As the shift in American attitudes towards "traditional" fast food has become more pronounced in recent years, Panera has emerged as one of the happy campers of the restaurant industry. Wounded bears, in the form of MCD, WEN, and others, pose a danger for PNRA.
In February, we wrote that Panera’s mix growth outlook was negative. Further evidence is emerging that competitors from QSR and Casual Dining are looking to challenge Panera’s position as the “healthy” option, a factor that could represent an added headwind to Panera comps going forward.
Panera Bread’s position as a healthy QSR option that is relatively free of competitors is gradually changing as casual dining chains offer lower price points and chains like Wendy’s upgrade their menus to include items that are cheaper than Panera’s core offerings but are marketed as healthy eating options. McDonald’s offering healthier menu alternatives, such as the McWrap, and investing in marketing the item aggressively, further underscores the industry-wide focus on healthier options that are sought by millennial consumers.
Happy Camper, Meet Wounded Bear(s)
We believe that the market has been shifting away from Wendy’s, McDonald’s, and other “traditional” QSR players for years. The impact of this shift in consumer preferences on McDonald’s has been masked, to a degree, by successful but transient products like frappes and smoothies. McDonald’s “millennial problem”, well described by Maureen Morrison at Adage, is front-and-center for the company’s marketing strategy.
We are not optimistic that McDonald’s marketing shift will solve its issues but we do believe that Panera’s traffic trends are likely to be, on the margin, negatively impacted. Ultimately, when MCDonald’s hand is forced, the company will invest more meaningfully to change its brand’s perception among millenials who, increasingly, want fresh and organic food offered in a customizable manner.
McDonald’s and other traditional QSR players are scrambling to change with the times. Beverage initiatives at McDonald’s have worked as short-term panaceas but we contend that soft sales growth is symptomatic of a changing business environment as well as MCD's business becoming overly-complex. We believe that traditional QSR management teams see Panera’s brand positioning as an attractive path for the future. Given the deep pockets of this industry and the highly competitive nature of the companies involved, this will present a headwind to Panera’s same-restaurant sales going forward.