What Panera Could Learn From Chipotle


Panera Bread is in unfamiliar territory. After logging industry-trouncing sales growth for years, its latest results put it much closer to plain old average. That could be bad news for a stock that's trading at a premium to other casual dining giants.

For the quarter that just ended, Panera saw comparable sales growth of just 3.8%. That was lower than the 4%-5% annual target it forecast last quarter, which itself was below the 4.5%-5.5% that Panera was expecting two quarters ago. Something clearly isn't working at the bakery-cafe.

What's working
Store growth isn't the issue. Panera opened 37 new locations in the quarter, bringing its total to 1,708 restaurants. The company sees loads of potential for boosting its store footprint and expects to hit the high end of its full-year openings goal of 115 to 125 new units.

Profitability is on track, too. Operating margin inched up by 60 basis points, keeping Panera firmly ahead of Darden Restaurants , and closing in on Chipotle Mexican Grill .

PNRA Operating Margin TTM Chart
PNRA Operating Margin TTM Chart

PNRA Operating Margin TTM data by YCharts

What's not working
But Panera is coming up short where it counts the most -- during peak lunch hour. After average food production times spiked last quarter, Panera has called out its throughput as a major operational weakness. It seems that for many of the company's locations last quarter, the customer traffic was there, but service just wasn't quick enough to satisfy it.

That could be due to Panera's increasingly complex menu. The company recently added a full line of pasta dishes to its offerings. And while that's been great for boosting check averages, it might have slowed down the kitchen and limited total output.

It doesn't have to be that way. For clues on mastering the art of high-volume feeding, Panera can look to Chipotle. The burrito slinger's most efficient restaurants process 350 orders over lunch hour, moving one through the line every 11 seconds. Sure, that's mostly thanks to Chipotle's buffet-line concept that keeps the kitchen humming. But the company has also been extremely careful about adding anything to its menu for fear of gumming up the works.

A tough road ahead
The good news is that Panera is aware of the production issue and plans to meet it head-on. But it won't be an easy fix.

Management warned of "choppy" results over the next few quarters -- and a potential drop in profitability -- as it makes the investments required for getting throughput numbers up. That spending will be worth it if it helps Panera serve all of its customers at peak hours, lifting the company's sales growth back to above average in the process.

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The article What Panera Could Learn From Chipotle originally appeared on Fool.com.

Fool contributor Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Panera Bread and owns shares of Chipotle Mexican Grill, Darden Restaurants, and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published