With so many dining choices available to consumers today, Panera Bread (NASDAQ: PNRA) breaking into the ranks of the top 10 limited-service restaurants as measured by QSR Magazine is no small accomplishment. Panera Bread is the first fast casual restaurant in the history of the magazine's rankings to crack the upper echelons of the industry, and it did so with fewer stores and franchisees than many other chains it beat out. Yet it still sported outsized sales.
Fast food has meant fast money
Since 2004, QSR Magazine has been tallying the size and growth of the limited-service restaurant industry and not surprisingly, McDonald's has resided at the top of the heap. Its far-flung empire covers more than 36,000 restaurants in over 100 countries employing some 420,000 people and generating over $35 billion in annual systemwide revenues.
In contrast, Panera Bread came in No. 10 on the QSR Top 50 list with about 1,880 locations in 45 states and just about a tenth of the employees of the Golden Arches at the end of 2014. Yet, the company generated $4.5 billion in sales last year, or an average of $2.5 million per restaurant. That puts it on par with McDonald's for average sales and means only Chick-fil-A and Jason's Deli stores were more productive than the typical Panera Bread location.
So what's its secret?
A healthy serving of good eats
Certainly it has done a remarkable job of cashing in on the trend of healthier eating. Panera Bread's bakery-cafe restaurants were ranked No. 1 by Health magazine for offering consumers the healthiest choices across its menu at all times of the day. And Panera calls itself an "advocate for clean food," sourcing and serving high-quality ingredients without artificial additives.
It publishes what it calls its "no no list," a laundry list of ingredients that it doesn't allow in its foods or is in the process of removing but which you might find at other restaurants.
As Panera says, "We believed that food that was good and that you could feel good about, served in a warm and welcoming environment by people who cared, could bring out the best in all of us." It combines the speed and convenience of traditional fast food with the food quality and appeal of casual-dining restaurants.
Location, location, location
That "welcoming environment" it highlights also wins accolades from customers, as it hews closely to the successful path blazed by Starbucks, which made its lounge-like atmosphere a destination spot in its own right. And don't discount the availability of free W-Fi as an inducement to come and stay as it leads to enhanced consumer engagement.That translates into higher sales.
Revenues at Panera jumped 7% in the second quarter to $677 million as comparable-store sales, or those made at restaurants open a year or more, a metric that helps eliminate growth achieved by simply opening new restaurants, rose 1.8% over the year-ago period. Comps at company-owned stores, which are undergoing a remodeling program it calls Panera 2.0, enjoyed even stronger growth, rising 2.4%.
A winning combination
It's using the hallmarks of the fast casual segment -- natural ingredients and redesigned stores -- to woo attract even more diners. The market apparently likes it as it keeps bumping its stock to record levels in the wake of the earnings report.
Certainly at 30 times next year's earnings estimates and trading at two times sales, Panera doesn't come cheap. Yet its multiples are comparable to industry-leading Chipotle and indicates investors are willing to pay up for quality growth. There's nothing to suggest it won't be able to keep notching such gains, either -- meaning it should continue to hold its own with other leading quick-service restaurants while advancing further up the list of the 10 top chains.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns and recommends Chipotle Mexican Grill, Panera Bread, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.