Assessment 1: Critical Thinking in Action

How Panera Solved Its 'Mosh Pit' Problem Publication info: Dow Jones Institutional News ; New York [New York]. 02 June 2017.

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Long lines at lunch should make restaurant chains happy. But not at Panera Bread Co.

Seven years ago, customers at the popular sandwich-and-soup chain had to wait in line for up to eight minutes to

place an order. Then they had to stand in what Chief Executive Ron Shaich called a "mosh pit" of people waiting for

their food. Ten percent of the time, the orders were wrong, the company said.

The St. Louis-based chain of more than 2,000 restaurants realized it had to rethink its service model -- and found

online ordering was the answer.

It took more than six years to get the process right, testing the patience of store managers, company management

and Wall Street analysts -- and even attracting an activist shareholder.

Today, online orders make up more than a quarter of its company-owned restaurant sales, and the average time

customers spend waiting in line to order food has shrunk to one minute. Panera is widely cited by analysts as one

of the most technologically savvy, best-performing chains in the industry.

European investment fund JAB Holding Co. in April offered a 20% premium to take Panera private, in a deal that

will keep Mr. Shaich at the helm of the fast-casual chain. The transaction is expected to close in the third quarter.

In 2010, as he started the overhaul of Panera's ordering process, Mr. Shaich drew on his own frustration as a

customer.

"By the time I'd get there, find a parking space, go in and wait for the food, it's 30 minutes. I'd just as soon go to my

fridge and look for leftovers," he recalled thinking.

At the time, Mr. Shaich had retired as CEO but was still the company's chairman. He tapped Blaine Hurst, a former

Papa John's International Inc. executive, to help with the overhaul.

Mr. Shaich eventually returned as CEO in 2012, and the chain opened a prototype Panera in Braintree, Mass., to

test all elements of "Panera 2.0": self-order kiosks, delivery, digital ordering and a new practice of bringing food to

customers' tables.

Messrs. Shaich and Hurst spent about 100 hours a week in that Braintree cafe observing what would work.

Easing the ordering bottleneck by taking orders online, instead of at the counter, wasn't enough: The kitchen had to

be able to handle the volume. Allowing customers to place orders themselves led to more customization, but also

more staff mistakes. The company revamped the way employees process orders in an effort to minimize errors by

simplifying the kitchen display systems.

"It was literally hundreds of these little things that we did," said Mr. Hurst, who became company president last

year after holding several other executive positions with Panera.

Other restaurant chains are going through similar struggles as they try to adapt their business models to the way

consumers want to order and receive their food. Starbucks Corp. has suffered growing pains as customers have

migrated to its mobile order and pay app, shifting the congestion that used to occur at the counter to an area in the

cafes where the mobile orders are handed off.

Starbucks is currently working on ways to solve the bottleneck, including texting customers when their orders are

ready.

By Julie Jargon

Many other chains, such as McDonald's Corp., are just now starting to roll out mobile ordering and delivery.

Panera began rolling out its rapid pickup system nationwide in 2014. But the results didn't come overnight. In the

fourth quarter of 2014, the chain reported that per-share profit had fallen 7%, in part because of the investment in

technology, and warned that earnings growth would be flat or negative in 2015.

New York investment firm Luxor Capital Group LP took a roughly 4% stake in Panera in 2015 and encouraged the

restaurant chain to cut costs and take on debt to buy back more shares. Noah Elbogen, an investment analyst at

Luxor at the time, said the firm believed that digital ordering and delivery were the right things to do, but pushed

the company to find other cost-cutting to help offset the investment in technology, which he pegs at well over

$100 million. Panera wouldn't disclose the cost of the upgrades.

"I took three years of flat earnings and a lot of heat as we made these bets," Mr. Shaich said. While he agreed to

buy back shares and cut costs unrelated to the technology effort, Mr. Shaich told employees to press ahead.

Panera turned the corner last year as digital orders and delivery gained traction. In the first quarter of 2016, it

posted its best traffic and same-store sales growth in four years, outperforming the industry by 6.5 percentage

points -- the widest margin it had ever recorded.

The company continued to post strong growth throughout 2016, raising its full-year earnings per share guidance

each quarter. It ended the year with earnings per share up 7% and same-store sales up 4.2% versus the prior year,

far outpacing the industry.

Catherine Rhinehart, of Kingsport, Tenn., says Panera's online ordering has been a "life-saver."

"It saves me from standing in line and taking half my lunch hour to get the food," said the 68-year-old marketer,

who remembers the time when the lines inside Panera were long.

Mr. Elbogen, now chief executive of Misada Capital Group LLC, a New Jersey-based investment manager, said he

wasn't surprised by Panera's success. He recalls seeing lines out the door at Panera, which convinced him that

demand wasn't the company's problem, but rather its ability to handle it. By implementing digital ordering, he said,

"They were really solving a problem."

Write to Julie Jargon at [email protected]

(END)

June 02, 2017 05:30 ET (09:30 GMT) DETAILS

Subject: Customers; Restaurants; Securities buybacks; Fast food industry; Earnings per

share; Cost reduction; Financial performance; Food

Business indexing term: Subject: Customers Restaurants Securities buybacks Fast food industry Earnings

per share Cost reduction Financial performance; Corporation: Starbucks Corp Panera

Bread Co; Industry: 72251 : Restaurants and Other Eating Places

Company / organization: Name: Panera Bread Co; NAICS: 533110, 722513; Name: Papa Johns International

Inc; NAICS: 533110, 722513; Name: Starbucks Corp; NAICS: 722515

Classification: 72251: Restaurants and Other Eating Places

Publication title: Dow Jones Institutional News; New York

Publication year: 2017

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Publication date: Jun 2, 2017

Publisher: Dow Jones &Company Inc.

Place of publication: New York

Country of publication: United States, New York

Publication subject: Business And Economics

Source type: Wire Feed

Language of publication: English

Document type: News

ProQuest document ID: 1905075667

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Last updated: 2021-10-04

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