Panera Bread (PNRA) is one of the largest food service companies in the U.S. today, and it owes much of that growth to its franchise model. Franchises are big business in the United States. In fact, franchise establishments will employ a staggering 8.5 million Americans this year and create $840 billion in sales, according to research from IHS Global Insight. Moreover, for a public company like Panera Bread, the franchise model helps increase profitability by offering a steady stream of revenue in the form of rent and royalty income. Whether you are a potential franchisee or a stock investor looking to unlock serious growth, let's look at how Panera Bread Co. stacks up as a top franchise company today.
Source: The Motley Fool.
Franchise me
One of the reasons Panera is a top franchise company is because it doesn't let just anybody franchise its brand. For starters, would-be franchisees must be well capitalized. That's because the company requires its partners to open at least 15 bakery-cafés within a six-year period in any given market. Additionally, all of Panera's franchise owners have a proven track record of restaurant management. This criterion helps the restaurant chain find capable and passionate entrepreneurs to build out its franchise locations.
This has paid off in spades for the fast-casual chain. Last year, Panera generated an impressive $113 million in franchise royalties and fees, and an additional $163 million of fresh dough and other product sales to franchisees. More than 51% of Panera's roughly 1,777 locations in the U.S. and Canada are franchise operated today. This is a good thing for Panera shareholders because the company is able to pass certain costs on to franchise owners and instead invest resources in further developing the brand.
In fiscal 2013, for example, Panera's franchisees put 1.8% of their net sales toward national advertising efforts. They also paid Panera a "marketing administration fee" of 0.4% of total net sales, and were required to spend 1.6% of their sales on advertising in their respective markets. Importantly, Panera Bread also reserves the right to increase the fees and royalties it charges franchisees in the future. This means, unless you have a massive chunk of cash and millions in liquid assets at your disposal, it makes more sense to invest in Panera stock rather than become a franchisee.
Source: The Motley Fool.
Despite the company's selective approach, Panera's franchise operations are essential to the company's future growth prospects. At the end of fiscal 2013 there were 910 franchise-owned Panera Bread stores throughout the U.S. and Canada. However, the restaurant chain has commitments to open 117 additional franchise locations in the next four to five years. This should translate into meaningful market share gains in the years ahead -- another positive for Panera shareholders.
Through the franchise model, Panera has grown from serving 60 customers per day at its first restaurant to currently serving around 7.5 million customers per week. Yet, franchise royalties and fees accounted for just 5% of Panera's total revenues last year, which means that there's plenty of runway left for Panera to continue growing its franchise business in the years ahead. With shares of Panera now trading more than 17% below the stock's 52-week high, there's an opportunity for long-term investors to own one of the top franchise companies available today -- without the added risk of actually operating a franchise.
