Panera: Speak Chipotle, Say Less Than McDonald's

NEW YORK (TheStreet) -- I want to start by saying that I really like Panera Bread Company (PNRA). I like its food, its management team (lead by founder and CEO Ron Shaich) and its restaurant atmosphere.

With that being said, the fast-casual diner is not growing quite as quickly as many of us shareholders have hoped, despite the stock rallying in recent weeks, it's up about $12 from the first of the year. In its most recent quarter, Panera barely beat earnings per share estimates, slightly missed revenue estimates and guided below the Street's consensus for next quarter's EPS estimates. 

One of the company's main issues has to do with throughput during peak hours. In other words, Panera is struggling to handle its large customer flow during its busiest hours. 

Among other things, (such as drive-throughs in select locations and better, faster cooking equipment), could the throughput issue simply be solved by using a different menu? 

Before we delve deeper into this conversation, take a look at what TheStreet's Jim Cramer, co-manager of the Action Alerts PLUS portfolio, had to say about the company and its management: 

Throughput is an issue here. During the company's most recent earnings call, Roger Matthews, executive vice president and CFO of Panera, discussed the changes the company is making to the menu. He said, "the intention of our new menu structure is to make it easier for guests to understand our product offerings... and offer greater visibility to the range of price points."

A little later, Mathews also mentions that this easier-to-read menu could help with the throughput issue. (To listen to conference call, the dial-in phone number is available, here). Obviously management has noticed the menu issue and admits it could be responsible for slowing things down. 

Here's my thought though: McDonald's (MCD) has struggled with throughput issues in the past, due to a menu that continues to add new product after product, bogging down ordering times and lengthening the lines. 

Comparable-store sales for McDonald's in the most recent quarter fell 1.4%. 

Let's take a look at McDonald's Menu: 

Notice there are an astounding 16 combo items. Also keep in mind that this is only the lunch menu, and has none of the breakfast combos. Then there are salads in the lower right, along with 21 items on the Dollar Menu, including four breakfast items. 

In all, I counted 63 total items on this menu. This does not include the breakfast menu (with the exception of the four breakfast items on the Dollar Menu), or the multiple flavors and different choices with the desserts and drinks. 

As the company continues to struggle to grow revenue and where comparable-store sales fell 1.4% in the most recent quarter, McDonald's has resorted to adding more and more items to the menu. 

I addressed this very issue with its menu back in October, when I wrote, McDonald's Needs to Focus on Fat

Management has admitted that this bulked up menu may have been counter-intuitive as it has slowed down the ordering process and confused customers. Of course, this is not the only issue for McDonald's as competition has increased as well. 

Before taking a look at Panera, let's consider Chipotle Mexican Grill (CMG). I'll let the menu speak for itself, which can be seen below: 

Look at the simplicity. Look at how easy the menu is. You get to choose between a burrito or a bowl. There are four items on the kids menu, three drink choices and four side items. There are only a half-dozen or so choices for what to put in your burrito or bowl, subconsciously easing the customer's decision-making process into a relaxed and comfortable state. Chipotle already decided what you're ordering, now you just need to decide how you want it. 

There's none of this:

(Worker): Hi ma'am/sir, what can I get for you today?
(Long pause)
(Customer): I'm not sure, can you give me a minute to order?
(Worker): Sure ma'am/sir, no problem. Just let me know when you're ready. 

It also makes for an incredibly easy catering service, which can barely be seen in the far right of the image above, (I wish I was considering the catering aspect when I snapped the pic!). The catering service is for between 20 and 200 people, which can add a substantial boost to sales. 

And sales don't lie. Last quarter -- and for the same period that McDonald's reported -- Chipotle posted comp sales of 9.3%. That's incredible! Especially when so many restaurants and retailers reported such horrible numbers last quarter. 

Now let's consider Panera. Below is a picture of Panera's menu:

You can see that the menu is certainly more organized than the menu from McDonald's, but it's obviously not as simple as Chipotle's menu. Let's be honest, few businesses could pull off a Chipotle-like menu. 

However, the whole menu, in my opinion, can be seen as a little extensive. If you're a frequent Panera visitor, then maybe the menu is a piece of cake. But for customers that are visiting a Panera for the first time, or rarely eat there, the menu can definitely be overwhelming for a fast-casual restaurant. And I can see how it would bog down the lines during peak hours. 

The whole- and half-orders are easy enough to understand. If you want a half-sandwich, it's cheaper. Want half an order of Mac n' cheese? No problem!

The "You Pick 2" might not be the easiest concept to understand if you've never been to Panera. Sure it says what the "You Pick 2" is at the top of the menu, but when a line is stacking up behind and you're feeling the pressure, you might miss it. 

In the previous quarter, Panera's company-owned (non-franchised locations) comp-sales grew 1.7%. This is far better than McDonald's 1.4% drop, but nowhere near Chipotle's 9.3% surge.

So what are you getting at here, Kenwell?

Well, like I said before, there's no way Panera could adopt a menu like Chipotle's. There's no way. An ordering system like Subway's is the closest Panera could get to a similar model, but that would clearly be the wrong route to take. 

And the menu is obviously cleaner and more organized than that of McDonald's, although it does have some resemblances to it. In this regard, I think Panera's menu could be more concise and easier for customers to navigate. 

For instance, in the picture above, there are four columns -- Sandwiches, Salads/Pastas/Soups, Drinks and Treats, and Breakfast. 

If the company is opposed to eliminating, say 15% to 20% of the menu items to make it more concise, why not eliminate the breakfast menu when it is no longer being served?

It would at least cut the number of columns down to three, making it quicker and easier to read.

But what do I know? Maybe I'm crazy. Maybe my suggestion has no merit.

Perhaps the increased number of menu items makes customers happier, and drives repeat business. To some degree, I'm sure it does. But if there were 12 or 13 sandwich selections, instead of 16, I don't think the company would lose any business.  

In any event, I think Panera is still a great company. It doesn't need an overhaul and it isn't in the midst of a turnaround. I just feel as though there are a few things the company could tweak to improve throughput traffic and really fire on all cylinders.

It'd be great to see Panera smoke top and bottom line estimates, beat comp-sales expectations and over-deliver on guidance. One day, I'm confident Shaich and Company will do just that. 

At the time of publication, the author was long PNRA. 

-- Written by Bret Kenwell in Petoskey, Mich.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter. Focuses on short-to-intermediate-term trading opportunities that can be exposed via options. He prefers to use debit trades on momentum setups and credit trades on support/resistance setups. He also focuses on building long-term wealth by searching for consistent, quality dividend paying companies and long-term growth companies. He considers himself the surfer, not the wave, in relation to the market and himself. He has no allegiance to either the bull side or the bear side.

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