1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Patricio Kehoe
Patricio Kehoe
Articles (164) 

Cheesecake and Baked Goods Fight over Market Leadership

November 07, 2013 | About:

The $31 billion fast-casual restaurant industry is a viable option for most middle-class citizens with a knack for cuisine. Between Mexican grills, quick service diners and bakery-cafes, the variety is endless. However, the Cheesecake Factory (CAKE) and Panera Bread Company (PNRA) demonstrate that market expansion and management are key elements to success in the industry.

Cheesecake Doesn’t Make the World Go Round [/b]When talking about popular casual dining restaurant chains, the Cheesecake Factory should definitely be worth a mention. Its 155 units focus on baked goods and desserts, but the 200 available menu items also extend to a larger cuisine variety. Apart from its namesake concept, the company operates the Grand Lux Café, and Southeast Asian chain, RockSugar Pan Asian Kitchen. Two bakery production facilities also add to revenue income and have helped the firm maintain stable growth margins, positioning them solidly in the casual dining niche.

This company has established its concept mainly by serving decadent desserts in chic locations, for an average price of $19. However, this dining price is well above the norm for casual diners and could be complex to sustain amongst increasing industry competition. In addition, a 3% to 5% rise in food costs this year might negatively affect the firm, requiring extra caution in order to keep operating costs in check. Furthermore, the fast-casual restaurant category has been growing continually and presents the greatest future threat, as rivals are abundant. By offering high-end ingredients at low prices (average of $12 per consumer), industry competitor Panera Bread Company, for example, could easily take over the company’s customer base.

Nonetheless, the Cheescake Factory has the advantage of very strong brand recognition, since it first opened in 1972. The firm generates an average of $10 million in sales per restaurant, due to high traffic, as well as its biannual menu innovation. The new SkinnyLicious menu, for one, offers over 50 low calorie options and has helped bump business matters considerably. However, in terms of international market expansion, the firm remains far behind its competitors’ tail. Despite plans to launch 22 new restaurants in the Middle East by 2016, the company lacks aggressiveness in its expansion strategy. And in view of the current domestic market saturation, this could put the firm’s growth to a halt. Investment guru Joel Greenblatt sold out his entire company stock, and I would wait for the company to expand before investing.

[b]A Bakery Café Takes the Stage
[/b]Panera Bread Company is the single largest fast-casual bakery café in the U.S. and represents a 50% share of the bakery café industry. This dominant market presence is due to the product sales from 1,700 restaurants. And these are evenly split between company owned stores and franchises. Hence, you can purchase its baked goods, sandwiches, salads and custom-roasted coffee varieties at the Panera Bread, Saint Louis Bread Co. or Paradise Bakery brands. Situated primarily in high traffic regional malls, this firm has shown impressive operating results in the past, earning them $3.9 billion revenue income in 2012.

Despite constant industry competition, there are several attributes that indicate a bright future. For one, due to the low real estate and labor costs in the fast-casual dining industry, you should expect close to a 10% market growth in the next few years. Additionally, this firm is set on expanding and started by opening 115 to 125 new units this year. And, the chain is expected to reach about 2,900 locations over the next decade, by acquiring additional smaller franchises. This business model will also give the firm a competitive advantage, by earning a steady stream of rent and royalty payments.

On the other hand, it’s important to mention this firm’s customer base. Composed mainly of high-income consumers, these guests are barely bothered by macroeconomic pressure. However, the company is set on reaching a broader target and, therefore, added some lower-priced products (like half sandwiches) to their menu this year. The My Panera loyalty program, initiated in 2010, was also a smart move for the firm. By rewarding customer loyalty and frequent visits, the program gathered over 14.5 million members and proved a clever marketing strategy. With all this in mind, investment guru John Hussman recently added 35% to his Panera Bread Company shares and I also feel bullish about this firm’s future growth.

[b]Bread Beats Cheesecake
[/b]Although the Cheesecake Factory has strong brand recognition in the U.S., its above average menu prices and lack of expansion outside North America could prove detrimental. Also, its 14 Grand Lux Café units grossly underperformed this year, further motivating me to shift my attention towards the Panera Bread Company. With its menu innovation, marketing strategy and franchise system, I believe this company has a brighter long term future.

[b]Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Patricio Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 4.4/5 (10 votes)


Please leave your comment:

Performances of the stocks mentioned by Patricio Kehoe

User Generated Screeners

pbarker46Hist. High Yield
andrewgu999valleylink - gogogo
DBrizanROTA ultimate18nov2017 1041p
DBrizanROTA18nov2017 1041p
DBrizanROTA18nov2017 1035p
DBrizanROTA18nov2017 1032p
DBrizanROTA18nov2017 1025p
averacjrnot about to fail
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat