Panera Bread Co. expects its ongoing 2.0 rollout eventually to build its catering, consumer packaged goods and delivery streams into $1 billion businesses, the company’s chief financial officer said in recent investor meetings.
According to analyst Sharon Zackfia, Panera Bread CFO Mike Bufano said the Panera 2.0 initiative will increase the bakery-café chain’s accessibility to customers. Zackfia, analyst with William Blair & Co., issued a note Monday after meeting with restaurant management.
“Ultimately, management believes catering, delivery and CPG each hold the potential to be $1 billion businesses, vs. about $2.7 billion in total revenue estimated for Panera this year,” Zackfia wrote.
Panera executives expect growth in digital ordering (currently about 10 percent of transactions) and catering (currently about 8 percent of sales), Zackfia said. Sales of Panera-branded consumer packaged goods at the end of this year will be about $175 million, she said.
“Key to realizing these opportunities has been the ongoing rollout of Panera 2.0, which will be at roughly 400 company locations by the end of this year (about 44 percent of the company-owned store base), inclusive of 200 conversions in the second half of this year (the company's fastest conversion pace yet),” Zackfia said.
She also noted that management said the company’s “30 franchisees are eager to begin conversions at their roughly 1,000 locations, with the first likely to begin late this year or early next year.”
The pace of conversions at company-owned restaurants will depend on management’s decisions on earnings, she said, noting that the company had seen “two successive years of lower earnings on investments in the business.”
Panera 2.0 has impacted the number of digital orders in stores, Zackfia said. “In Panera 2.0 locations, digital starts at about 20 percent of orders and ramps up to about 30 percent after about one year, with digital ordering positively tied to throughput, customer frequency and, to a lesser extent, average ticket,” she wrote in the note.
Customization of Panera 2.0 orders is also higher, with more than 70 percent of them customized vs. about half for non-converted stores, she said.
“Moreover, customer satisfaction is higher at Panera 2.0 locations, given improved perception of speed of service as well as greater order accuracy,” Zackfia said.
Delivery of small, non-catering orders has been in test since early this year in Louisville, Ky., and Charlotte, N.C., Zackfia said, with the company using its own drivers.
“The company will also begin a test with Uber in the near future in another market,” she said.
“With the technology infrastructure already in place (delivery orders queue up just like a to-go order), management sees good potential for delivery to add incremental transactions, and franchisees are also excited about the possibility,” Zackfia said.
“The key will be deciding how to get the product to consumers, whether via Panera's own delivery or through a third-party service. Ultimately, management is seeking to essentially break even on the delivery fees, yielding a net neutral dollar profit margin between delivery and regular Panera orders.”
Panera has also created 29 catering hubs that cover about 25 percent of its company-owned system. No further hubs are planned in 2015, Zackfia said.
“The company is also testing a smaller footprint bakery prototype largely focused on delivery and to-go, which could also serve as small catering hubs,” she said.
Zackfia said she expects the Panera 2.0 conversion costs to continue to pressure net income, and earnings per share growth will be “modest” in 2016.
Panera’s net income fell 14.8 percent in the second quarter ended June 30 on special charges for refranchising and an insurance issue, the company said in July.
The company reported income of $41.9 million, or $1.60 a share, compared to $49.2 million, or $1.82 a share, in the same period a year ago. Revenue in the second quarter rose 7.2 percent, to $676.7 million, from $631.1 million a year ago.
As of June 30, the company had 1,926 bakery-cafés in 46 states and in Ontario, Canada, operating under the Panera Bread, St. Louis Bread Co. and Paradise Bakery & Cafe names.