It's been a long time coming, but Panera Bread's (Nasdaq:PNRA) 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.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

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.

Financial Implications

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's (NYSE:MCD), YUM Brands (NYSE:YUM) 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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Investing

    Top Cities Where Airbnb Is Legal Or Illegal

    Thinking of subletting your apartment on Airbnb? Make sure that you meet your city's regulations first.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!