Panera looks to new venues in expansion

CHICAGO Wed Mar 18, 2009 4:36pm EDT

Panera Bread Co-Chief Operating Officer William Moreton speaks during the Reuters Food and Agriculture Summit in Chicago March 18, 2009. REUTERS/John Gress

Panera Bread Co-Chief Operating Officer William Moreton speaks during the Reuters Food and Agriculture Summit in Chicago March 18, 2009.

Credit: Reuters/John Gress

CHICAGO (Reuters) - Debt-free Panera Bread Co (PNRA.O) is in expansion mode as many of its rivals shrink and is exploring the idea of embedding its bakery-cafes in retail stores, but the company has no plans to go on a buying spree.

Panera plans to open 80 to 90 restaurants this year, taking advantage of its reputation for high-end affordability and a weak economy that has created excess retail space.

"We understand that there are a lot of big-box retailers that may be willing to shrink part of their box ... We're talking to some people ... we may test that," Panera co-Chief Operating Officer William Moreton said at the Reuters Food and Agriculture Summit in Chicago on Wednesday.

He declined to identify potential partners, but said any agreement would be with a retailer of "similar quality."

Eateries including McDonald's (MCD.N) and Starbucks (SBUX.O) have taken up residence in stores like Home Depot (HD.N), Barnes & Noble (BKS.N), Wal-Mart (WMT.N) and Target (TGT.N).

As weak consumer spending continues to batter retailers and restaurants, Moreton said he expects real estate prices to become more "realistic" in the next six to 12 months.

The real estate market is stagnant because landlords, who are under pressure deliver on cash flow targets, have not lowered rents to adjust for weaker demand for space, he said. "We think the logjam will break free pretty soon," he added.

While most of Panera's more than 1,250 restaurants are in suburban areas and neighborhoods on the edges of urban areas, downtown locations are another potential area for growth.

"We're very actively developing west of the Mississippi and there are a lot of pockets from the Southeast, to the Northeast and the Midwest where we have plenty of room for growth," Moreton said, noting the company now operates in 38 states.

For now, the company has no plans to open locations in New York City, although it does have operations on Long Island.

Panera has restaurants in other large cities including Los Angeles and Chicago.

Moreton sees California, the nation's most populous state, as an attractive market. "In the whole state of California there are 80 (Panera) cafes, roughly. So there's a great deal of opportunity there," he said.

PARADISE GAINED

Earlier this year, Panera announced plans to spend $20 million to $25 million to buy the remaining 49 percent of Arizona-based Paradise Bakery & Cafe it does not already own.

Panera, which has no long-term debt and whose free cash flow is at a nine-year high, may appear to be well-positioned to make more acquisitions -- but Moreton said it has no interest in going down that road.

"We think the best use of our money is to open more bakery cafes," he said.

Panera plans to stick to its heritage of selling bread, pastries, soup, salads, sandwiches and coffee, he said.

"We think people in our industry get into a lot of trouble when they start to buy across different segments or different categories that they don't know as well," he said.

While the St. Louis chain is early in its growth cycle, many of its formerly fast-growing rivals are cutting back.

Starbucks, for example, is in the process of shuttering nearly 1,000 cafes around the world.

Company executives say Panera, which is positioned between casual chains such as Cheesecake Factory Inc (CAKE.O) and Chili's and fast-food giants like McDonald's Corp and Burger King BKC.N, is weathering the recession because its food is often made with fresh ingredients and costs less than at mid-tier restaurants.

"We do get some of the trade-down from casual dining," said Moreton. "We don't tend to see any trade-down between ourselves and fast-food because there is such a difference in quality."

Shares of Panera, which have risen about 25 percent over the last 12 months, closed 6.2 percent higher at $54.46 on the Nasdaq on Wednesday.

(Reporting by Lisa Baertlein and Jessica Hall, editing by Matthew Lewis and Ted Kerr)

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