Whopping wheat prices whipping Panera worse than bakery rivals

While soaring commodity costs are wreaking havoc on many restaurant companies, the hyperinflation of wheat has severely affected the restaurant-level margins—and the parent company’s earnings—at bakery-cafe segment leader Panera Bread Co.

Meanwhile, segment rivals like Einstein Noah Restaurant Group Inc. and Così Inc. were able to post improved first-quarter results chiefly on higher sales and their proactive cost controls at the restaurant level.

Einstein Noah’s efforts to lock in wheat prices in January at $8.40 per bushel combined with its increased sales helped the Denver-based company boost its profit by more than threefold.

Deerfield, Ill.-based Così said it took a 30-basis-point hit on food and beverage costs, but was able to offset that burden with reduced labor and general and administrative costs. It narrowed its first-quarter net loss by 28 percent.

Panera, however, reported a 190-basis-point drop in bakery-cafe margins for the first quarter, or a 1.9-percentage-point slip from last year. One hundred of those points were driven by what the company called an “unprecedented rise” in wheat costs. The company, which operates about 500 of its 1,252 locations, said its wheat costs rose to about $13 per bushel from $5.80 per bushel last year.

The company said it now has locked in wheat costs for the year at $14 per bushel.

“The total hit to our P&L throughout the year is about $17 million year-over-year from wheat, or about 130 basis points at the operating line,” chief financial officer Jeffrey Kip said in a call with investors.

While Panera sells dough to its franchisees and could therefore theoretically earn back what it spends on wheat, the company has a contract with franchisees that pegs its sale price of dough to corporate-store retail prices, not to wholesale prices.

To stem the costs of wheat, and to increase the dough price to franchisees, Panera said it plans to raise menu prices again, after jumps of 2.5 percent in November and an additional 2.7 percent in March. The price increases will be focused on its bagels and will take a tiered approach, which company executives said consumers had responded to favorably in tests that began in February.

In the tiered pricing structure set to begin systemwide June 18, signature bagels, including cinnamon crunch, Asiago and Dutch apple, will cost $1.25, and such nonsignature bagels as plain, everything, sesame or whole grain will remain at 99 cents.

“I think customers have heard so much about inflation in these products on the nightly news and they’ve seen it in the grocery stores that they’re giving folks like us permission,” said Ron Shaich, chairman and chief executive. “They don’t like it, but they at least understand it and don’t feel resentful of it.”

The rising cost of wheat, higher labor and interest expenses, and charges for locations Panera decided not to open led to a first-quarter profit decline of 17 percent. The company earned $12.4 million, or 41 cents per share, versus $15 million,or 47 cents per share, in the prior-year quarter.

Revenue for the quarter ended March 25 rose 27 percent to $305 million, aided by new unit growth and menu price increases that drove same-store sales improvements.

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