Vote of Confidence

A CONFIDENT COMPANY ON THE RISE
The line is six deep at the cash register at the Saint Louis Bread Co. bakery café in Brentwood, Missouri. It's rush hour, and people are crowding the counter, trying to decide on this morning's indulgence.

The decision isn't easy. Behind a glass case, arrayed like jewels, is a pastry lover's dream scape: flaky apple croissants, glistening pecan rolls, and a sugary, muffinlike concoction called a cobblestone. There are also fragrant loaves of bread: stone-milled rye, kalamata olive, and rosemary-and-onion focaccia. And there are bagels like they've never seen on the Lower East Side of Manhattan: cinnamon crunch, French toast, Asiago cheese, and "choc-o-nut" with powdered sugar.

The place is buzzing, but it's not just the usual doughnut-shop in-and-out crowd. A slick suit at a table in the corner is earnestly making a pitch to his breakfast companion, who's clearly not buying what he's selling. Laptops are open at tables near the fireplace. A woman in a print dress asks me if I'm here for the school-committee meeting. I'm not. I'm here to meet the choreographer behind this drama, Ron Shaich, chairman and CEO of Panera Bread.

Panera (still called the Saint Louis Bread Co. in St. Louis, where it originated) has been the darling of both customers seeking an alternative to fast food and investors hoping to find that rare company whose stock has been rising like a loaf of sourdough. Last year, Panera was the top performer on the Standard & Poor's SmallCap 600 Index, with a stock price that jumped 44% from October 2001 to October 2002. Shaich (pronounced Shake) and his team are bullish about their prospects. This year, sales are expected to top $750 million, and Shaich predicts that they will hit $1 billion by 2003. Panera now operates 414 bakery cafés (each with an average annual sales volume of $1.8 million), and Shaich expects to have nearly 600 open by the end of 2003.

Shaich calls Panera (a name loosely derived from Latin that means "time of bread") his "21-years-in-the-making overnight success." A soft-spoken man with self-deprecating charm, he began his love affair with the food industry with a small cookie shop in Cambridge in 1980. He was the mixer and the baker. He also had an MBA from Harvard, so it didn't take long for him to start thinking beyond gingersnaps. "I realized that 50,000 people a day were going past my shop, and I had nothing to sell them in the morning," he recalls. So he became a licensee of Au Bon Pain, the Boston-based company that put croissants on the American fast-food map.

At the time, Au Bon Pain was struggling. Between 1978 and 1981, it had opened 13 stores in New England and closed 10. It had also piled up $3 million in debt. But Shaich and his partner, Louis Kane, thought that the business had potential. They put together a deal to buy the company and spent the next three years trying to get out from under the debt load they had assumed.

Along the way, Shaich and Kane began to notice a strange pattern of customer behavior. People would order a baguette and ask that it be sliced, not in little round slices, but from top to bottom. Then they would pull out a bag from the corner grocery, slap on some lunch meat, and make a sandwich. "You didn't have to be a Harvard MBA to realize that there was a huge opportunity there," says Shaich.

It was a "eureka" moment, the birth of the category known as "quick casual." Au Bon Pain was "the first place that gave white-collar folks a choice between fast food and fine dining," Shaich says. "You could come in at noon on a Wednesday and get smoked turkey and real Brie or roast beef and Boursin. Nobody else was doing that."

By 1991, Au Bon Pain owned the category. By 1994, it had 200 stores. But that top-line growth masked a problem. The company was built around what Shaich calls "high-density urban feeding" for office workers in places such as Boston, New York, and Washington, DC. That real estate was pricey, and locations were hard to come by. It was a niche business with limited expansion possibilities.

In the early 1990s, Shaich met a group in St. Louis that had 19 bake shops -- the Saint Louis Bread Co. -- doing about $1 million in lunch business a year, rooted in bread. Again sensing an opportunity, Shaich and Kane bought the company. "It was our gateway into the suburban marketplace," Shaich says, "and backward into a manufacturing business." The Au Bon Pain team spent two years studying the business, looking for a concept that combined Au Bon Pain's quality food with the potential for broader appeal.

Scott Davis, Panera's chief concept officer, remembers the miles that the management team logged trying to figure out what the new business should look like. "We didn't just look at restaurants and coffee houses," he says. "We spent a lot of time looking at retailers. That's where our front-of-the-house bakery displays came from. We knew that people buy with their eyes, so we wanted them to walk in and crave baked goods."