Bakery-cafes' offerings fresh option to fast food

The economy is slow and retail sales are lagging, but Panera Bread has caught Wall Street's notice with its rapid growth of restaurants that offer an antidote to fast food. Operating bakery-cafes under its own name or St. Louis Bread, Panera serves food made with a creative edge: sourdough bread bowls of soup, Asiago cheese bread and turkey-artichoke panini, for example. Its stores also sell salads and fresh bread. The formula has given Panera solid numbers: Its 183 stores in 1999 grew to 478 in 32 states through 2002, with about 70 percent owned by franchisees. Panera added more than 100 stores last year and plans 120 more in 2003. There are no stores in Washington state; the company said it wouldn't talk about potential expansion plans in the region. The company's 2000 sales of $350.8 million more than doubled to $755.4 million last year, and Panera looks to reach the billion-dollar mark in 2003. Earnings per share grew 75 percent in 2001, 59 percent last year and should rise, the company believes, 36 percent this year. Such performance amid the economic malaise has analysts upbeat on the company, which is based in the St. Louis suburb of Richmond Heights. A few predict there will be 1,500 Panera locations someday, more than triple the current number. "When the market and the economy gets better, it'll be one of the first places people go with their money (to invest) because it's the best story in the restaurant business. Period," said Mike Smith, a Kansas City, Mo.,-based restaurant analyst for Fahnestock. Panera's success is tied to what Ron Shaich, chairman and chief executive officer, long has preached: Increasingly sophisticated diners crave fresh sandwiches, bagels, salads, soups and pastries as alternatives to fast-food fare he deems "the nutritional essence of manufactured." Shaich said he's not focused on how big his company can get — "I don't lay awake at night wondering if we'll have 1,500 stores" — but on more immediate issues, such as figuring out how to speed up service during lunch, when lines traditionally have swelled. "What we're concerned about is doing this right," he said. Shaich is a bakery-cafe veteran who in the early 1980s helped found Boston-based Au Bon Pain. In 1993, Au Bon Pain bought 6-year-old St. Louis Bread, which had 19 bakery-cafes around St. Louis and Missouri. Au Bon Pain, specialists in urban markets, saw the acquisition as its entree into suburbia. By 1998, Shaich — Au Bon Pain's CEO — had decided to expand St. Louis Bread nationally. The next year, the company sold the Au Bon Pain unit to a private investment group and changed its corporate name to Panera Bread, where management devoted its full attention to growing St. Louis Bread. People who crowd the Panera locations like the quality of the food. While lunching recently at a St. Louis Bread near Panera's headquarters, customer Michelle Wiedl munched a Caesar salad and sipped cream-of- chicken-and-wild-rice soup. "I'm not a fast-food gal, and I prefer this because it's fresher," Wiedl said. In its spring 2002 issue, BusinessWeek ranked Panera as the top-performing company in the Standard & Poor's smallcap 600 index, with the criteria including each company's one- and three-year stock-market returns. "With cushy sofas dotting its stores, Panera is creating a cachet for breads similar to what Starbucks created for coffee," the magazine said. The Wall Street Journal, meanwhile, called Panera the "restaurant industry's hottest company." "It's clearly at the top of the class," said McDonald Investment analyst Jonathan Waite. "They're not in the ninth inning yet; they're still in the third or fourth. They still have plenty of growth left." While Panera is getting good reviews, the U.S. fast-food industry struggles amid economic jitters and changing consumer tastes. McDonald's, the world's largest fast-food company, is mired in its worst slump. Last year, it posted its first quarterly loss — $344 million — and acknowledged complications from its fast expansion and complaints about speed and food quality in its U.S. restaurants. Panera's food falls into the category of what analysts call "quick casual," slower than fast food but faster than a traditional sit-down restaurant.