Panera Bread 2006 Annual Report Download - page 10

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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 26, 2006.
Also, as of December 26, 2006, there were 636 franchise-operated bakery-cafes open and commitments to open 359
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 85 to 90 new franchise-operated bakery-cafes in 2007. 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 and for their Crispaniยปhand-
crafted pizza. Fresh dough is supplied daily to both Company-owned and franchise-operated bakery-cafes by fresh
dough facilities, which are called our bakery-cafe supply chain. There were 19 fresh dough facilities, of which 18
were Company-owned and one was franchise-operated, as of December 26, 2006, and 17 fresh dough facilities, of
which 16 were Company-owned and one was franchise-operated, as of December 27, 2005 and December 25, 2004.
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 associates. At December 26, 2006, we leased
152 trucks. The optimal distribution is approximately 300 miles; however, when necessary, distribution range may
be 500 miles. An average distribution route delivers dough to 7 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 if necessary.
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. This agreement was subsequently extended to May 2008. 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, tuna and other materials to bakery-cafes.
With the exception of fresh dough products and the majority of our cream cheese 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 an independent 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. As of
December 26, 2006, there were three primary distributors serving the Panera Bread system.
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