Panera Bread 2005 Annual Report Download - page 11

5
FRANCHISE OPERATIONS
We began a broad-based franchising program in 1996. We are continuing to extend our franchise relationships beyond our current
franchisees and annually file a Uniform Franchise Offering Circular to facilitate sale of additional franchise area development
agreements (ADAs). The franchise agreement typically requires the payment of a franchise fee of $35,000 per bakery-cafe (broken
down into $5,000 at the signing of the area development agreement and $30,000 at or before the bakery-cafe opens) and continuing
royalties of 4-5% on sales from each bakery-cafe. Franchise-operated bakery-cafes follow the same standards for in store operating
standards, product quality, menu, site selection, and bakery-cafe construction as do Company-owned bakery-cafes. The franchisees are
required to purchase all of their dough products from sources approved by us. Our fresh dough facility system supplies fresh dough
products to substantially all franchise-operated bakery-cafes. We do not finance franchisee construction or ADA payments. In
addition, we do not hold an equity interest in any of the franchise-operated bakery-cafes.
We have entered into franchise ADAs with 41 franchisee groups (area developers) as of December 27, 2005. Also, as of December
27, 2005, there were 566 franchise-operated bakery-cafes open and commitments to open 416 additional franchise-operated bakery-
cafes. We expect these bakery-cafes to open according to the timetables established in the various ADAs with franchisee groups, with
the majority opening in the next four to five years. We expect our area developers to open 80 to 85 new franchise-operated bakery-
cafes in 2006. The ADAs require an area developer to develop a specified number of bakery-cafes on or before specific dates. If a
franchisee fails to develop bakery-cafes on schedule, we have the right to terminate the ADA and develop Company-owned locations
or develop locations through new area developers in that market. We may exercise one or more alternative remedies to address
defaults by area developers, including not only development defaults, but also defaults in complying with our operating and brand
standards and other covenants under the ADAs and franchise agreements. At the present time, we do not have any international
franchise development agreements.
BAKERY-CAFE SUPPLY CHAIN
Bakery-cafes use fresh dough for their artisan and sourdough breads and bagels. Fresh dough is supplied daily by the fresh dough
facilities to both Company-owned and franchise-operated bakery-cafes. There were 17 regional fresh dough facilities, of which 16
were Company-owned and one was franchise-operated, as of December 27, 2005, December 25, 2004 and December 27, 2003.
We believe our fresh dough facility system provides a competitive advantage. The fresh dough facilities ensure consistent quality
and supply of fresh dough products to both Company-owned and franchise-operated bakery-cafes. We focus our growth in areas that
allow us to continue to gain efficiencies through leveraging the fixed cost of the fresh dough facility structure and to selectively enter
new markets which require the construction of additional facilities when sufficient numbers of bakery-cafes may be opened that
permit efficient distribution of the fresh dough. The fresh dough distribution system delivers product daily to the bakery-cafes.
Distribution is accomplished through a leased fleet of temperature controlled trucks operated by our personnel. At December 27, 2005,
we leased 138 trucks. The optimal distribution is approximately 300 miles, however, when necessary, distribution range may be 500
miles. An average distribution route delivers dough to 6 bakery-cafes. Although we may contract for the supply of ingredients with
only one supplier, we believe there are numerous suppliers of needed product ingredients and we could obtain ingredients from
another supplier should we need to.
We have contracted externally for the supply of the remaining baked goods in the bakery-cafes, referred to as sweet goods. In
November 2002, we entered into an agreement with Dawn Food Products, Inc. to provide sweet goods for the period 2003-2007. The
agreement with Dawn is structured as a cost plus agreement. Sweet good products are completed at each bakery-cafe by professionally
trained bakers. Completion includes finishing with fresh toppings and other ingredients and baking to established artisan standards.
We use independent distributors to distribute sweet goods products and other materials to bakery-cafes. With the exception of
fresh dough products supplied by the fresh dough facilities, virtually all other food products and supplies for retail operations,
including paper goods, coffee, and smallwares, are contracted for by us and delivered by the vendors to the distributor for delivery to
the bakery-cafes. The individual bakery-cafes order directly from a distributor two to three times per week.
Franchise-operated bakery-cafes operate under individual contracts with one of our distributors or other regional distributors. As of
December 27, 2005, there were three primary distributors serving the Panera Bread system.
COMPETITION
We experience competition from numerous sources in our trade areas. We compete with specialty food, casual dining and quick
service restaurant retailers including national, regional and locally owned restaurants. Our bakery-cafes compete based on customers’
needs for breakfast, lunch, PM “chill-out,” lunch in the evening, and take home bread sales. The competitive factors include location,
environment, customer service, price, and quality of products. We compete for leased space in desirable locations. Certain of our
competitors may have capital resources exceeding those available to us. For further information on competition, see “Item 1A. Risk
Factors” in this Form 10-K.