Panera's Hold on Breakfast Goes 2.0

Breakfast restaurant visits are growing. In 2013, breakfast visits grew by 3%, while the lunch and dinner visits fell by 1%. Furthermore, 80% of breakfast traffic is served by quick-service restaurants. This growth in breakfast visits has intensified competition between restaurants, which means solid leadership will be a key factor.

Panera Bread Company (NASDAQ: PNRA  ) , led by Co-Founder and CEO Ronald Shaich, is rolling out new technology to minimize customer wait and purchase time. What is this plan, and how effective is it? How do breakfast rivals Krispy Kreme Doughnuts  (NYSE: KKD  ) and Einstein Noah Restaurant Group  (NASDAQ: BAGL  ) , parent company of Einstein's Bagels, compare? And which of the three looks the most promising to an investor?

Panera 2.0
Shaich has been pushing for the rollout of Panera 2.0, which aims to streamline guest ordering and purchasing through the use of technology and other operational efficiencies. Shaich acknowledges that waiting customers will eventually become someone else's customers if the wait is too long. Panera 2.0 is his push to get customers their food quickly. He also notes that the use of technology in Panera 2.0 will allow for customer-specific customization in the food order, which will enhance customer experience.

One of the first tangible features of Panera 2.0 is the ability to do rapid pickup -- customers order the food remotely and designate a pickup time. At the designated time, customers pick up their food from a designated shelf.

Panera 2.0 will require some new infrastructure elements: an in-cafe kiosk, a new website, and a new mobile app that makes it easier for customers to place orders, customize food orders, and pay. Other Panera 2.0 improvements include a special to-go area with dedicated seating and an order status monitor. According to Shaich, the Panera 2.0 improvements are "meant to create a truly frictionless and personalized experience for each of our guests in all of their need states."

Even at this early stage, Panera 2.0 is getting positive results. Shaich noted that last summer, 60% of Panera's orders took longer than three minutes. The first stage of Panera 2.0 was implemented at 14 of its locations this quarter. At those participating restaurants, orders that took longer than three minutes dropped to less than 40%. With these promising early results, it's no surprise that Panera 2.0 will expand rapidly. By the end of the year, Shaich expects Panera 2.0 to be in 150 restaurants, with nearly complete systemwide implementation by 2016.

Panera 2.0 will initially bite into the company's financials. Its first-quarter EPS was $1.55, down from an EPS of $1.65 from the same period last year. Panera hinted that its EPS for the second quarter would be lower than analysts' expectations.

Shaich conceded that Panera 2.0 will take time, and the investment may be a net negative for individual cafes for the two months before and the four months after the implementation. However, the CEO expects to see positive financial results toward the end of the year. CFO Roger Matthews supported Shaich's position, noting that Panera's 2014 year-end EPS range is expected to be $6.80 to $7.00, an expected increase of 5% to 8% of the 2013 EPS of $6.50.

Is Krispy Kreme still sweet?
The most notable news from Krispy Kreme's June earning call was the introduction of its new CEO and president, Tony Thomson. Thomson was formerly the president and COO of Papa John's International. While Thomson did not speak at length at the earnings call, Vice Chairman James Morgan noted that Krispy Kreme is looking to develop a best-in-class digital experience to assist in customer engagement. It is worth noting that Papa John's was a pioneer in digital and online orders and marketing.

Morgan noted the rollout of its Enterprise Resource Planning (ERP) to aid in operational efficiency, which will cost $1 million over the next three quarters. Unlike Panera 2.0, Krispy Kreme's ERP is not expected to make a net positive in the investment for at least two years.

Does Einstein's have a hole in its bagel?
Like Krispy Kreme, Einstein's Bagel is experiencing a transition in its top leadership positions. However, unlike Krispy Kreme, the company has not settled on a new CEO. Furthermore, COO Manny Hilario left the company in late May. Einstein's will be looking at an extended period of unsettled leadership, as it announced that the COO position will not be filled until the bagel maker first hires a CEO.

The company's unsettled management transition has had a direct impact on its overall income. Net income for the first quarter was $2.1 million or an EPS of $0.11, compared to $2.4 million and $0.14, respectively, from the same period last year. Management transition costs accounted for $1.1 million, or $0.04 of the EPS decline.

At the May earnings call, Hilaro commented that Einstein's is pursuing several digital marketing strategies, which include a mobile app and digital menu boards. The company's digital marketing strategies are in the initial stages and are not as ambitious as Panera's 2.0 rollout. Einstein's has the additional challenge of missing executive leadership to push its digital marketing efforts.

So, who's got the dough?
Panera is attacking the breakfast market share with the rollout of its ambitious Panera 2.0 strategy. Both Krispy Kreme and Einstein's suffer from less ambitious operational plans and challenging transitions in their executive positions. Of the three, Panera is positioned for better operational excellence, which should result in quicker financial results and a better long-term investment. 

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