Will Delivery Be Panera Bread Co's Next Big Growth Driver?

Source: Panera Bread

During its fourth quarter earnings call, Panera Bread announced it will offer delivery at 200 to 300 locations, or about 10% of its restaurants, this year. The announcement should be music to investors' ears as the company has struggled to show meaningful growth the past two years. With the introduction of delivery and successful implementation of Panera 2.0, its investment in streamlining the ordering process,it appears a turnaround at Panera is beginning to take hold.

Company-owned same-store sales grew 3.6% during the fourthquarter. In the first 41 days of the current quarter, that growth accelerated to 6.4%. Systemwide same-store sales were a bit tamer as franchisee locations failed to put up equally impressive numbers. Fourth quarter systemwide sales grew 2.3%, while full-year sales increased 1.9%. Nonetheless, after posting only 1.1% same-store sales growth in 2014, its lowest level since 2003, Panera investors should be pleased to see positive momentum return to the Saint Louis-based restaurant chain.

Much of Panera's increasing growth can be attributed to its Panera 2.0 initiative, which utilizes technology to improve the guest experience, allowing customers to order at their table using their mobile device, or via kiosks upon entering the restaurant. Customers are also able to order "to go" items from the same kiosks, online, or through Panera's mobile app. As of the end of December 2015, Panera 2.0 has been implemented in 410 restaurants. Same store sales at company-owned restaurants that have converted to Panera 2.0 through four quarters increased an impressive 7.6%.

Panera should continue to see growth in 2016 as the company implements Panera 2.0 in more of its restaurants. However, with the stock priced at a lofty 35 times 2015 earnings, investors should be asking where additional growth will come from.

Although Panera Bread plans to open 90 to 100 locations in 2016, at just under 2,000 locations currently, the company is at the latter stages of saturating the U.S. market. In the fast casual space, only Applebee's has more locations at 2,016, and its growth has essentially stalled.Panera should be able to surpass Applebee's, but its upside potential may be limited. Restaurant chains with over 3,000 locations tend to have much smaller square footage requirements and are mostly either fast food or pizza chains.

As for same-store sales, Panera 2.0 is providing a boost that should continue into the near future. However, average weekly restaurant sales appears to be nearing capacity, too. After growing nearly 3% a year for seven years, average weekly sales slowed to just 1.2% annualized growth in the past three years. In the fourthquarter earnings call, CEO Ron Shaich pointed out that lunchtime seats are either "at, or nearly at capacity".

With unit and same-store growth approaching capacity, Panera is looking at delivery to assist in its next phase of growth.

DeliveryAccording to Shaich, initial testing in two markets and 25 restaurants is resulting in approximately $5,000 per week in incremental revenue on a $3,000 per week breakeven point. A 10% boost to same-store sales will provide a meaningful lift to the bottom line.

After reaching the $3,000 breakeven point, restaurant costs are mostly variable, including food and labor. These expenses came in at 62.3% of revenue in 2015. Assuming a conservative 65% variable expense, $5,000 per week in delivery revenue, and a $3,000 breakeven point, each store should be able to generate an additional $700 in profit per week. Let's take a look at the potential annual revenue and bottom line impact of a delivery rollout in company-owned locations:

Delivery can potentially add 8% to revenue and 22% to net income. These numbers don't account for increasing delivery comps and profits on additional royalties for increased revenue at franchisee locations.

The RisksFortunately for Panera, the costs related to implementing delivery will be nowhere near the Panera 2.0 rollout. Panera will be able to leverage existing technology for delivery orders. According to Ron Shaich, Panera will just need to hire and train drivers and market the delivery service. I do expect higher insurance and liability costs, but that should all be built into the breakeven projections.

Source: Panera Bread

I believe the biggest risk to Panera Bread will be operational. Prior to the Panera 2.0 rollout, Ron Shaich called the ordering process a "mosh pit" where you played a game called "find your food". Customers would order in one area, wait for their buzzer to sound, and then pick up their sandwich, salad, drinks, and condiments in different locations.

Panera does not just have sandwiches and salads. Offerings like soup, paninis, broth bowls, and pasta will require both hot and cold food storage units during delivery. Combining the two may lead to lower quality. Additionally, without an efficient process for delivery drivers, treating deliveries like to-go orders can potentially cause confusion and hurt customer service.With the addition of delivery service, the kitchen may be at risk of going through the same type of confusion. Shaich had mentioned that Panera's products are suited to delivery as sandwiches and salads travel well. Additionally, caf managers will treat delivery orders just like to-go orders, so it won't complicate operations. However, I see the process being a bit more complex than that.

Good training should mitigate the operational risk factor. However, rolling delivery out to 25 restaurants in two markets is a much easier task than expanding to nearly 2,000 locations, over half of which are franchises where Panera has less control over day-to-day operations.

All in all, I believe delivery expansion is a great move from the company. The monetary risk is small, while the potential reward is significant. However, the company will have to be very prudent with training and execution.

The article Will Delivery Be Panera Bread Co's Next Big Growth Driver? originally appeared on Fool.com.

Palbir Nijjar has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Copyright 1995 - 2016 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.