Panera to get ‘surgical’ with pricing

by Jeff Gelski
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ST. LOUIS — Panera Bread Co. plans to become more detailed in its menu pricing after the average check price in its restaurants declined 0.3% in the second quarter ended July 1. Actions may involve more price variance by market and the promotion of higher-end items.

Ron Shaich, chairman and chief executive officer, called the strategy a “more surgical approach” during a July 30 call to discuss second-quarter earnings.

“Every investor and analyst on this call has a view on pricing at Panera, and frankly, we have felt the need to deeply understand pricing and its impact on our business,” he said. “To that end, we’ve spent significant time and in excess of $1 million on research and consulting on pricing in the last nine months.”

He said currently the difference between the chain’s highest priced markets and lowest priced markets is about 2%.

“We now project that a dispersion potential of as high as 10% between markets could exist,” Mr. Shaich said. “We call this ‘tiering.’ Future price increases can be expected to target those markets that we’ve identified as being less sensitive to price, or with greater inflation.”

The price points of specific items also may change. Recently Panera Bread Co. has focused on value items, such as flatbread and half sandwiches.

“We’re going back to celebrating some of the higher-priced items, which we’ve walked away from over the last several quarters as we were conducting this research,” Mr. Shaich said.

The average check decline of 0.3% in the second quarter was comprised of a negative mix impact of about 0.9% partially offset by price growth of about 0.6%.

Panera Bread revised its target range for fiscal 2014 earnings per diluted share to $6.65 to $6.80 as a result of expected lower growth in the average check price and expected higher input costs. The previous target range was $6.80 to $7.

The targeted range in fiscal 2014 for sales growth in company-owned comparable net bakery cafe sales was revised to 0% to 1.5%. The previous targeted range was 2% to 3.5%.

The changing mix of the business, primarily day part mix and business composition mix, and pricing decisions cut into the average check price in the second quarter. Much of the transaction growth in the quarter came in the day part before 11 a.m.

“Breakfast represents approximately 20% of our sales, but roughly 30% of our transactions,” Mr. Shaich said. “So as traffic disproportionally grows in the a.m. hours, it actually has a dampening effect on our average check for the entire day, as breakfast has a lower average check.”

Net income of $49,192,000, or $1.83 per share, for the second quarter ended July 1 was down 4% from net income of $51,042,000, or $1.75 per share, in the second quarter of the previous year. This year’s second quarter included a benefit of $3.2 million, or 8c per share, from a favorable resolution of an insurance coverage matter. Total revenue of $631,055,000 in the second quarter marked a 7% jump from $589,011,000 in the previous year’s second quarter.

Food costs affected Panera negatively in the quarter, said Roger Matthews, executive vice-president and chief financial officer, in the July 30 call. The cost of butter increased 16%. Bacon was up by as much as 23%, given the porcine epidemic diarrhea (PED) virus in pigs. The drought in California pushed the price of avocados up 25%.

“Compounding the issue, the menu items we sell that incorporate these ingredients sold even better in the second quarter,” Mr. Matthews said. “The increases in these three components alone resulted in an additional roughly $2 million of food costs. As a result of these cost pressures, we now expect food inflation to be approximately 1.25% this year, and we expect this to continue to affect our bakery-cafe margin in the back half of the year.”

In the second quarter, company-owned comparable net bakery-cafe sales increased 0.1% while franchise-operated comparable net bakery-cafe sales decreased 0.2%. Panera Bread opened 10 new bakery-cafes in the second quarter and its franchisees opened 9, resulting in a total of 1,818 bakery-cafes system-wide as of July 1.

For the 26 weeks ended July 1, Panera Bread had net income of $91,587,000, or $3.38 per share, which was down 8% from $99,159,000, or $3.41 per share, for the same time period of the previous year. Total revenue over the 26-week period was $1,236,808,000, which was up 7% from $1,150,790,000 in the same time period of the previous year.
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