Strategic Management

Building a Brand on the Smell of Mom's Kitchen: How Panera Found Success in a Down Economy

Stroll into any Panera in the country -- whether it is in Portland, Ore., or Portland, Maine, St. Louis, Mo. or St. Augustine, Fla. -- and the setting is the same: a wide-open airy space with stylish light fixtures, walls painted in rich red and yellow hues, an assortment of cushy, upholstered seats and perhaps a gas fireplace. The scent of fresh bread baking wafts through the café. Panera's menuoffers hearty $7 sandwiches made on artisan breads, as well as soups, salads and baked goods. It serves its meals on real dishware rather than on plastic plates, and invites customers to sit on elegant wooden chairs rather than in Formica booths.

It is not your average fast food joint. Today, Panera attracts both everyday customers and Wall Street investors; it is one of the fastest-growing chains in the U.S., with 1,420 stores, and a roughly $3 billion market capitalization. During the depths of the downturn, when most companies contracted, Panera's management invested in its product line and increased the number of stores. The strategy worked: In 2009, the company posted revenues of $1.4 billion, up from $640 million in 2005.

The reason for Panera's success is simple: The chain has pursued a niche strategy, differentiating itself as a fast food restaurant that serves healthy, tasty, affordable food, according to Lawrence Hrebiniak, a Wharton management professor. And at a time when two-thirds of adults in the U.S. are classified as obese and many Americans are paying more attention to the food they eat, Panera offers a wholesome alternative to purveyors of fatty burgers and burritos. Equally important, Hrebiniak says, it provides an appealing customer experience.

"Panera has become a symbol of warmth," he adds. "In advertisements, they position themselves as a warm, welcoming place. They want you to bring your friends and family. They want you to come to Panera to have lunch with a good old friend.... When times are tough, people go back to the basics. You can't go out to dinner and drop $250, but you can go to Panera with a friend and have a tasty bowl of soup and smell the bread baking."

As the economy improves, however, there are challenges ahead. Panera's management must stay close to the market, paying particular attention to whether customers' needs or demands are changing, and adjusting their products accordingly. The company must also maintain solid entry barriers for potential competitors, which will ensure that customers perceive they are getting a good value. "This is a challenging and difficult task," Hrebiniak notes.

'Self-service Gas for the Human Body'

Panera started out as the St. Louis Bread Co., a modest chain that ran 19 bakery-cafes in urban Missouri. In 1993, Ron Shaich, who at the time was head of the similarly minded chain Au Bon Pain, bought the company for $23 million and renamed it Panera, Latin for "time of bread." By 1999, Shaich sold off Au Bon Pain to concentrate on the Panera division. "At the highest level -- and I've been doing this for 30 years -- what I am trying to do is bring real food to people in environments that engage them," says Shaich in an interview with Knowledge@Wharton.

According to Shaich, who stepped down as CEO last year but remains chairman, Panera's growth is due to a larger trend driven by American consumers' rejection of commodities. "After World War II, McDonald's and Burger King were special, but by 1993-1994, they had become self-service gasoline stations for the human body," he notes. "There was a reaction to that; people wanted specialness, and an end of commoditization. We saw it happening in specialty soft drinks, ice cream, beer and coffee. It was also happening in the food industry. This was a trend that I understood would play out over decades, not quarters. My vision for how Panera would compete was rooted in specialty artisan bread, made with no chemicals and no preservatives."

And compete it has. By the beginning of the financial downturn, Panera was one of the best performing restaurant stocks. Between 2007 and 2009, its earnings per share grew by more than 50%. Panera, which appears in the Quick-Serve and Quick-Casual market grouping, consistently ranks third in financial performance, trailing only McDonald's and Chipotle.

"As we began the recession, we made a decision to increase our investment," says Shaich. "At a time when almost every other restaurant was driven to cost cutting, and pulling back, we invested in the quality of the product, in growth and in marketing."

During the recession, Panera introduced a range of low-fat fruit smoothies and brought out new dishware for its dine-in customers. It retooled its salad line, introducing new dressings, and new signature dishes. The company also moved toward growing its own lettuces. "These details actually matter," Shaich states. "In the middle of a recession our salad business was up 30%."

The company increased its labor force, paid bonuses and gave raises. It made significant investments in the quality of its stores and built new ones, taking advantage of the fact that construction costs were down 20%. In addition, Panera rolled out a loyalty program during the recession, giving its most devoted customers opportunities to earn free pastries and coffees, and offering invitations to cooking demonstrations.

Shaich says that Panera had gained credibility with investors before the recession, which gave management more room to maneuver when the economy worsened. "We had a highly supportive board, highly supportive investors, and we had a pristine balance sheet," he notes. "We stayed the course, and we became an even better competitive alternative.

"We're not doing anything new and different; we're trying to get closer to our vision," he adds. "I believe the biggest detriment to other companies is intense overreaction. There is intense pressure for short-term results. I compete for two, five, 10 years out, but if you're competing for the next two quarters I have a lot more options than you do."

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