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Panera's Rising Hopes

Restaurants: The gourmet sandwich chain from the Midwest should expect voracious competition as it expands to the Southland.


Panera Bread Co., a Midwest-based gourmet sandwich chain whose consistent and profitable growth has made it a Wall Street darling, faces new challenges in its bid to expand into the highly competitive Southern California market.

Panera said last week it plans to open up to 100 cafe-bakeries in the Southland over the next few years. It intends to open its first California store in Los Angeles County in 2003.

Moving into the Southland won't be easy, analysts say. Panera must grapple with several potential roadblocks, including more intense competition and wider consumer dining choices, as well as high rent, utility and labor costs, said Janet Lowder, president of Restaurant Management Services in Rancho Palos Verdes.

The 390-store chain, based near St. Louis, must contend with the growing presence of other sandwich makers such as Subway and Quizno's. It also must deal with cutthroat competition from a host of expanding "fast-casual" restaurants such as Panda Express, Baja Fresh and Wahoo's Fish Taco, she said.

"It's a lot easier for a chain to do business in a place like Omaha, Neb., than it is here," Lowder said. "To succeed here, you have to really know what you're doing."

Panera executives and analysts contend that the chain's mix of a coffeehouse-like ambience--fireplaces, plush leather couches and soft jazz--and fancy sandwiches served on 30 types of freshly baked bread will help it flourish.

"Consumers want quick, tasty and healthy products at a good price and that's what Panera delivers," said Scott Van Winkle, an analyst with Adams, Harkness & Hill.

Both diners and Wall Street have developed a taste for Panera, which has posted 25 consecutive quarters of same-store sales growth. In 2001, profit jumped 92% to $13.1 million, and revenue increased 51% to more than $529 million.

Panera shares, which traded at less than $6 four years ago, closed Wednesday at $64.15, up $1.55, on Nasdaq.

Reflecting its turbocharged growth, Panera has more than doubled its outlets in the last 2 1/2 years. The typical unit now rings up sales of about $1.8 million, higher than any other fast-food or fast-casual restaurant, the company said.

To ensure quality, professional bakers--paid at least $13 an hour--bake bread in $50,000 stone-deck ovens that turn out crispier loaves, Panera Chief Executive Ron Shaich said.

"We don't cut any corners," he said. "We strive for authenticity, and our customers can feel the difference."

Panera, which has bakery-cafes in 30 states, should fare well in Southern California because it offers tastier food than its sandwich competitors, said Dennis Joe, an analyst with Sidoti & Co. in New York. The chain also could appeal to the legions of people burned out on hamburgers.

"For a little more, you can get a much better-quality meal that's better for you than you would at McDonald's," he said.

The average check at Panera is $6.30, the company said.

Panera stands to profit from consumers' growing demand for sandwiches. While domestic pizza sales last year increased 2.5% and burger sales rose 2.7%, sandwich sales jumped 12%, to $14.6 billion, said Dennis Lombardi, executive vice president of Technomic Inc., a restaurant research and consulting firm in Chicago.

Subway's advertising blitz, along with improved offerings by such chains as Arby's, have helped fuel the sandwich surge, said Christopher Muller, professor of restaurant management at the University of Central Florida in Orlando.

Panera began life in 1987 as closely held St. Louis Bread Co. Au Bon Pain acquired the 19-unit company in 1993 and later added new stores. St. Louis Bread performed so well, especially in suburban markets, that Au Bon Pain was sold in 1999 to investors for $73 million. The company was renamed Panera.

Richard Adler, president of Mariposa Bread, a franchise group that recently signed an agreement to develop 14 Panera outlets in Los Angeles County, said he expected the restaurants to catch on with locals, just as they have elsewhere in the country. To take advantage of the Southland's weather, outlets would have more outdoor seating than the typical Panera, he said.

Despite his confidence, Adler conceded that Panera's success here is by no means assured.

"There are more restaurant choices in L.A. than in most other places," he said. "We have to prove to the people of this area that we're offering a good product, which I know we are."

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