Panera founder Ron Shaich acts as ‘Sherpa’ to operators
Ron Shaich discussed his strategy for Act III Holdings at the Restaurant Finance & Development Conference last November.
Summiting Mount Everest is a daunting feat that few achieve alone. Most climbers rely on someone who has been there, someone who knows the route and how to avoid the many pitfalls.
“Building a nationally dominant restaurant concept is very similar,” said Ron Shaich, the founder behind Panera’s growth. “A large part of our role and where our value comes in is mistake avoidance. We’ve seen all the mistakes there is to make in growing from one café to the eighth largest restaurant chain in America. So we bring that kind of perspective to the boardroom.”
Back in the 1990s, when he started growing the concept, he saw a major shift in restaurant retail. Consumers began to “hold their nose” when it came to mass-produced burgers and plastic environments. The small St. Louis bakery concept carved itself a hearty portion in what would eventually become the $50 billion fast-casual segment as it grew to nearly 2,400 units. It outpaced Starbucks by four times, Chipotle by six and beat the S&P 500 by 44 percent.
Since stepping back from the day-to-day at Panera, Shaich's been focused on Act III Holdings, the private equity fund dedicated to finding concepts for the next phase in restaurant retail.
“Now that fast casual has become substantive and large, I believe the next turning of the wheel will be specialty fast casual, just like specialty retail,” said Shaich.
He’s quick to say it’s not just another private equity fund. Firstly, the $300 million fund was capitalized only by Shaich and close partners, so there’s no push to sell after a few years and funnel cash to investors. The partners have also built out value-added services including a technology arm, research and strategy on top of that Sherpa-like guidance. The fund will also invest in every round at a pre-determined multiple, which means founders know they’ll have capital and exactly how much there will be. That, Shaich said, helps business builders get off the fundraising treadmill.
“Mostly I try to keep them focused on what got them to the game in the first place, not capital raising, not building infrastructure but staying focused on continuing to evolve that concept to be a better competitive alternative, which is to get your customer to walk past your competitor to you,” said Shaich. “There’s a reason almost nobody ever makes it—it’s really hard. If we can help increase those odds in a material way, we will have given a great gift.”
The fund is invested in four brands with ownership stakes reaching up to 80 percent, though the details were not disclosed. Each, Shaich says, has a high level of authority and the potential to become “category dominant” players.
There’s Tatte Bakery & Café, the upscale concept with 11 locations producing a $3.5 million in average unit volume. Also the four-location Life Alive, a plant-based wellness concept with a $3 million AUV. Shaich called it a “spa for your insides” that aims to capitalize on the growing cohort of consumers seeking vegan and plant-forward concepts.
Clover, the 11-location fresh-focused concept, plays in plant-forward as well, doing $1.8 million out of a smaller prototype than Life Alive for $1,400 in sales per square foot. And finally there’s Cava, a 75-location Mediterranean concept known for long lines and rabid fans with a $2.4 million AUV.
At the core of each of those brands, according to Shaich, is true authority over their niches and real differentiation. That authority is key. It’s not something a concept can grow into; it’s part of the brand DNA.
“You don’t evolve it, you start with it and you start with that authority and build off of it,” said Shaich.
That was part of the thesis for the recent Zoes Kitchen acquisition. Cava acquired the brand in a $300 million transaction that combines the scale of Zoes with the authority of Cava. “Cava has the capabilities, Zoes has the real estate. Cava is inefficient today because it's 75 stores. Zoes is large but not very competitive. Put the two together and we have the potential to have a category-dominant player,” said Shaich.
Whether any of these brands become franchised is still to be determined, though Shaich said Panera’s limited number of highly sophisticated franchisees would be his chosen model, but only if it’s right for any of the Act III companies.
Above all, he’s using the fund to insulate great brands from the “pervasive short-termism” seen on the markets and in the endless fundraising. He lambasted the unsustainable march toward investor value at all costs during an energetic address to the crowd at the Restaurant Finance and Development Conference in November.
As a 26-year veteran at the helm of a public company and target of activist investors, he’s seen the outcome of public pressure better than most.
He’s curated his next act as venture capitalist to avoid those pressures, but as the sale of Panera netted Shaich nearly $400 million (pretax per SEC filings), it’s not all about stress relief.
As he describes his mindset: “I’m long-term greedy. Not short-term stupid.”