It's been a long time coming, but Panera Bread
) Canadian expansion, which started with a single Toronto-area store back in October 2008, announced on December 28, 2011, that five new locations will open in 2012 to go along with its three existing bakery-cafés. Although it's taken more than three years to open its first few stores in Canada, I think you'll find that the expansion process will move along nicely in 2012, helping Panera grow beyond its 1,504 company-owned or franchise-operated bakery-cafés. (For more, see Earning Forecasts: A Primer
Bump in the Road
Panera awarded Millennium Bread Inc. an area development agreement for the Greater Toronto Area in 2008. The agreement specified that the franchisee
would open three bakery-cafés in the Toronto area before Panera would authorize any additional expansion in Toronto and other parts of the country. Millennium opened its three bakery-cafés in late 2008, but the relationship obviously changed, as Panera took back the stores in December 2010 for a total sum of $4.8 million. The move temporarily put its Canadian expansion on hold until May 2011, when it awarded Covelli Enterprises the rights to open Panera bakery-cafés in Toronto. Its first will open in the heart of downtown on January 24, 2012.
Covelli is the largest operator of Panera Bread franchises in America, with 190 bakery-cafés in Ohio, Pennsylvania, West Virginia, Kentucky, Florida and now Ontario. In addition to being the largest Panera franchisee, it's considered the fifth-largest restaurant franchisee in America. If anyone can grow Panera in Canada, it's Covelli. By comparison, Starbucks (Nasdaq:SBUX) has at least 47 stores in downtown Toronto alone and while the average Starbucks is one-fifth the size of a Panera bakery-café, I think you can see the potential. Toronto is the fifth largest city in North America behind only Mexico City, New York, Los Angeles and Chicago. The opportunity is real, despite past examples of American restaurant chains like Krispy Kreme Doughnut (NYSE:KKD) failing miserably here. I'm confident that it has the right operator to be a big success.
The best example of the Canadian potential is BG Urban Café out west in British Columbia. Founded in Vancouver in 1979, it was the original bakery-café chain north of the border. Once known as the Bread Garden, hence the BG, it changed names after Spectra Group of Restaurants sold the franchising rights. Now owned by SPBG Franchising, the new owners plan to expand beyond its 13 locations in British Columbia to Alberta and Ontario.
Panera only looks at multi-unit restaurant operators like Covelli. A typical area agreement might call for 15 bakery-cafés to be opened in six years. Covelli can certainly handle that. The original franchise fee is $35,000 per store or $525,000 for a full complement of 15. The franchise fee isn't the most important part of the agreement. The real moneymaker is royalties
, which are 5% of gross sales, paid monthly. The average franchisee-owned bakery-café has annual net sales of $2.3 million. Therefore, the royalties on 15 stores comes to $1.73 million annually, much of it pure profit.
In the first nine months of 2011, Panera received $66.6 million in franchise royalties and $1.6 million in franchise fees, of which $63.6 million was profit. At the end of the day, a successful franchisor is one whose royalties significantly outweigh fees, whether it be Panera Bread, McDonald
), YUM Brands
) or any other. Thinking big picture, there are 105 locations in the state of California, with 45 company-owned and 60 franchise-operated.
Canada has a similar population, so let's assume the potential number of bakery-cafés north of the border is 105. With that number in operation, Canada could generate as much as $25 million in profit from $106 million in total revenue. That's an excellent profit margin and certainly one worth pursuing. (For related reading, see A Look At Corporate Profit Margins.)
The Bottom Line
It might not seem like much, but I believe the $25 million figure above is just the tip of the iceberg. If Panera, along with savvy operators like Covelli, can execute as they always have, the number could be much higher and awfully tasty indeed.
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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.