While most of the financial world focuses on Europe and waits with bated breath for every new development in Greek parliamentary voting, S&P sovereign-debt rating, or ECB bank-lending stimulus, we would like to point out that economic indicators in the US have been showing modest but real progress.
Without downplaying the importance of the issues that are at stake in Europe (which we believe are extremely important issues, and which we have discussed in this and this recent post), we would suggest that investors might want to pay attention to some of the companies in the US that we think are well-run and positioned in front of what we call "fertile fields for future growth."
One such company is Panera Bread*, which operates a chain of "fast casual" restaurants which they call "bakery-cafes" distinguished by fresh-baked artisan breads, hormone-free chicken, all natural ingredients, and a dining atmosphere that very different from a typical "fast food" establishment.
Panera Bread calls their concept "fast fresh," which points to one of the reasons that we believe the company is operating within a larger paradigm shift that may constitute a "fertile field of growth." The explosion of the fast-food restaurant concept during the 1950s through 1980s corresponded with a paradigm-shift in pace of life in the United States after World War II. The tradeoff consumers made, however, was in the healthiness of the meal -- you don't always feel very good (or very good about yourself) after consuming a fast-food meal.
Fast-fresh seeks to counteract the negative aspect of traditional fast food without sacrificing the main positive aspect of the fast-food concept (the "fast" part). Instead of plastic decor, bright and unnatural colors, and mass-produced bread, Panera features fresh-baked breads (fresh dough is delivered daily from strategically-located fresh-dough facilities that have an optimal distribution radius of 300 miles), a healthy menu, and a natural ambiance emphasizing earthy colors and free wi-fi.
The history of the company provides a clue to another paradigm we believe is important to the investment thesis. In 1976, a French oven manufacturing company created a showcase restaurant in Boston's newly-renovated Faneuil Hall Marketplace, dubbed Au Bon Pain (French for "with good bread"). In 1978, investor Louis Kane bought the restaurant and began expanding in the Boston area. In 1981, he was joined by political consultant and cookie chain regional manager Ronald Shaich, and together the two began pioineering a new concept in fast-food, the bakery-cafe.
At about the same time, in Kirwood, Missouri, a man named Ken Rosenthal was appropached by his brother about starting a business based on the sourdough bakeries popular in San Francisco. Ken and his wife traveled to SF, learned sourdough baking methods, and founded St. Louis Bread. The concept was successful, and they began expanding slowly over the next few years. By 1993, they had grown to twenty cafes. At that time, their business was acquired by Au Bon Pain, which had gone public in 1991. The concepts of the two companies were very similar, serving breakfast and lunch and featuring baked goods, made-to-order sandwiches, soups, salads, and locally-roasted coffee.
Eventually, the Au Bon Pain line was sold to a private equity firm and the remaining St. Louis Bread bakery-cafes were branded as Panera Bread bakery-cafes (except in St. Louis itself). The company has now grown to over 1,400 locations.
The interesting thing to note about this story is that Panera's success appears to be built in part upon the expansion of an urban phenomenon into suburban, "ex-urban," and even "sub-rural" markets. The concept of a "corner bakery" is an urban concept, and the convenience of having fresh-baked bread available in the neighborhood, and the cultural phenomenon of having neighborhood delicatessens and bagel-shops, are primarily an urban phenomenon in the United States. Panera has built a business model based on capturing the benefits of this primarily urban experience and exporting it to non-urban settings (suburban, collegiate, upscale rural, etc).
The company, of course, continues to have a significant presence in cities, but that is not surprising -- by making a successful urban concept repeatable, they can compete in cities as well, gaining economies of scale and using their superior resource base to their advantage.
Finally, the company faces an attractive potential field of growth in the large portions of the country where there are still few or no Panera Bread bakery-cafes. Our internal analysis suggests that, if the saturation level of Missouri can be projected to the rest of the US, the country is still under 50% penetrated in terms of the addressable market for the Panera Bread concept.
This is an example of the type of company that we look for as a potential destination for investment capital, and the kind of growth story which we seek to connect our investors with so that they can participate in the company's future earnings.
To read about other companies which we believe exemplify some of the same criteria, please visit this previous post, which contains a description of a different investment thesis and links to others we have published in the past.
* At the time of publication, the principals of Taylor Frigon Capital Management own securities issued by Panera Bread (PNRA).
