additional 6,200 in 140 countries, followed by Applebee’s with 201 9 stores in 15 countries. Chili’s Grill and Bar and Panera both have 1541 locations, however out of those, 241 of Chili’s Grill outlets are located in 30 foreign countries. Chipotle Mexican Grill has approximately 1 ,200 locations. Overall, based on the number of stores, Starbucks is by far the leader when it comes to geographic coverage, with 17,000 stores worldwide, followed by T. G. I. Fridays with 60 locations worldwide.
Chili’s Grill and Bar has presence in 30 countries worldwide; Applebee’s is located in 15 countries, and Ruby Tuesdays in 14. While Panera Bread has locations only in North America, although they do have a large number Of locations (1 ,541) and strong revenues $1. 8 billion, there is an opportunity for expansion within and beyond North America.