Panera Bread 2007 Annual Report Download - page 5

The good news is that by January 2008 we had contracts to buy all our wheat for the year at an all-in cost
of $14 per bushel. By February 4, 2008, the all-in cost of wheat traded over $20 and then hit $24 per
bushel by February 13, 2008 on the Minneapolis Grain Exchange. To give you some understanding of the
magnitude of the impact of wheat prices, you should know that, without price increases by us, the full
year incremental wheat cost in 2008 vs. 2007 would impact the company by approximately $27 million,
or about 55 cents per diluted share.
Know that we intend to increase dough transfer prices to cover the higher cost of wheat. However, our
ability to do so is complicated by the contractual relationships we have with our franchisees, which
require us to take retail price increases first and then give franchisees 45 days notice before affecting a
dough transfer price increase. As a result, it will take us several quarters before we will be able to fully
offset our increased costs for wheat. We have raised our dough transfer prices in both the first and second
quarters of 2008, but this will not be enough to completely offset the increased cost of the wheat we are
purchasing. By the third quarter, we expect to have sufficient dough transfer price increases in place to
offset the elevated cost of wheat that we have contracted to buy during the second half of 2008. We
expect the net impact of the hyperinflation in the wheat markets will make 2008 earnings growth choppier
than what we normally experience. Overall, however, we do not currently expect wheat prices to
materially adversely affect earnings growth in 2008.
Grow Transactions
The second prong in our 2008 plan calls for counter-acting the negative consumer headwinds so many
others in the food and retail industries are experiencing by building transaction growth through a number
of initiatives.
The first tactical action to grow transactions is the system-wide rollout of our breakfast sandwiches. These
new items fit naturally in our product line without increasing fixed labor costs. Let me describe them for
you. We crack fresh eggs in the cafe and add other high-quality ingredients like Vermont white cheddar
cheese, all-natural sausage and applewood smoked bacon. We then serve it on our freshly-baked ciabatta
bread. These sandwiches are made by bakers, nor microwaves. They belong in Panera. We invite you to
visit your neighborhood Panera and experience them. We know you will be pleased.
Additionally, we plan to increase our expenditures on billboard and radio advertisements significantly in
2008. As one of the least advertising intensive companies in our industry, we believe there is a real
opportunity to use media to build awareness and transactions. Over the last two years, we have done
extensive research and tested various media and, based on this research and testing, we will initiate a
more intense media effort in 2008 in those markets that we have identified as being most responsive to
media (about half).
We also plan to use our Via Panera catering program to build transactions in 2008. If executed properly
— with an excellent customer experience and strategic pricing — we believe we have a very powerful
growth vehicle in our hands. Count on us to do just that.
And, as ever, we are focused on quality of operations to build transactions — this means speed, accuracy
and a further improved customer experience to increase differentiation.
It is clear to us that our growth in transactions in 2007 was a response to the differentiated experience we
offered customers. This is the key to the future and you can expect more of this from us.
The 2007 Sandelman and Associates survey is indicative of the strength of our concept and the experience
we offer customers. The survey, considered the definitive measure of customer satisfaction and concept