Should Investors Be Worried After Ad Agency Fires Client Panera Bread?

It's not often that an ad agency fires its client. Hearing that makes me think I'm watching an episode of Mad Men. Well, that is what happened this month when Chicago-based ad agency Cramer-Krasselt told its client Panera Bread (NASDAQ: PNRA  ) that it no longer wanted its business. In other words, Cramer-Krasselt told Panera Bread to take its business elsewhere.

Source: Panera Bread 

This is certainly not the news investors want to hear as Panera embarks on a radical transformation of its business--first, with its Panera 2.0 initiative, and second Panera is adopting a sustainable and healthy food policy. To help boost these initiatives and create awareness for Panera, it's going to need an ad agency to drive the company's message to its customers. Could this delay Panera' efforts to boost sales and better compete with Chipotle Mexican Grill (NYSE: CMG  ) and Starbucks (NASDAQ: SBUX  ) ?

The ad agency's criticism of Panera is quite scathing
The Chicago Tribune was able to get a copy of the memo Cramer-Krasselt's CEO sent to his employees about resigning from the Panera account. In the memo to his employees, Cramer-Krasselt Chairman and CEO Peter Krivkovich said:

  • "Sometimes, it's just time to bite the bullet and say, 'Okay, enough is enough.'"
  • "[T]he constant last-minute shifts in direction, the behind-the-scenes politics, the enormous level of subjectivity that disregards proof of performance -- all churn people at a rate that becomes much too much even in this crazy business"
  • "environment of inconsistency"
  • "The previous agency found that out as well. There is a pattern. And in the end, no amount of money makes it worthwhile. Fortunately, we have always been in a position to act in situations like these if we really, really have to."

Besides his critique of working with Panera Bread's management, there were two other things I noticed about the ad agency's relationship with Panera. For one, Cramer-Krasselt has only had the account for two years. Cramer-Krasselt won Panera's business in May 2012 after Panera sought a new ad agency after firing its previous ad agency. Boston-based Mullen had been Panera's creative ad agency since 2005.

Source: AMC TV

And second, Cramer-Krasselt is walking away from $94 million a year in business with Panera. It is almost unheard of in today's world for a company to say a client is too much trouble and not worth $94 million a year. I guess that makes Cramer-Krasselt's Peter Krivkovich a modern-day Don Draper from the hit show Mad Men.

Panera's response
Panera's Chief Marketing Officer Michael Simon told the Chicago Tribune that Panera had informed Cramer-Krasselt a week and a half prior to the memo that it was putting the account under review. What this means is that Panera's relationship with its ad agency was obviously strained, and Panera was looking for a new approach to its advertising. A review allows other agencies the opportunity to capture Panera's business. Simon said of the work Cramer-Krasselt had done for Panera, "[I]t was good solid work. What we wanted was great work."

Panera's latest initiatives are still on track
Panera has had a lot going on lately. It is determined to boost its same-store sales, which grew by only 0.1% in the first quarter. This is in stark contrast to the results posted by Chipotle Mexican Grill and Starbucks. Chipotle saw its same-store sales rise 13.4% in the same quarter. Starbucks' results were only about half as impressive. Its U.S. same-store sales rose 6%.

Source: Panera Bread 

To better compete, Panera is launching Panera 2.0 and will remove artificial ingredients from its menu by 2016. Chipotle pioneered the sustainable food trend, and Panera is hoping some of Chipotle's magic rubs off on it. Shareholders are hoping for a turnaround as well. Shares of Panera are down almost 20% in the past year. Panera is looking to take advantage of this weakness by implementing a new share-repurchase program worth $600 million. This is enough to repurchase 14% of its outstanding shares at current prices.

Foolish final thoughts
While we will never know for sure what happened between Panera and its ad agency, it looks to me that both parties had enough of each other. When Panera informed its agency that it was putting the account up for review, Cramer-Krasselt declined to participate in the review process. Was that because it knew it would not win the business anyway? Again, we will never know.

Overall, I think change is good. Panera needs to do something to better compete with Chipotle and Starbucks. Both are posting strong same-store sales numbers, and Panera is not. With its new initiatives and a new ad agency, Panera just might be able to deliver the message it needs to boost its sales numbers. That is what's important for shareholders, and it's time for Panera to deliver for them.

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