ON THE RISE 2003

Roseanne Harper

Today's bakery/cafes don't loaf around.

Panera Bread Co., Atlanta Bread Co., Corner Bakery and a rejuvenated Au Bon Pain are among the concepts that have sliced through geography, demographics and income levels to attract a wide spectrum of customers with crispy-cool selections and a warm, soft ambiance that invites patrons to linger -- and spend.

Each operator touts interesting menus spanning all dayparts, shifting their menu focus as the day progresses. Interiors, fixtures and lighting foster a sense of intimacy that opens customers to linger, according to industry observers, who've also become patrons.

"I go to the Panera in Jensen Beach [Fla.] frequently. It's a pleasant environment with classical music playing, very much like the comfort a Starbucks gives you," said Bernie Rogan, a former executive at Shaw's Supermarkets, Bridgewater, Mass., and now a consultant based in Miami. "They have a good menu selection -- interesting salads and some hearty offerings like cheddar broccoli soup. I see a broad range of age groups there, too, from older people to very young."

Others said this fast-casual dining category is a real player and worth watching.

"This whole segment is still on the upcurve. It's very appealing to a lot of people," said Bob Goldin, executive vice president, Technomic Inc., a Chicago firm that tracks the food-service industry. "Many customers are graduates of traditional quick-service: Soccer moms look for a quiet place to eat lunch, and baby boomers are tired of fast food. They're willing to pay more. And special touches appeal to the younger crowd, too."

In fact, fast-casual is the fastest-growing segment in the restaurant industry today, and SN's sources credit bakery/cafes with giving it a big boost. Fast-casual dining as a category grew 6% from May 2002 to May 2003 -- that's after a year of absolutely flat sales, according to Harry Balzer, vice president, The NPD Group, a Port Washington, N.Y.-based, consumer marketing research firm.

The statistics reflect a large number of new bakery/cafe units popping up on the landscape as the chains mentioned above and others, like Jason's Deli and McAllister's, fan out across the country.

Panera Bread Co., based in St. Louis, is the clear front-runner, industry sources said. Atlanta Bread Co., Smyrna, Ga., is the new kid on the block, but growing fast. Meanwhile, Corner Bakery, Dallas, and Au Bon Pain, Boston, both under new ownership, are making obvious changes to keep up.

"Corner Bakery has always had a wonderful product, but never quite figured out how to deliver it," said Neil Stern, senior partner, at McMillan/Doolittle, Chicago. "There continue to be changes. I was in one of their newer stores yesterday. They have menu boards, and serve the customer almost like a traditional QSR. Earlier versions were cafeteria-style where you slide along the rail, and pick out what you want. That makes the product the hero, but operationally it's sort of a nightmare."

There's a future for Corner Bakery, Stern said, because it is in the right, growing niche. Yet he added that Panera is the only bakery/cafe right now that has the model down pat -- with the right menu, decor, operational systems and good price points.

"It shows up in their numbers. They now produce about $2 million per location, which is exceptional in the restaurant business. In particular, I think they've nailed the salad part much earlier than anybody else and made it a key component of the business," Stern said. "They've captured the female consumer in particular. They're giving her a viable option for eating, and they've hit the price point right, relatively inexpensive. These things separate them from the pack right now."

With so much room to grow, the success of any one concept, like Panera, can only help the entire segment, he added. Others agree.

"The growth of bakery/cafes has been tremendous, certainly paced by Panera and Corner Bakery, that's for sure. But Atlanta Bread, a Panera clone, is growing fast, too. Panera saw 43% sales growth in the United States alone in 2002, and in 2001, it was up 51% from the year 2000. Corner Bakery was up 10% in 2001, and then 15% in 2002," said Technomic's Goldin.

Their success shouldn't be a surprise because the bakery/cafe menus reflect what customers are looking for today, said Brian Salus, president of Salus & Associates, a Midlothian, Va., consulting firm.

"The entrepreneurial restaurant industry continues to morph itself to meet the changing needs, as well as the unmet needs, of the consumer. Just look at the burger chains. Both Wendy's and McDonald's are making a big play in response to the ever-changing consumer with their introduction of upscale salads," Salus said.

Salus sees the bakery/cafes presenting competition for the supermarket deli and bakery, but also inspiration, he said. For one thing, supermarkets have all the right ingredients already in-store.

"Supermarkets, particularly independents and regionals, are looking for ways -- or should be -- to drive customer counts and to give the consumer one more good reason to visit their stores frequently vs. a Wal-Mart or club store," Salus said. "The fact that supermarkets already have delis and bakeries, and could leverage their coffee

[or bread] brand or brands -- that creates an opportunity to build the dine-in and takeout business in addition to traditional pantry shopping."

Salus, a former executive at Ukrop's Super Markets, Richmond, Va., helped that regional chain launch its successful prepared-foods program.

Another consultant, Howard Solganik, president of Solganik & Associates, Dayton, Ohio, told SN that Panera and Atlanta Bread Co. have stepped into a market that was just waiting for them.

"[The bakery/cafe concept] might be a little bit slower [than traditional fast food], but there's better flavor and apparent healthfulness. It's based on something we've said to supermarkets for so long: A good sandwich that's not just stuff stuck between two square slices of bread is appealing, and it's quick and easy to eat," said Solganik,

He added that Panera Bread Co., in particular, is appealing to all ages in all income brackets.

"Panera is doing a really good job of attracting teenagers, for example. My kids love it."

Sandwich programs lend themselves easily to the supermarket, especially since most supermarket in-store bakeries have, or could have, good artisan breads at hand.

"Sandwiches are more of a natural to supermarkets than prepared foods are," Solganik said.

Unfortunately, most supermarket delis and ISBs are not jumping on the sandwich bandwagon, as researcher Rosita Thomas, president, Thomas Opinion Research, urged them to do when she presented recent research data earlier this summer.

In a study commissioned by Madison, Wis.-based International-Dairy-Deli-Bakery Association, Thomas found that, while sandwiches are growing in popularity, a full 50% of respondents said they don't buy sandwiches from supermarket delis and only 5% said a supermarket would be their first choice as a place to buy a sandwich. And significantly, 24% said they don't know why they don't buy sandwiches at a supermarket.

"To me, that says supermarkets are just not yet on their radar screen when they think of buying a sandwich," Thomas said.

While the bakery/cafe concept might not be feasible for supermarkets to replicate, there are components of it they could incorporate, sources said. Consumers are obviously taking to sandwich programs or enhanced artisan bread programs.

"They could be emphasizing what they do best," Bernie Rogan said, noting that the bakery/cafe concept has built its business on great-tasting, fresh bread.

"Freshly baked bread makes a good opportunity for upselling," said another industry expert.

Harry Balzer explained the sandwich boom at bakery/cafes this way: "It's all about freshness, and that they're making freshness convenient. People want fresh, but they don't want to deal with it [at home]. A fresh loaf of bread that a consumer takes home isn't fresh after a day. Give him a fresh sandwich on fresh bread with fresh tomato and fresh lettuce. That way, he has 'fresh' and doesn't have to throw away the rest of the loaf."

SN's sources agreed that freshness and quality are key ingredients in the bakery/cafe concept's success. So is ambiance.

Balzer credited the sub sandwich chain, Subway, with showing everybody that consumers will pay for a sandwich that's made for them. That was a while back. Then, about three years ago, when Subway began saying, "Come to us and lose weight," people really took notice.

While Subway and other successful sub sandwich chains deliver an appealing variety of sandwiches on fresh bread, most are geared toward takeout so ambiance hasn't topped their priority list.

Among the important things the bakery/cafe concepts have added are extra touches, he said, particularly when it comes to atmosphere. Soft colors, lighting and music and comfortable seating are hallmarks of the bakery/cafe, and they're appreciated.

"It's a place that makes you feel peaceful. You don't mind hanging out there awhile. You don't rush to eat your sandwich and soup," one consumer said of Panera.

Comfortable seating areas have proved a plus for supermarket bakery and deli sales, officials have said many times. Indeed, some have said that if they're offering ready-to-eat food, seating is a must.

At Giant Eagle, Pittsburgh, Pa., officials said earlier this month that the company has invested a lot of time and energy developing comfortable seating areas adjacent to its deli/prepared foods counters, taking into account color, lighting and seating materials.

"The overall setting plays a major role. We try to have a neighborly, comfortable atmosphere that makes people feel like they're in a cafe," said a spokesman for the 214-unit chain.

Most recently, Kris Kowalski, chief operating officer at Minneapolis-based Kowalski's Markets, told SN the eight-unit independent considers a pleasant seating area so important that it's putting in a mezzanine at a newly acquired, small store just to provide seating overlooking the fresh-food departments.

NO HALF-BAKED SCHEMES HERE

The four most-talked about bakery/cafe concepts -- Panera, Au Bon Pain, Corner Bakery and Atlanta Bread Co. -- are expanding or making major changes in design and operating systems. Up-and-coming regionals, like Jason's Deli and McAllister's, too, are spreading out. Among the reasons their business keeps rising:

Panera Bread, St. Louis, whose name means "time of bread," leads the pack and tops the list of consumer favorites. Its forerunner was the successful Saint Louis Bread Co., and Panera is expected to keep wowing its customers and expanding. It continues to open stand-alone units in the suburbs, hitting a total of 531 in 32 states as of last month. Sales for fiscal 2003 are expected to hit $1 billion.

Au Bon Pain, Boston, formerly headed up by Ron Shaich, who is now Panera's chairman and chief executive officer, is undergoing a personality change and looks to be taking cues from Panera. With 230 units, the company is redesigning selected locations to give them a warmer feel, with muted yellow walls and more wood than plastic. Menus have been upscaled to include the likes of St. Anne's Bay lobster wraps. Customer service has been heated up, too, a corporate source told SN.

Corner Bakery, Dallas, now owned by Brinker International, is currently making changes in its operational systems. In a switch from its earlier cafeteria style, it is now using menu boards and taking orders much like a traditional QSR. That's the change noted in its newest units as the company wrestles with operational efficiencies.

Atlanta Bread Co., Smyrna, Ga., which began as a sandwich and bakery cafe in 1993 in a suburb of Atlanta, is currently making its way into the Mid-Atlantic states. With 150 units now in 22 states, the privately owned company announced this month that it will open an additional 30 locations in New York state. It also recently entered a partnership with Delta Air Lines to test selling its products aboard 166 domestic flights.