How Panera Bread Defies the Recession

What's the best business reaction to a recession? How about none at all. Unlike many outfits in the struggling restaurant industry, Panera, the soup and sandwich chain with more than 1,300 stores in 38 states, has stayed strong by standing still. "The key to Panera's success lies in what the company hasn't done," says Nicole Miller Regan, an analyst at Piper Jaffray. "Panera hasn't fallen victim to discounting. It hasn't levered up the balance sheet. It hasn't tried to change."

Such calm amidst the storm has paid off for shareholders. Panera stock is up 26% this year: in fact, it's one of the best performing stocks of the decade, having generated a whopping 1,560.65% return. Profits rose 38% in the third quarter, and sales in company owned stores rose almost 7% during the first 27 days of the third quarter (sales in franchise stores rose 6.3%). "For us, the recession has been the best of times," says Panera founder, chairman and CEO Ron Shaich. In an environment where even McDonald's, once a recession superstar, is reporting negative same-store sales (down 0.6% in November), Panera's continued growth stands out. "I've never seem restaurants this competitive," says Bob Derrington, an analyst at Morgan Keegan and a 30-year veteran of the industry. "It's a flea market out there. For Panera to keep their prices and still succeed like this — it's an astounding achivement." (See the best business deals of 2009.)

Shaich's recession-fighting philosophy is simple. "We understood that the fundamentals of the marketplace really haven't changed," says Shaich. "Unemployment went from 5% to 10%. There's 90% of society that is still employed. I couldn't capture all those people that are unemployed. They weren't eating out at all. All I could do was stay focused on who my target customer was, and not be reactive."

It helped that Panera's paninis were already hot products. "To consumers, Panera isn't just a refueling stop," says Derrington. "It's a treat, and you don't have to pay a ton of money for that experience." For about $6, you can get half a sandwich, soup or salad, and a drink.

To Panera's credit, the company didn't sit completely still in 2009. While the restaurant world cut staffs and shuttered stores, Panera continued to invest. "We've been basically opening up a new store every five days," says Shaich. "This is the time to grow. Real estate costs are down, development costs are down, volumes are up — these are the highest-return investment stores we'll ever generate." Panera has hired 20,000 new workers, rolled out new menu items, and improved the lettuce quality in its salads. Salad sales are up 30%. (Read a brief history of peanut butter.)

Now all the company has to do is repeat the sterling performance in 2010. Panera might not be able to stay out of the price wars forever. "I've never seen so many deals being offered," says Derrington. "They have to stay sharp." And they'll have to do it without Shaich, a highly respected CEO who will relinquish his day-to-day role this spring, though he will stay on as chairman. A transition is in place — company co-COO Bill Moreton will step into the CEO role. "I worry about keeping the concept special," says Shaich. "Is it worth walking across the street to? It doesn't matter how cheap it is. If it isn't special, there's no reason the business needs to exist."

Read "Restaurants Face Lean Times in the Economic Downturn"

See the worst business deals of 2009.