Tag Archives: Panera



I really like Starbucks. It’s my social life in the morning. Everyone in the store knows my name (Roger that!) and my drink (a grande’ soy latte’, no foam, costs $6.04 in Manhattan, including tax). It therefore costs me $2200 annually of after tax money, so it costs well over $3,000 per year, pretax, for my morning coffee experience.

On the other hand………..

As you may have heard, Panera is now offering a monthly coffee program, whereby I can get unlimited coffee for the month for $8.99, any size, any flavor. (no soy for that price, admittedly)

Burger King has been offering, since last March, a monthly coffee subscription for $5.00 per month.

McDonald’s has been offering any size coffee for $0.99. You can also get two breakfast sandwiches for $4.00, so two people can have a McMuffin and cup of coffee for $6.00 plus tax.

Wendy’s is aggressively rolling out a new breakfast program, starting today. They have been promoting “two for $4” sandwich deals for some time, so we can expect the breakfast offerings to be similar. They are planning to spend $40-50M on advertising of the introduction so we can assume they will be aggressively pricing the coffee.

Dunkin’ Brands, with an extensive selection of donuts and other pastries, sells their coffee at $2.00 a cup, more or less, a little less for a “regular”, a little more for “large”.

All these companies are clearly hoping that the customer will buy something else besides the coffee, as long as they are at the store. However, without question, the pricing environment for our morning cup of coffee is getting more competitive..


Away from the publicly traded companies, perhaps Panera, with their established reputation for the quality of their breakfast offerings, combined with their “community gathering place” comfort (pioneered by Starbucks) will see the largest incremental positive effect of their new breakfast program. The publicly held companies will be fighting each other for market share, since nobody has a  “moat”.

Relative to Starbucks: This can’t be a plus. Will it cripple them? Certainly not, but we suggest that the comps will slow rather than accelerate. If only one out of twenty customers makes a switch, it will be noticeable, and there is likely to be at least one of their competitors fairly nearby. They could sell more food but that’s already been the strongest part of their comp growth the last ten years. Their competitors sell food as well, and Starbucks doesn’t have a material edge in that regard. Stocks sell, by the way, based on the “second derivative”, the change of pace of the growth rate, still growing but  how fast?

If there were a Panera or McDonald’s between “my Starbucks” and my office, I would be sorely tempted to adjust, even if I have to make new friends. I could afford to spend another day or two on the golf course 😊

Roger Lipton



About a year ago, two high priced acquisitions were made, namely Panera Bread and Popeye’s Chicken. We said at the time that these two deals were not harbingers of a broader trend. Panera was a strategic acquisition by a deep pocketed European buyer (JAB) . Popeye’s (PKLI) was a another franchise vehicle for the highly leveraged financial engineers at Restaurant Brands (QSR). Inexpensive capital (i.e.very low interest rates) and highly valued paper (QSR equity was trading at over 20x trailing EBITDA, with access to billions of debt) allow for some abnormal risk taking. Some have called it “misallocation of capital”.

It’s a year later, and two more highly priced deals are now on the radar screen. Zoe’s Kitchen has been bid for by Cava Grill, joined by Ron Shaich of Panera fame. ZOES is trading above the $12.75 suggested price, in the expectation that a higher bid could emerge. You can find our most recent description of Zoe’s, from our website article here:


We are not going to comment further  on this situation, at the current time, other than to alert our readers that it is an interesting case study.

Dunkin’ Brands Group, a much larger company, has been recently touted as an acquisition target, perhaps by Coca Cola (KO), and DNKN is trading at an all time high. The latest writeup, from our website, on DNKN is provided here:


Our attitude here is that, Coca Cola, or anyone else, would be paying an unnecessarily high price for a Company that is not the industry leader. The Dunkin’ brand has been lagging the dominant Starbucks by a large measure, clearly losing market share, and there is no reason to believe that will change in the foreseeable future. While Dunkin’ works to refresh it’s approach, Starbucks is more aggressive than ever as it works to overcome the “law of large numbers” and cope with industry headwinds such as the increasing cost of labor.

DNKN trades today at about 18x trailing twelve months EBITDA,  twenty seven times estimated earnings for 12/31/18, and it is difficult to project more than high single digit earnings growth in ’19 and beyond. If DNKN remains public, stock buybacks might take EPS growth into low low double digits, but DNKN has already leveraged its  balance sheet to about 5x trailing EBITDA, so stock buybacks won’t do too much more than cover executive options. Few investors are enthused about paying 25x forward earnings, and 18x TTM EBITDA,  for a company building earnings something like 10%. This is especially true in the case of DNKN, where a cash can be made that much of the free cash flow should be re-invested in the system. New and improved products, marketing, mobile order and pay, and other obviously lagging elements of the system are overdue to be addressed. The franchisees have been fighting the daily battle while the Company has bought back over a billion dollars worth of stock, and new highs in the stock have enriched the franchisor’s executives.

Asset light franchisors, with their supposedly free cash flow (because franchise systems have to be supported) are very desirable properties. Furthermore, Coca Cola, or another deep pocketed strategic acquirer could make the case, as Warren Buffet has often made, that one can afford to pay a fair price for a high quality asset run by proven dedicated executives, and the long term success will overcome the initial premium price. In this case, however, we don’t believe that DNKN has either a dominant industry position, nor is the management team outstanding.

Lastly, if KO or someone else is determined to get into the franchised coffee shop business, we suggest that this USA economic expansion and stock market boom is closer to its end than its beginning. A more opportune time to purchase almost anything may not be far away. We wouldn’t want to own DNKN at this valuation because the Company’s performance doesn’t support the stock price. We suggest, further,  that potential purchaser’s of DNKN would be better advised to play another day.

Roger Lipton



Credit Cheryl Bachelder and Ron Shaich, Cheryl for her ten year stint leading Popeye’s Louisiana Kitchen (“Popeye’s”) to prosperity, and Ron Shaich, who built Panera Bread Company (“Panera”) from 20 stores (originally called “St.Louis Bread”) to 2000 stores over 25 years. Each has now sold, (agreed to sell, at PNRA) at valuations at the very top of historic ranges, roughly 20 times trailing EBITDA.

Popeye’s was bought by Restaurant Brands International (publicly traded QSR), which also owns Burger King and Tim Horton’s. It must be acknowledged that QSR has produced admirable operating results since acquiring Burger King and Tim Horton’s. The largest shareholder (16.66% according to Bloomberg) in QSR is Pershing Square Capital, managed by William Ackman. Simply put, Popeye’s has become the third leg within their QSR platform.

Panera is about to be acquired by JAB Holding Co., a Luxembourg-based privately held investment fund that has also acquired (at top dollar) Einstein Noah Restaurant Group, Caribou Coffee, Krispy Kreme Doughnuts, Peet’s Coffee & Tea, Keurig Green Mountain, (all previously publicly held in the US). Also in their portfolio, unfamiliar to us, are Stumptown Coffee Roasters  plus Intelligentsia Coffee.  JAB Holdings, according to Wikipedia, is 95% owned by descendants of chemist Ludwig Reimann, who co-founded, in 1828, with Adam Benckiser, the Benckiser chemical company. JAB is obviously very substantial since they paid $13.9 billion for Keurig Green Mountain, $1.35 billion for Krispy Kreme, and now over $7 billion for Panera.

We don’t doubt there will be corporate synergies at both parent companies. Popeye’s, Burger King, and Tim Horton’s can learn from one another and administrative overhead can be shared.  Panera and Einstein’s and others can sell the various coffee related products controlled by JAB, and some of Panera’s food skills (and technology expertise) can be installed elsewhere in the portfolio. Corporate overhead can be spread more efficiently, and the public expenses at Popeye’s and Panera can obviously be eliminated, reducing the apparent valuation modestly. The point of this discussion, however, is more general. While Restaurant Brands and JAB holdings have taken stakes that will be very long term in nature, the history of the restaurant industry does not provide comfort.

People have to eat and drink, and investors are invariably seduced by the apparent simplicity and attractive returns on capital for successful operators, but there is no consumer product line more demanding to produce and deliver than freshly prepared food and drink. The challenges have only become more intense over the years, with increased competition which leads to more choice for consumers, higher labor costs, and higher rents for prime locations. Lately, slowing mall traffic, financially stretched lower and middle class consumers, and deflating grocery store prices have exacerbated the situation. Problems such as experienced at Chipotle can happen almost anywhere, so even a company that’s “on a roll” can be undermined at any time.

One of the most predictable elements of long term success within the restaurant industry has been the intense involvement of the founder. Off the top of my head, examples include Ray Kroc at McDonald’s, Dave Thomas at Wendy’s, Alex Schoenbaum at Shoney’s, Norman Brinker at Chili’s, Robert Rosenberg at Dunkin’ Donuts,  Jim Patterson at Long John Silver’s, Jim Collins at Collin’s Foods, Howard Schultz at Starbucks, Jack Fulk and Richard Thomas at Bojangles, to name just a few.  Almost all of these companies, some of which are still prominent, do not enjoy the “first mover” leadership and prestige of their earlier days. The only one still clearly at the top of the heap is Starbucks.  We attribute that to the fact that Howard Schultz, clearly a visionary and an exceptional leader, happened to be a young man when he started Starbucks, and of course the four wall economics (to this day)  provide a powerful growth engine. Schultz has stayed healthy, enthusiastic and deeply involved over thirty years (still young in his early 60s). Interestingly, Starbucks stumbled noticeably when he stepped aside seven or eight years ago. He stepped back after a couple of years and the great performance resumed. We should note that he is currently taking a step back, if not aside, so hopefully the company won’t suffer noticeably from his reduced role.

It is ironic that 2016 was a banner year for bankruptcies within the chain restaurant industry. Nine restaurant companies, including 14 chains, filed for bankruptcy. For the purpose of this discussion, we need not concern ourselves with secondary or tertiary brands. However, among the bankruptcies were Logan’s Roadhouse, Hometown Buffet, and Ryan’s Family Steakhouse. We “knew” these chains, and even owned stock in each of them when they were publicly held. They were generating compelling store level economics, excellent corporate returns on capital and steady growth. They had long runways for future growth. In short, they were “best of breed” at the time (just like Popeye’s and Panera today) and the stocks were valued accordingly. Ted Moats at Logan’s, Roe Hatlan at Hometown, and Alvin McCall at Ryan’s were dedicated and effective leaders. The reasons for each corporate demise have varied, but we contend that if the original dedication to detail and operational excellence had been maintained, bankruptcy need not have been the result. Times change and people change but competitive pressures or general  economic downturns have never put any well situated restaurant company out of business. The problems have invariably been self inflicted. Why should Logan’s be gone when Texas Roadhouse has done so well? Why should Hometown and Ryan’s be gone when Fogo de Chao (all you can eat) is doing well. The departed companies might not be as dominant today as they once were but they could have still be reasonably prosperous. At the very least they could have been survivors, even in an increasingly challenging environment.

This brings us back to the top dollar purchases of today’s “best of breed” Popeye’s and Panera. Forty years ago investors bought “conglomerates”. Twenty years ago, they called them “rollups”. Over the last couple of years “platform companies” have come into vogue. Unfortunately, especially for many institutional investors, Valeant Pharmaceuticals recently demonstrated that not all apparent synergies at platform companies pay off. Williiam Ackman’s Pershing Capital Management, 16.6% owner of QSR as noted above, took a $4B realized loss on the sale of Valeant.

QSR enjoys a high valuation (30x ’17 EPS estimates and 19.9x trailing EBITDA), and can borrow at still low rates, so could afford to pay about 20x trailing EBITDA for Popeye’s. QSR is obviously comfortable expanding their “platform” JAB Holdings has billions of equity and more billions of borrowing power. They have to own “something” with long term “value” no doubt in addition to other assets and currencies around the world in an effort to maintain the family wealth over future generations. (I suspect they own at least a  little GOLD, as well.)  People have to eat, after all, and the apparent leadership position and predictable growth at Panera will make the price seem reasonable over time. On the other hand, as discussed above, Logan’s Roadhouse, Hometown Buffet, and Ryan’s Family Steakhouse looked pretty good in their time.

In conclusion: QSR and JAB Holdings can’t buy them all so I wouldn’t be buying restaurant stocks with the prospect of being taken out by a possibly overenthusiastic purchaser. Cheryl Bachelder has already left Popeye’s, and we hear that franchisees are already a bit apprehensive. They will get over that, but a new CEO will have to prove himself or herself. Ron Shaich at Panera has said “we’re here, nothing changes”, but he is a dedicated family man, very philanthropic, no doubt has other interests as well, so time will tell.  A couple of predictions we are prepared to make: (1) The valuations of Popeye’s and Panera will prove to be “outliers” on the high side over time, a reflection of the still very low interest rate environment which encourages unnecessary risk taking (2) Cheryl Bachelder’s absence and our prediction of Ron Shaich’s reduced commitment and involvement over time will be reflected in less impressive performance at the store level, for both customers and owners. We are not predicting disaster, just “underperformance” relative to expectations implied by the purchase price.

Lastly, we’d like to take this opportunity to wish both Cheryl and Ron all the best for their future. Both are extraordinary business people and admirable individuals. They did a great job for all their stakeholders, including a shareholder exit at “top dollar”. Most importantly, they invariably provided the best possible leadership by example to their respective organizations.