Panera Bread Company Crafting and Executing Strategy

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Executive Summary

The Panera Bread Company is starting 2007 with unfinished goals and missed targets previously set and a

review of their strategy is in order to continue their ongoing success. The company has grown substantially

since its inception in the competitive restaurant industry; however, an aggressive target of 2,000 Panera

Bread bakery-cafes will require a focused strategic plan. The company has a strong base with loyal

customers who appreciate Panera’s unique dining atmosphere with a focus on quality products at a

reasonable price.

Panera will need to continue its market research and focus on environmental issues, which are an important

core value. The opportunity for growth in the competitive market is still available, as noted in the analysis

section of the report, but the most risk lies with the competition’s ability to adapt and change along with

Panera to gain their own increases in market share. With this in mind, the recommendation is to continue the

expansion process through the franchise offerings while maintaining the differentiation qualities Panera

already possesses. The strategy must also acknowledge the potential for a market decline due to potential

economic downturns and must act accordingly by keeping a close eye on stores which are profitable and

stores which may be struggling. It is important to keep the brand image high to ensure a consistent quality

and profitability for investor confidence.

Panera has the potential to be the recognized leader in not just the specialty bread segment of the bakery-café

restaurants business but across multiple dimensions challenging Applebee’s as a national brand.

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Table of Contents

Introduction ..............................................................................................................................................3

Problem Statement....................................................................................................................................3

Analysis and evaluation ............................................................................................................................3

SWOT Analysis........................................................................................................................................4

Strengths ..............................................................................................................................................4

Weaknesses ..........................................................................................................................................4

Opportunities ........................................................................................................................................4

Threats .................................................................................................................................................4

Financial Analysis ....................................................................................................................................5

Segment Profitability Analysis:.................................................................................................................6

Key Success Factors .................................................................................................................................6

Competitor Analysis .................................................................................................................................7

Five Forces Analysis ................................................................................................................................8

Alternatives and Discussion ......................................................................................................................9

Alternative 1 – Back to Basics ..............................................................................................................9

Alternative 2 – Expand Fresh Dough Operations .................................................................................10

Alternative 3 – Review Existing Locations..........................................................................................11

Alternative 4 – Expansion through Franchise Operations.....................................................................11

Alternative 5 – Expand Catering Segment ...........................................................................................12

Recommendations and Action Plans .......................................................................................................12

Recommendations ..............................................................................................................................12

Action Plans .......................................................................................................................................13

Contingency Plan ...................................................................................................................................14

Attachments ...........................................................................................................................................15

Exhibit 1.............................................................................................................................................15

Exhibit 2.............................................................................................................................................16

Exhibit 3.............................................................................................................................................17

Exhibit 4.............................................................................................................................................18

Deleted: ¶

Deleted: T

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Introduction

The Panera Bread Company grew out of many years and commitment to the bakery-café concept of Louis

Lane and Ron Shaich. Their original company, Au Bon Pain, utilized the idea of a market for consumers

which lay between a typical fast food restaurant, such as McDonalds, and a regular “seated and served”

restaurant. This was achieved by offering better quality foods and a quick dining experience in a friendly,

cozy atmosphere. The Au Bon Pain Company started servicing the American East coast focusing in malls,

shopping centres and airports and successful operations during the 1980’s and 1990’s led to the acquisition

of Saint Louis Breads, where all locations outside Saint Louis would be renamed – The Panera Bread

Company. In 1998, Ron Shaich convinced the Board of Directors to focus exclusively on the Panera Bread

brand where the fresh-dough, unique dining experience with quality light foods and soups could be a

national, winning concept. The Board agreed and all Au Bon cafes where sold for $73 Million dollars. The

resulting profits left the new Panera Company in an enviable, debt-free position to start the next phase of the

venture. The company aggressively started new café openings and franchise opportunities for strongly

committed applicants who had to might eight stringent criteria such as a $7.5 M net worth and cultural match

in philosophies.

Panera is now recognized as a leading player in the competitive restaurant industry and continues to ensure

their cafes remain current with health and environmental concerns, while offering quality food following

their commitment to Product, Environment and Quality Service (PEGS).

Problem Statement

Panera Bread Company is at a crossroads of how to meet its target expansion goal of 2,000 restaurants by the

end of 2010, and become a nationally- recognized brand name in their segment. In addition, Panera needs to

improve sustainable profitability in order to meet its 25% EPS annual growth target that it missed in 2006.

Panera’s current goals and strategies need to be evaluated and adjusted to its current reality to ensure its

future success and growth in a highly competitive market.

Analysis and evaluation

Panera Bread Company’s strategic intent is to make great bread broadly available to consumers across the

United States through company owned and franchised bakery cafés that offered attractive menus and high

quality food at attractive prices in combination with superior dining ambiance and quick service to capitalize

on customer loyalty. The long-term objective is to make Panera Bread a nationally recognized brand name

and to be the dominant restaurant operator in the specialty bakery-café segment.

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SWOT Analysis

Strengths

• Panera Bread is widely recognized as the nationwide leader in the specialty bread segment

• The company has a high level of customer loyalty and customer satisfaction

• In 2005, the company was rated among the best of 121 competitors in the Sandlemen & Associates

national customer satisfaction survey and has also won “best of” awards in nearly every market

across 36 states in 2005

• Uses ingredients that are free of preservatives or chemicals

• The bakers are well trained

• Wide menu selections to provide target customers with products built on the company’s bakery

expertise

• Menu offerings are reviewed and revised regularly to ensure customer preferences are met

• The company’s fresh-dough-making capability provides a competitive advantage

• Strong management and marketing team leading the company’s expansion by opening more

locations annually

Weaknesses

• Some ingredients used at the fresh dough facilities were sourced from a single supplier which may

cause supply problems in the future if the relationship with the supplier sours or is terminated

• Alcohol beverages are not part of the company’s menu selection and could be a competitive

disadvantage

Opportunities

• Consumers are prone to give newly opened eating establishments a trial and would return if they

experience good service

• Growth expansion through company-owned cafes and franchising is promising

• Expansion of Panera’s catering business may be a way of boosting revenues

Threats

• The nature of the restaurant industry is fiercely competitive

• The restaurant business is labor-intensive, capital intensive and risky

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• The life span for some restaurants can be very short depending on fads

Financial Analysis

Panera Bread Company followed an aggressive growth strategy set to capitalize on market potential by

opening company-operated and franchised stores as fast as was prudent. This is evident from the increase in

the number of cafés from 262 in 2000 to 1027 in 2006 (Exhibit 3) a massive increase of 392% over the last

seven years. During that period, expansion of company-operated stores amounted to 434% (from 90 to 391

stores) while the number of franchised stores increased by 370% (from 172 to 636 stores).

Between the years 2005 to 2006, system-wide revenues increased by 19.73% (1,596.6M to 1,911.6M)

however, the basic earnings per share (EPS) only increased by 11.24% (from $1.69 to $1.88) over the same

period, which is much lower than the EPS annual target growth rate of 25%. This is because since 2005

restaurant openings have been dominated by corporate-owned locations rather than franchises. Prior to 2005,

franchise openings dominated Panera’s growth, averaging 72% of the total 479 new restaurants. Since 2005,

this has been reversed and corporate-owned establishments now account for the majority of new openings at

58% or 169 restaurants out of 286. Corporate-owned stores not only carry more risk they also carry all the

costs associated with running each location, whereas franchise-owned operations are just a steady stream of

revenue to the parent company without the risk and therefore increase overall earnings and EPS. We can see

this deterioration in the financial statements after 2005.

Although total revenues for Panera Bread Company have increased significantly overall, the pace of revenue

growth appears to have slowed down from 2005 to 2006 in comparison to previous years with franchise

royalties and fees leading the decline in the date of growth (Exhibit 1). Bakery-café expenses as a

percentage of bakery-café sales has gradually increased from 79.3% in 2003 to 81.5% in 2006 which

indicates that it is becoming progressively more expensive to operate these bakery-cafés. On a positive note,

the cost of sales of fresh dough has decreased over the years either due to lower costs of ingredients and/or

improved internal processes.

It appears that total costs and expenses are rising in relation to total revenues while operating profits and net

income are on the decline. Panera’s operating profits have shrunk by 2.7% from 2003 to 2006 and its net

income has decreased from 8.43% in 2003 to 7.1% in 2006 (Exhibit 1).

Even though the current ratio has declined from a high of 1.58 in 2003 to 1.16 in 2006, it is still within an

acceptable range indicative of Panera’s ability to meet its current obligations as they become due and also

the ability to finance operations without the need to incur additional short-term debt. On the plus side, the

working capital ratio is positive and the debt-to-equity ratio signals creditworthiness and good balance sheet

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strength. The debt-to-assets ratio at 0.27 (Exhibit 1) indicates that Panera Bread is on sound financial

footing and does not face any real risk of bankruptcy at present.

Segment Profitability Analysis:

From the analysis in Exhibit 4, it appears that Panera's focus has been on increasing revenues in bakery-café

sales, which went up from 75% of total revenue in 2002 to 80% in 2006. However, this appears to have

come at the expense of revenues generated from the other two segments: Franchises and Fresh-dough sales.

In 2003, 10% of total revenues came from Franchise royalties and fees. This level dropped to 7% of total

revenue during 2006. Likewise, revenue from fresh-dough sales made up 15% of total revenue of 2003 and

dropped to 12% in 2006.

The trend analysis of bakery-café expenses from 2002-2006 indicates that the cost of operating these stores

is on the rise, and therefore, its profitability is adversely affected as evidenced by the overall trend in

decreasing operating profit margins and net income (Exhibit 1).

In going forward, it may be wise for the company to focus attention on expanding operations through

franchising and fresh-dough sales as these segments appear more profitable than company-operated bakery-

cafés.

Key Success Factors

• Appealing marketing strategies – it is very essential in a highly competitive industry. Sound

marketing strategies will draw more consumers and increase market share.

• Location – choosing the right geographic location for opening cafes is very important. Locations

with higher traffic and higher income demographics tend to generate more sales.

• Customer satisfaction – Unique menus offering healthy food choices made with high quality

ingredients pricing and dining experience are factors that determine the level of customer

satisfaction. Maintaining a high level of customer satisfaction increases the possibility of repeat

customers.

• Differentiation – due to the nature of the business, consumers can easily substitute the products at a

lower cost. Signature fresh artisan bread products help to differentiate the company from rivals in

order to maintain and attract more customers.

• Knowing the competitors – competition is fierce in the restaurant industry. Having a good

knowledge of the competitors’ moves enables the company to alter the current strategy plan to stay

as market leader.

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• Strong relationship with suppliers – a long term strong relationship with the suppliers will save the

company from supply shortage and lower operating costs.

Panera Bread has a very strong marketing team and the company has dominated market share in the industry.

In addition, it is continuously expanding operations through franchising. Panera’s stores are located in areas

where market penetrations are high and people in the area are willing to dine out. Panera uses ingredients

that are free of preservatives and chemicals. The dough is freshly made daily in its own facility to ensure

high product qualities. New products are introduced on a regular basis and the menus are periodically

revised to ensure consumer expectations are met and interest maintained. Currently, Panera has strong, long-

term relationships with its suppliers.

The Panera strategy has been based on broad differentiation, offering many product variations and a wide

selection, emphasizing differentiating features, constant innovation and premium pricing. Analysis of

Panera Bread’s past financial results indicates that it is currently faced with rising production costs and hence

decreasing profitability. Industry and competitor analysis indicates increasingly fierce competition from

value-based fast-food chains. Going forward, it is important that Panera address these two challenges in

order to stay competitive, improve profitability and protect market share. Competitor Analysis

The nature of the restaurant industry is very competitive. Major competitors that are closely competing with

Panera including: Atlanta Bread, Applebee’s Neighborhood Grill and Bar, Chili’s Grill and Bar, Au Bon

Pain, Brueggers, California Pizza Kitchen, Cracker Barrel, and Starbucks. Information on the top five

competitors follows:

Competitor Analysis

Company Number of Locations, 2005-2006 Select 2005 Financial Data Key Menu Categories

Applebee's

Neighborhood

Grill and Bar

1,730+ locations in 49 states, plus

some 70 locations in 16 other

countries

2005 revenue of $1.2

billion; average annual

sales of $2.5 million per

location; alcoholic beverage

accounted for about 12

percent of sales

Beef, chicken, port,

seafood, and pasta

entrees plus appetizers,

salads, sandwiches, a

selection of Weight

Watchers branded menu

alternatives, desserts,

and alcoholic beverages

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Chili's Grill

and Bar

1,074 locations in 49 states and 23

countries

Average revenue per meal

of approx. $12; average

capital investment of $2.4

million per location

Chicken, beef, and

seafood entrees, steaks,

appetizers, salads,

sandwiches, desserts,

and alcoholic beverages

Cracker Barrel 527 combination retail stores and

restaurants in 42 states

Restaurant sales of $2.1

billion in 2005; average

restaurant sales of $3.3

million

Two menus (breakfast

and lunch/dinner);

named "Best Family

Dining Chain" for 15

consecutive years

Bruegger's 260 bakery-cafes in 17 states 2005 revenue of $155.2

million; 3,500 full-time

employees

Several varieties of

bagels and muffins,

sandwiches, salads, and

soups

Au Bon Pain 190 company-owned and

franchised bakery-cafes in 23

states; 222 locations

internationally

System-wide sales of about

$245 million in 2005

Baked goods (with a

focus on croissants and

bagels), soups,

sandwiches and wraps,

and coffee drinks

As indicated in the competitors’ information above, Applebee’s Neighborhood Grill and Bar has a very

strong market position and offers a variety of menu categories including a selection of Weight Watchers

branded menu alternatives in 1,730+ locations nationally and internationally. As consumers’ concern grows

with healthy food choices, Applebee’s Weight Watchers branded menu alternatives would be a threat to

Panera.

The other four close competitors are showing strong market positions and also offer a variety of menu

selections. Most of these competitors’ offerings are similar to Panera’s but some competitors offer alcoholic

beverages which Panera does not include in its menu categories. Consumers who enjoy alcoholic beverages

as part of their dining experience would opt for such restaurants over Panera.

Five Forces Analysis

Rivalry among Competing Fast-Casual Restaurant – A Strong Competitive Force

• Competitors consistently introduce new products to their menu selections based on changing

consumer preferences.

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• Industry members pursue differentiation strategies to set themselves apart from rivals via pricing,

food quality, menu theme, signature menu selections, dining ambience and atmosphere, service,

convenience, and location.

• Switching costs for consumers from one restaurant to another are low; customer satisfaction and

consumer loyalty tends to be important in the restaurant industry.

•

Threat of Entry- A Strong Competitive Force

• Many restaurants have fairly short lives due to many factors: lack of enthusiasm for the menu or

dining experience, inconsistent food quality, poor service, bad location, and meal prices could

discourage new entrants.

• 130 million U.S. consumers are food service patrons at an eating establishment on a typical day;

market growth is promising and could encourage new entrants.

• Consumer loyalty to existing restaurants is low and consumers are prone to give newly opened

eating establishments a trial; favorable reviews encourage return visits and/or frequent customers

which would encourage new entrants.

Competition from Substitutes - Varies Depending on Consumer Preferences

• Switching costs to substitutes are low.

• The primary consumers of fast-casual restaurants are those who are looking for quick-service dining

with enticing menus, higher food quality and a more inviting dining environment than those of the

fast food restaurant.

The Bargaining Power and Leverage of Suppliers – A Weak Competitive Force

• Ingredients can be obtained from a variety of suppliers.

• Suppliers are not likely to integrate forward or backward as it is not economically viable.

The Bargaining Power and Leverage of Buyers – A Strong Competitive Force

• Cost of switching restaurants is low. Many consumers are willing to try new eating establishments,

they may switch if they were pleased with their dining experience.

• Many competitors are offering similar menu selections.

Alternatives and Discussion

Alternative 1 – Back to Basics

Panera’s original strategy was to provide “great bread broadly available to consumers across the United

States.” The company was originally known for its artisan breads and its upscale quick service atmosphere.

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In 2006, the company, in an attempt to appease customers’ nutritional desires and attract more diners during

evening hours, made a number of changes. This entailed offering more menu items (a new line of artisan

sweet goods), upgrading the quality of ingredients (natural, antibiotic-free chicken), and adding light entrees.

In addition, the company changed many of its restaurant interiors in an attempt to create a Starbucks-like

atmosphere. The result of the menu and decor changes in strategy is an overall decline in net profit and an

increase in debt. Bakery-café expenses as a percentage of revenue rose from 80.4% in 2005 to 81.5% in

2006. Bakery-café revenues (as a percentage of overall revenue) dropped from 37.9% in 2005 to 33.4% in

2006. The bakery-café segment margin dropped from 19.59% in 2005 to 18.50% in 2006.

Panera should perform an in-depth analysis of its menu items and limit its offerings to the most successful

ones. It needs to look at the profitability of its ingredients. For example, is the demand (and profit margin)

for natural, antibiotic-free chicken great enough to justify its expense over regular chicken? Are the artisan

sweet goods providing the required level of profitability? Is it necessary to have 5 varieties of scones?

Panera should review margins on the products they sell and drop slow moving or low profit items (Focused

Strategy).

Panera also needs to stop trying to be all things to all people. Its success was initiated by its differentiation

strategy and not by copying other companies.

Advantages:

Reducing the number of menu offerings to core items will reduce product costs, labour costs and other costs

such as power (less in-store baking) and increase profitability;

Disadvantages:

There is a potential for loss of some customers due to Panera’s streamlining of menu offerings.

Alternative 2 – Expand Fresh Dough Operations

This segment is growing in both revenues and profitability. The segment margin for fresh dough operations

was 13.3% in 2005 and 15.48% in 2006, an increase of 16.41%. The company should look at the possibility

of expanding its dough sales to other non-competing companies. If there is available, unused capacity, this

may provide additional revenues/profits and better use of assets.

Advantages

Making alliances with other companies may provide increased revenues and better use of available labour

and capital assets, thereby increasing segment profits.

Disadvantages

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The formation of strategic alliances may result in higher maintenance costs, and distract from Panera’s core

business.

Alternative 3 – Review Existing Locations

Examine existing locations closely and close those which are not meeting company profit expectations.

Panera should determine if any locations are losing money, and if so, why. Is the advertising strategy in the

unprofitable market effective? Panera has traditionally taken a soft approach to its advertising campaigns.

Perhaps it is time for a more aggressive means of marketing. Are the menu items suitable for the location?

If all efforts to revive profitability in these locations have failed, these cafes should be closed to prevent

further drain on the company’s resources.

Advantages:

Closing unprofitable locations will reduce losses and increase overall profitability;

Disadvantages:

Closing locations may also cause damage to the company’s reputation; revenues will be reduced, and

shareholders’ confidence may decrease;

Alternative 4 – Expansion through Franchise Operations

The franchise operations need close examination. The franchised locations are performing better on a

weekly basis than the company-owned locations, with franchise operations doing $39,894 (2006) versus

$37,833 for company-owned locations. Franchise operations also increase revenue without adding expenses

to Panera’s bottom line because the burden of operational expenses lies with the franchisee. The company

has many opportunities for franchise expansion in markets that have not previously been explored. A focused

expansion into areas where there is less saturation may prove to be very profitable– i.e. L.A., Miami,

Northern California or Canada.

We are not given the investment requirements for other, similar, restaurants, but it seems the requirements

Panera sets are unusually high. Why is there a need for each franchisee to commit to opening 15 bakery-

cafes in six years? This would limit the number of potential franchise owners and place undue stress on

existing franchise owners. Perhaps opening the market to more franchisees with less location commitments

would prove more successful in the long run. This move may alleviate the necessity for the parent company

to repurchase locations, as well as increasing franchise fees and dough sales, thereby increasing overall

profitability. In addition, Panera should remove the clause allowing its purchase of franchisee locations any

time five years after the execution of the franchise agreement. Given the prerequisite to open 15 locations in

five years, it would appear to be a strong disincentive to potential new franchisees.

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Panera could also adopt a more aggressive advertising campaign with its franchisees and contribute a higher

percentage towards advertising. This would help entice more franchisees as well as increase brand

awareness.

Advantages:

Reducing the franchise investment would provide greater potential for more locations, increased franchise

revenues, increased profitability;

Expansion will enlarge the customer base and spread business risk across a wider foundation; - facing

competition in low penetration area or Canadian market (eg: Applebee’s is doing well in Canada);

Expansion of franchise operations will provide new revenue streams for all segments, and increased name-

brand awareness which may benefit all markets;

Franchise operations add revenue without the burden of additional expenses and the additional revenue

increases earning and EPS.

Disadvantages:

Expansion into new markets may require significant capital investment in that new dough making facilities

may be required;

Alternative 5 – Expand Catering Segment

Adding the catering program increased revenues by $80 million in 2005. Panera could focus on expansion

of this program to help increase EPS and overall profitability while gaining the opportunity of a relatively

new market without changing the brand image.

Advantages:

Increased revenues, increased profitability and increased brand awareness.

Disadvantages:

Increased capital investment for dough-making facilities; distraction from core business.

Recommendations and Action Plans

Recommendations

Alternative 4 is recommended. Opening additional franchise locations is a core element of Panera’s

strategy. Panera has good control of franchise stores’ operations. Franchisees indicated high satisfaction with

Panera’s concept, leadership and overall support. The franchise-operated bakery cafés have higher average

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weekly sales volumes and higher profits and return on equity than the company operated cafés. As

franchisees bear most of cost and risk of establishing foreign locations, Panera could expand franchise

business to low penetration areas, new regions in United States. Panera could also explore the possibility of

expanding its franchise business to Canadian areas. However, expanding internationally needs additional

strategic plans including availability of fresh dough facilities. Panera needs to evaluate the feasibility and

alternatives of continuing to provide fresh dough and administrative support out of the United States.

Overall, franchise expansion allows Panera to gain more access to new consumers and spreads business risk

to wider market. In order to make the franchise opportunity more attractive to potential investors, we

recommend the removal of some constraints from the franchise qualification requirements.

Alternative 1 is not recommended. Panera needs to constantly adjust its market strategies to better

accommodate changes in market conditions. As consumer loyalty to existing restaurants is low and

switching costs low, this route may be perceived as old fashioned. Strategies focusing on limiting offerings

and cutting costs to increase profitability may cause loss of interest and end up losing consumers and market

share in the long run.

Alternative 2 is not recommended. Panera’s fresh dough is sold to company owned and franchised bakery

cafés. The increase in fresh dough profit positively correlates to increasing demands from company bakery

and franchised bakery cafes. Even though Panera could sell dough to other non-competing companies and

use this side business to generate more revenue, it can potentially increase business risk, qualify control risk,

operation and management complication, and incur additional costs.

Alternative 3 is not recommended. Evaluation of costs and benefits of existing locations is important.

Panera is facing rising costs from 2003 to 2006. However the need of immediately addressing this issue is

not strong. Increasing cost relates to increasing sales. With a strong balance sheet, increasing earnings per

share, and healthy operation profits, it will be less effective for the company to focus strategy on cutting

locations at this stage.

Alternative 5 is not recommended. Expanding the catering program will help the company extend its

market and generate more revenue. However it represents an insignificant portion of company’s business.

Increasing capital investment in additional physical facilities could slow down expansion on other business

lines and distract Panera’s core business. It is not in company’s best interest to focus on this side business at

the current stage.

Action Plans

Date Item Description

Immediately Market research

Market research on new regions and low penetration areas in United states for possible expansions, market research of meal habits of Canadians

Immediately Franchise application Re-evaluate franchise application criteria based on

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criteria re-evaluation franchisees’ operation and performance data

1 month Analyze market research result

Specialty evaluation team reviews market research results and draft report to management to explain feasibility of expansion in these new areas

1.5 months Management decision of possibility of expansion Management approve of expansion to new areas

2 months Identify strategic plans for expansion

Identify specific strategic plan to expand to new areas and low penetration areas

2 months Reduce franchise application constraints

Based on analysis and re-evaluation, revise franchise application criteria and make it more achievable and easier for new franchise applicants

3 months Increase advertising

Increase advertising such as commercial, radio, networking, on new region in United States, low penetration areas and possible Canadian areas

3 months Assign contacting staff Assign contacting staff for new franchise application in new areas and low penetration areas

Mid term Evaluate and approve new applicant Evaluate and approve new applicants in new areas

Mid term Provide support Provide franchisee help including site selection assistance, lease review, design service and new store opening assistant

Mid term Provide training Start providing various training programs to new franchisees

Long term Re-evaluate strategies and make adjustment

Re-evaluate strategies and make adjustments based on current market conditions and accommodate changes

Long term

Continue to provide leadership, support and help to franchisees

Continue providing leadership, controls and support to franchisees and maintaining good working relationship with franchisees

Contingency Plan

In case Panera’s management would like to withhold any further expansion, alternative 3 can be considered.

Decreasing profit and increasing costs could be due to various reasons including changes in population mix

in local areas, increasing health concerns, new openings of competitors’ stores, etc. Panera needs to review

operations and conduct profit analysis to identify factors that caused its costs to rise. Conducting market and

consumer research helps identify factors which affect performance in certain locations. Based on analysis of

the results, Panera could improve performance by introducing new items and dropping slow moving and low

profit items. For those locations which continue generating poor contributions, Panera can review lease

agreements and make decisions on whether to discontinue under-performing locations or relocate existing

cafes.

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Attachments

Exhibit 1

Panera Bread Company - Ratios

% chg

2005-06 2006 2005 2004 2003 Notes

Y.O.Y. % change in bakery-café sales -4.5% 33.4% 37.9% 36.2% 25.1%Y.O.Y. % change in franchise royalties & fees -8.9% 13.3% 22.2% 22.6% 29.9%Y.O.Y % change in fresh dough sales -2.2% 17.0% 19.3% 18.0% 47.6%Y.O.Y. % change in revenues -4.2% 29.5% 33.6% 31.7% 28.9% Pace of Revenue growth slowed

Food and paper as % of bakery-café exp 36.3% 35.5% 35.1% 35.0%Labour as % of bakery café exp 37.8% 37.7% 38.2% 38.5%

Occupancy as % of bakery-café exp 9.0% 9.3% 9.2% 9.0%Other operating exp % bakery café exp 17.0% 17.4% 17.6% 17.5%

Bakery-café exp as % of bakery-café sales 81.5% 80.4% 80.2% 79.3% Trend - rising costs

Fresh dough cost of sales /dough sales 84.5% 86.7% 90.4% 89.3% Trend - decreasing costs

Total costs & expenses / total revenue 89.0% 87.3% 87.1% 86.3% Trend - rising costs

Operating profit as a % of total revenue 11.0% 12.7% 12.9% 13.7% Trend - decreasing

Net income as a % of total revenue 7.1% 8.2% 8.0% 8.4% Trend - decreasing

Current ratio = CA / CL 1.16 1.18 1.05 1.58 Trend - declining but within acceptable range

Working capital = CA - CL 18,008 15,909 2,515 26,079 Positive

Debt-to-assets ratio = total debt/ total assets 0.27 0.28 0.26 0.18 Low risk of bankruptcy

Debt-to-equity ratio = Total debt/total equity 0.36 0.38 0.35 0.24 Good balance sheet strength

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Exhibit 2

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Selected Consolidated Financial Data for Panera Bread, 2002 - 2006

($ in m illions, except for per share amounts)

Income Statement Data 2006 2005 2004 2003 2002

Revenues:Bakery-café sales 666,141 499,422 362,121 265,933 212,645 Franchise royalties & fees 61,531 54,309 44,449 36,245 27,892

Fresh-dough sales to franchisees 101,299 86,544 72,569 61,524 41,688 828,971 640,275 479,139 363,702 282,225

Bakery-café expenses:Food and paper products 197,182 142,675 101,832 73,885 63,370 Labour 204,956 151,524 110,790 81,152 63,172

Occupancy 48,602 37,389 26,730 18,981 15,408 O ther Operating Expenses 92,176 70,003 51,044 36,804 27,971 Total Bakery-café Expenses 542,916 401,591 290,396 210,822 169,921

Fresh dough cost of sales to franchisees 85,618 75,036 65,627 54,967 38,432 Depreciation and amortization 44,166 33,011 25,298 18,304 13,794

General & adm inistration expenses 59,306 46,301 33,338 28,140 24,986 Pre-opening expenses 6,173 3,241 2,642 1,531 1 ,051 Total costs and expenses 738,179 559,180 417,301 313,764 248,184

Operating profit 90,792 81,095 61,838 49,938 34,041 Interest expense 92 50 18 48 32 O ther (income) expenses net 1,976- 1,133- 1,065 1,592 467

Provision for income taxes 33,827 29,995 22,175 17,629 12,242 Net income 58,849 52,183 38,430 30,669 21,300 Earnings per share

Basic 1.88 1.69 1 .28 1 .02 0.74 D iluted 1.84 1.65 1 .25 1 .00 0.71 W eighted average shares outstandingBasic 31,313 30,871 30,154 29,733 28,923

D iluted 32,044 31,651 30,768 30,423 29,891

Balance Sheet Data

Cash and cash equivalents 52,097 24,451 29,639 42,402 29,924 Investments in govt securities 20,025 46,308 28,415 9,019 9 ,149 Current assets 127,618 102,774 58,220 70,871 59,262 Total assets 542,609 437,667 324,672 256,835 195,431

Current liabilities 109,610 86,865 55,705 44,792 32,325 Total liabilities 144,943 120,689 83,309 46,235 32,587 Stockholders' equity 397,666 316,978 241,363 193,805 151,503

Cash Flow Data

Net cash provided by operating activities 104,895 110,628 84,284 73,102 46,323

Net cash used in investing activities 90,917- 129,640- 102,291- 66,856- 40,115- Net cash provided by financing activities 13,668 13,824 5,244 6,232 5 ,664 Net inc/(dec) in cash & cash equivalents 27,646 5,188- 12,763- 12,478 11,872

Exhibit 3

18 | P a g e

Exhibit 4

Panera Bread Company

Income Statement Data - Extract 2006 2005 2004 2003 2002

Revenues $:

Bakery-café sales 666,141 499,422 362,121 265,933 212,645

Franchise royalties & fees 61,531 54,309 44,449 36,245 27,892

Fresh-dough sales to franchisees 101,299 86,544 72,569 61,524 41,688

828,971 640,275 479,139 363,702 282,225

Revenues as % of total revenue:

Bakery-café sales % 80% 78% 76% 73% 75%Trend - increasing

Franchise royalties & fees % 7% 8% 9% 10% 10%Trend - decreasing

Fresh-dough sales to franchisees % 12% 14% 15% 17% 15%Trend - decreasing

Total 100% 100% 100% 100% 100%