What Panera Could Learn From Chipotle

Panera Bread (NASDAQ: PNRA  ) is in unfamiliar territory. After logging industry-trouncing sales growth for years, its latest results put it much closer to plain old average. That could be bad news for a stock that's trading at a premium to other casual dining giants.

For the quarter that just ended, Panera saw comparable sales growth of just 3.8%. That was lower than the 4%-5% annual target it forecast last quarter, which itself was below the 4.5%-5.5% that Panera was expecting two quarters ago. Something clearly isn't working at the bakery-cafe.

What's working
Store growth isn't the issue. Panera opened 37 new locations in the quarter, bringing its total to 1,708 restaurants. The company sees loads of potential for boosting its store footprint and expects to hit the high end of its full-year openings goal of 115 to 125 new units.

Profitability is on track, too. Operating margin inched up by 60 basis points, keeping Panera firmly ahead of Darden Restaurants (NYSE: DRI  ) , and closing in on Chipotle Mexican Grill (NYSE: CMG  ) .

PNRA Operating Margin TTM Chart

PNRA Operating Margin TTM data by YCharts

What's not working
But Panera is coming up short where it counts the most -- during peak lunch hour. After average food production times spiked last quarter, Panera has called out its throughput as a major operational weakness. It seems that for many of the company's locations last quarter, the customer traffic was there, but service just wasn't quick enough to satisfy it.

That could be due to Panera's increasingly complex menu. The company recently added a full line of pasta dishes to its offerings. And while that's been great for boosting check averages, it might have slowed down the kitchen and limited total output.

It doesn't have to be that way. For clues on mastering the art of high-volume feeding, Panera can look to Chipotle. The burrito slinger's most efficient restaurants process 350 orders over lunch hour, moving one through the line every 11 seconds. Sure, that's mostly thanks to Chipotle's buffet-line concept that keeps the kitchen humming. But the company has also been extremely careful about adding anything to its menu for fear of gumming up the works.

A tough road ahead
The good news is that Panera is aware of the production issue and plans to meet it head-on. But it won't be an easy fix.

Management warned of "choppy" results over the next few quarters -- and a potential drop in profitability -- as it makes the investments required for getting throughput numbers up. That spending will be worth it if it helps Panera serve all of its customers at peak hours, lifting the company's sales growth back to above average in the process.

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Read/Post Comments (8) | Recommend This Article (14)

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  • Report this Comment On July 27, 2013, at 2:59 PM, EquityBull wrote:

    Bad news is Chipotle does not consistently hit that one every 11 second mark and 350 per hour. I have two in NJ that don't come close to that. It was one reason I sold most of my CMG stake. I think they all hit a throughput ceiling where you just can't do much more on the line (or behind it for take out/catering).

    I once waited over 30 minutes (timed it on my iphone so not subjective) and another time over 25 minutes to get to the cash register from the time I got on line. One every 11 seconds would mean that they put through 163 people before me. Well there was just about 30 to 35 people ahead of me counting from back of line to the register. What happened to 11 seconds?

    Then it happened again. 26 minutes it took a couple weeks later. This time the line had under 30 people on it. Do the math.

    Chipotle has a throughput issue and I think it is going to be one of the biggest things that stops same store sales growth in time. Right now I would bet older stores are seeing flat SSS growth while the newer ones are propping up the entire SSS YOY numbers as they attract more people and get busier. However these in time will all max out the line.

    I contacted Chipotle about my long waits and they said they would investigate. Don't know if they did. I can say I would have visited chipotle another dozen plus times in the last 6 months if I didn't think the waits were going to be in the half hour range. The moment I think of going I think it's just not worth waiting 30 minutes on line so I just go somewhere else.

    I still own 20% of my original CMG position but this is a high multiple stock that now has too many risks which is why I dumped the rest.

    1) Throughput issues

    2) Commodity costs rising

    3) Organic food going in short supply

    4) Premium valuation

    5) Company states they will not open stores quickly so the percentage each year will drop as the total store count grows. Thus top and bottom line growth will stall. This changes the DCF calculation and eventually I believe the multiple which should be less than today's.

    All that aside I think CMG will be around for a long time. They will do well. I'm not so sure the stock will do as well and a multiple adjustment will crush it at some point. It will go on though to new highs years after that event but you have to figure the whole return at today's prices. In 10 years the stock may only be 600 bucks. 50% return in 10 years. Not great

  • Report this Comment On July 27, 2013, at 4:45 PM, dgdbuy58 wrote:

    I do not agree with this Motley article -- there is little comparison between Panera and Chipotle. This article only has value for the very short term investor. The 'fast burrito" caters to the younger crowd who loves fads. Panera caters to all walks of live especially the aging boomers. This is why I bought the stock - for long term investment.

  • Report this Comment On July 27, 2013, at 5:11 PM, plange01 wrote:

    after close to 5 years! without a president most of america's failing economy is doing bad and the rest will soon follow!!!

  • Report this Comment On July 27, 2013, at 8:11 PM, richfsr wrote:

    While dining at a Panera establishment I ordered a sandwich with lettuce and tomato. When I opened the sandwich a iridescent green bug was wandering around the lettuce. I have never been back because everytime I think of going to Panera I think about that bug and change my mind.

  • Report this Comment On July 27, 2013, at 8:30 PM, FoodieFairy wrote:

    "..the customer traffic was there, but service just wasn't quick enough to satisfy it"

    ..and therein lies the problem. I was an early, big fan when they opened in Northern CA.

    The lines back up (perception) whether or not service meets their 11 minute ticket time goal. There ordering system is detailed and difficult. I have often sees workers having to jump from screen to screen to find the item or instruction on the touch screen. I am asked to repeat "for here or to-go?" bread, chips or apple?", large or small? too complicated for them.

    The differences between location as far as food quality and service go are also wide ranging.

  • Report this Comment On July 27, 2013, at 9:55 PM, adarc wrote:

    They can't move people in and outa t lunchtime, because people STAY SEATED at Panera and hog the Internet for their whole lunch hour. I know my husband and I both avoid Panera at lunch, because there is never anyplace to sit.

    What does it matter if they can get us food in 10 minutes, if there is no place to eat it?

  • Report this Comment On July 29, 2013, at 11:59 AM, Awebb30 wrote:

    plange01...my 401k looks a lot better than it did 5 years ago. Just sayin'.

  • Report this Comment On August 02, 2013, at 2:30 PM, Anchor wrote:

    I doubt Chipotle gets each customer through in 11 seconds, but if you watch carefully you will see that they are processing online orders while you are in line too. You can't just count the number of people in line to count orders. Also, if I order three burritos, does that count as three orders? One person in line could buy 12 burrito bowls, and I've seen it happen (lady in front of you pulls out dreaded piece of paper with all these orders--you know what I'm talking about!).

    As far as Panera goes, there's no way they can get the speed that Chipotle gets with their current setup. The menu board is confusing, hard to see, and has all these options. I've held up the line more than once, asking questions about this or that, and newbies are probably going to be just as slow as me. It's a bit uncomfortable too as the cashiers look at you, waiting for you as you stare at this menu on the wall. Simplify it, Panera.

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