Panera Bread Company Puts Its Faith in Technology

It seems like the best kind of problem to have, but Panera Bread  (NASDAQ: PNRA  ) is still concerned that it may have gotten too popular. The company feels like it's gotten to a point where its in-store ordering can feel a bit like a fight for survival. Customers have to line up and pick up food in a handful of different places, checking slips of paper to make sure they get the right orders, and picking those orders up while rubbing elbows with their fellow diners.

The flock mentality that the situation creates gets worse as the restaurant fills up, and it's the impetus for a change -- which management is calling Panera 2.0. Given the time and effort Panera is sinking into 2.0, the results will need to speak for themselves.

Source: Panera.

Can I change my order (infrastructure)?
The moves being made at Panera are almost identical to the plans that companies like Nordstrom have put in place. Nordstrom has been at the forefront of retail omnichannel shopping, a system that replaces the standard shopping and shipping model to focus on making things easier for customers. At Nordstrom, for example, this means that customers can order online and pick the item up in a store, buy in-store and return the product through the mail, or check product availability on a tablet while in the dressing room.

While the products are different, the goals line up closely with Panera's. The company is changing its ordering system so that customers can order online and pick up at designated locations in the store, order at kiosks and bypass the traditional queue, or sit down and order, with the food actually brought out to your table -- imagine that.

Those changes aren't entirely cosmetic, but most will simply streamline the process for diners. Behind the scenes, things need to change, as well. And they are. Panera is changing its backroom systems so that production lines can more easily track what's been ordered and who's supposed to be making it. New load-balancing systems will help employees plan for pick-up orders delivered among a flurry of in-store orders and make sure that no one has to wait too long for their food. These systems will change the way that your order is fulfilled, giving the tasks to the person who has the capacity to make a sandwich then instead of just throwing the order into a general queue, for instance.

The cost of improvement
Panera has warned investors that this isn't going to be a free upgrade. Costs have already risen and general and administrative costs accounted for 5.8% of total sales last quarter, up from 5% a year ago. Those increases are largely due to the investment that Panera is making in 2.0, and the bite is only going to get closer to the bone as time goes on.

Management has said that it expects cost lines associated with Panera 2.0 to rise as the year goes on. The program is only in a handful of cafes now, but the company expects to have it rolled out to 150 by the end of the year, with all 1,800 cafes switched over by 2016. 

The payoff could be well worth it, though. Looking back at Nordstrom, the business has seen an improvement in its selling costs as time has gone on, and inventory management has seen increased efficiency, as well. For investors, the more immediate point may be that Nordstrom, in a weak retail environment, has been able to increase comparable sales at a respectable rate -- up 3.3% last quarter over the previous year.

The bite that Panera is feeling now isn't going to ease for some time, but the return for investors could easily outweigh the costs. Panera is already a leader in the fast-casual experience, but increased competition from other cafes and coffee shops is going to push the sector to diversify and distinguish. Omnichannel ordering could be the distinguishing factor that keeps Panera in the game long after others have fallen to the wayside.

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10/22/2014 4:00 PM
PNRA $167.29 Down -1.77 -1.05%
Panera Bread CAPS Rating: ****

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