Price of a loaf

Any home baker with a bread machine will tell you that it takes roughly 3 hours to make your own loaf of bread, and while you can control the quality of the ingredients that goes into that loaf, it still takes 3 hours. And, depending on your machine, you can at most only make one or two loaves at any time. For a consumer buying ingredients at retail, the cost to make your own loaf is about 30% of the price it costs to buy the finished good from a grocery store. You can imagine what the profit margin is like for restaurants that buy their raw materials at wholesale prices. 

People shop and eat at restaurants like Panera Bread because these places have an economy of scale working in their favor, larger ovens, the competitive advantage offering a multitude of culinary dishes not just breads, but also desserts, soups, salads, pizzas, and other common lunch fare. They even brew their own iced tea. Plus, it helps tremendously that the food that they make tastes really good. And, they offer free wifi and a casual, comfortable environment for people to meet and gather. You'll also note that aside from customers buying gift certificates for other future customers, Panera does not offer coupons or discounts on any of their bakery cafe items to attract new customers. Panera customers aren't all that frugal, nor are they value shoppers in that the discount a coupon would offer is the key decision point of that purchase decision. Because, as Michael Silverstein and Neil Fiske (CEO, Eddie Bauer) would tell you in Trading Up, "people are willing to pay more for quality products that matter to them."

In May, Panera Bread Company opened up a nonprofit restaurant location, branded under the Panera Cares name, where customers could pay what they felt their meal was worth and limited the program to one meal per person.  Barely six months later, the bakery-cafe which offers the same menu items as its for-profit counterparts reports that 4,000 people a day visit the restaurant and about 65% pay the recommended amount with the remainder divided among over-payers and those who pay less or nothing. The store almost breaks even and the company has plans to open more "shared responsibility" restaurants. (The Economist, 10/09/2010, p.94)

Is this a competitive strategy and could other restaurants compete with such a model? Well, let's backtrack a little bit to just before this restaurant opened.

Panera Bread rakes in $1.35 Billion in revenues (FY 2009) with over 1,300 for-profit locations and 85% of those revenues comes from bakery-cafe sales (the other 15% from franchise royalties/fees and fresh dough sold to franchises). The premise of the restaurant, how it is run and what it stands for is all neatly laid out in its annual report:

"Our bakery-cafes are principally located in suburban, strip mall and regional mall locations. We feature high quality, reasonably priced food in a warm, inviting, and comfortable environment. With our identity rooted in handcrafted, fresh-baked, artisan bread, we are committed to providing great tasting, quality food that people can trust. Nearly all of our bakery-cafes have a menu highlighted by antibiotic-free chicken, whole grain bread and select organic and all-natural ingredients, with zero grams of artificial trans fat per serving, which provide flavorful, wholesome offerings. Our menu includes a wide variety of year-round favorites complemented by new items introduced seasonally with the goal of creating new standards in everyday food choices. In neighborhoods across this country and in Ontario, Canada, our customers enjoy our warm and welcoming environment featuring comfortable gathering areas, relaxing decor, and free internet access. Our bakery-cafes routinely donate bread and baked goods to community organizations in need.

Bread is our platform and the entry point to the Panera experience at our bakery-cafes. It is the symbol of Panera quality and a reminder of Panera Warmth, the totality of the experience the customer receives and can take home to share with friends and family. We strive to offer a memorable experience with superior customer service. Our associates are passionate about sharing their expertise and commitment with our customers. We strive to achieve what we call Concept Essence, our blueprint for attracting and retaining our targeted customers that we believe differentiates us from our competitors. Concept Essence begins with artisan bread, quality products and a warm, friendly and comfortable environment. It calls for each of our bakery-cafes to be a place customers can trust to serve high quality food. Bread is our passion, soul, and expertise, and the platform that makes all of our other food special."

The short answer is no, other restaurants cannot compete against Panera's philosophy. But, before Panera became mainstream, there was the privately-held Corner Bakery and Cafe which operates the same type of upscale, fast-casual eatery and is thriving more with franchise operations than the restaurant being the core of its operation. But, that is a business strategy for restaurants for another blog post.

There are plenty of examples of for-profit restaurants that tried to offer the same "free meal" concept as Panera Cares and failed and/or went bankrupt as a result. But what boggles the mind is why would a for-profit business try to or want to compete with one operating as a nonprofit? The goals are different and revenue isn't the keystone of the Panera Cares operation.
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