Ron Shaich’s Franchising Ideals
Ron Shaich, Panera's founder and executive chairman.
The franchising model can take many forms, but the leader behind Panera says there are some key factors that enabled the brand’s incredible franchise growth over the last 26 years.
Panera now has more than 2,040 restaurants across the country, more than 1,100 of which are franchised. But the company still has just a handful of franchisees, which have an average of about 44 locations each.
Ron Shaich, the leader behind Panera’s growth, said they stuck with the limited franchise model because it worked really well for the company and the franchisees.
“Long after we had financing needs, we had a pristine balance sheet, we continued to franchise because it was a great model and they ran great stores. But we only had 25 franchisees,” said Shaich. “There was a joke at Panera that we’d call a franchise meeting and have all our franchisees fly in on their own jets. Which was great, that’s what we want,” Shaich told Franchise Times.
The franchisees were more than happy to gas up the Gulfstream for a little face time; after all, they make pretty good money. According to the most recent franchise disclosure document, franchised locations bring in net sales of $2.5 million. Earnings before interest, taxes, depreciation and amortization (EBITDA) was 14.9 percent for company stores with a 10 percent net profit. Even if those numbers don’t reflect franchised locations exactly, it’s still around $11 million in net profit for the average franchisee.
That had Shaich and the leadership team salivating about the 5 percent royalty, right? Not exactly. He said he focuses on the end goal, likening his focus to that of a diabetic keeping things in check.
“My friend is a diabetic, his mission is to stay alive as long as us. He’s focused on keeping his blood sugar between 70 and 140; his means are diet exercise and all that. What I care about in business is creating value, but that’s a byproduct, not the end that I’m completely focused on,” said Shaich. “But I’ve built $8 billion in value creation, but I never focused on it or the stock price. What I focused on was having a better competitive alternative, then having a way to distribute it at broad scale.”
For Shaich and Panera, franchising was just the ideal means to get that local distribution.
“The means are the quality of the food, the quality of the environment and it would include franchising as appropriate, so if franchising makes sense in certain instances, if [a brand] is mass market, if you’re looking for lots of distribution,” said Shaich. “Franchising is not a financing scheme, it’s a distribution scheme.”
It’s a model Shaich especially likes for Panera because it means local operators with hyper-local market knowledge—something that can be lacking in a company-only restaurant brand. Of course, to bring in the 25 highly sophisticated franchise groups, the brand and the leadership need to deliver.
“If you don’t have something to give the franchisee, if you’re not giving them a powerful concept, if you’re not giving them the leadership to evolve and grow, you’re just creating extraordinary headaches and pains,” said Shaich. “I see people franchising left and right, and I think, ‘Are you nuts?’ You don’t franchise until you’re stable and have high consistency. Otherwise, it's a down payment on legal fees and it’s a crazy model. It’s not a way to finance your business, it’s not a way to get rapid distribution.”
As for the big debate between corporate operations and the asset-light model that gets investors excited, Shaich says neither is perfect.
“Twenty years ago, everything was about company-owned stores, that as the action. In the last 10 years we’ve gone to asset-light models and everybody is franchised. I think neither approach is right,” said Shaich.
To him, it’s a matter of asset allocation, and like other assets, diversification is ideal to get over the business bumps and jostles.
“In the Great Recession, you really wish you had all the debt; in the last seven years you wish you had all equity. The truth is nobody can time it all right,” said Shaich.
Shaich remains the executive chairman of Panera, but stepped down as CEO soon after selling the company to JAB in a $7.5 billion take-private acquisition. He's now focused on his private equity fund, Act III holdings. Watch for more on that in the March issue of Franchise Times.