Question: Define the industry in which the company operates. Apply Porter’s 5 fo

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Define the industry in which the company operates. Apply Porter’s 5 forces framework to analyze and explain the industry’s profitability.

CASE 09 Panera Bread Company in 2014: Can a Slowdown in the Company's Growth Be Avoided? aconnect Arthur A. Thompson The University of Alabama n spring 2014, Panera Bread was widely regarded as But despite the recent acceleration of store the clear leader of the "fast-casual" segment of the openings, there were signs in 2014 that the com- restaurant industry fast-casual restaurants were pany's revenue growth in 2014 would not match viewed as being a cut above traditional quick-service the robust 19.9 percent compound average growth restaurants like McDonald's because of better food achieved from 2009 through year-end 2013. Top quality, limited table service, and, in many instances, mnagement in February 2014 indicated tha t was often wider and more upscale menu selections. On expecting 2014 sales gains of just 2 to 4 percent at average, close to 8 million customers patronized Panera bakery-cafés open at least one year, below Pancra Brcad restauranis cach weck, and Pancra e pcrcentage gains in cach of the past three ycars baked more specialty breads daily than any other Moreover, diluted earnings per share in 2014 were bakery-café enterprise in North America. There were projected to incrcase only 5 to 8 pereent, well below 1,777 company-owned and franchised bakery-cafés the company's targeted long-term EPS growth rate in operation in 45 states, the Disirictof Columbia, of 15 lo 20 percent annually and Ontario, Canada, under the Panera Bread. Saint Louis Bread Co., and Paradisc Bakery&Caf;é namcs. COMPANY BACKGROUND In 2013, the company had corporate revenues of $2.4 billion, systemwide store revenucs of $4.3 bilon, In 1981, Louis Kane and Ron Shaich founded a and average sales of almost S2.5 million per store bakery-café enterprise named Au Bon Pain Co., Inc location. Units were opened in malls, shopping centers, and The number of Panera Bread locations was up airports along the east coast of the United States trom 1,027 units in 36 states at the end of 2006, bu and internationally throughout the 1980s and 1990s; well short of the ambitious target the company set in the company prospered and became the dominant 2006 to have 2,000 outlets in operation by the end of operator within the bakery-café category. In 1993 2010. While the Great Recession of 2008-2009 ha Au Bon Pain Co. purchased Saint Louis Bread Com forced management to scale back Panera's expan- pany, a chain of 20 bakery-cafés located in the St. sion plans, the company decided to reinstitute ts Louis area. Ron Shaich and a tea of Au Bon Pain rapid-growth strategy by opening a net of 76 new managers then spent considerable time in 1994 and company-operated and franchised units in 2010, 995 traveling the country and studying the market 88 new units in 2011, 111 new units in 2012, and for fast-food and quick-service meals. They con- 125 units in 2013. Plans called for opening 115 to cluded that r 125 new company-operated and franchised units in 2014 many patrons of fast-food chains like Copy nghi 2014 by Arthur A. Thompson. All rights reserved.

Explanation / Answer

The company operates in the restaurant industry. The restaurant industry is considered as a highly competitive industry with low profit margins and a lot of players. The customers enjoy the power of superiority in this industry and the players have to ensure that customer service is best otherwise they can easily switch to other options. Apart from this, there are other challenges such as inventory management, staff fees, low scalability etc which contribute to lesser margins.

Below is the Porter's 5 forces framework applicable to restaurant industry:

1. Threat of new entrants: Threat of new entrants is certainly high in this industry since opening a new restaurant does not require huge upfront investment. Though there are regulatory issues which need to be tackled but costs such as payroll, rent etc are not that high. So opening a new restaurant is simple and can encourage a lot of budding entrepreneurs. Hence profit margins are less and competition is more.

2. Threat of substitute products: Restaurants face tough competition from online food ordering sites. Now a days people prefer to order food online as it costs less and people do not have to go out, thus saving their time and money. So online food ordering sites pose a huge challenge to restaurants and further reduces their profitability.

3. Bargaining power of suppliers: Bargaining power of suppliers is low since there is a lot of competition from other suppliers as well and no clear monopoly exists. So the suppliers have to keep their costs down in order to generate business and supply to the restaurants.

4. Bargaining power of buyers: Bargaining power of buyers is high since customers have the choice of switching to other restaurants as they have a lot of options available with them. If they find the service or cost of one restaurant bad, they can switch to other restaurants which increases their bargaining power.

5. Intensity of competitive rivalry: There is a lot of competition in the restaurant industry as there are a lot of options such as fast food chains, online food ordering sites, cafes, restaurants etc. which decreases the profit margin for the business operators. Also customer loyalty is less since customers have a lot of switching options available with them.

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