With Ron Shaich, Visionary Founder and Chairman of Panera Bread
Steve speaks with Ron Shaich, the founder of Panera Bread. Ron took his company from a 400-square foot store to a restaurant brand with over 2,400 bakery cafes, 120,000 employees, and nearly $6 billion in annual sales. From 1997 to 2017, Panera was the best-performing restaurant stock, delivering a return that was 44 times better than the S&P 500. Ron has now turned his attention to fixing Corporate America’s problematic focus on short-term results which he believes is causing unintentional damage to our country.
CEO’s Most Fundamental Role
The restaurant business isn’t easy. Nine out of ten restaurants go out of business. Ron believes business success depends on delivering a total customer experience that is materially better than competitive alternatives. To get there, the most fundamental role of a CEO is to figure out where his/her industry’s future lies and to prepare the organization for that future as it unfolds.
In building Panera, Ron converted a French bakery, Au Bon Pain, into a French bakery cafe. He made croissant bread his platform to sell soup, salad, and sandwiches.
After listening to consumer complaints about fast food, he positioned Panera as a healthier alternative, with real food served in an environment that engaged patrons. Howard Schultz did the same at Starbucks, and the folks at Chipotle followed with their own fast-casual restaurants.
Successful Business Transformations Require A Leap Of Faith
In January 1991, Ron Shaich took Panera public to raise capital for expansion and to give liquidity to its investors. Over the next 25 years, Panera’s stock did phenomenally well. Ron attributes this success to a series of transformational changes that kept Panera at the cutting edge.
Even so, every time Ron wanted to transform the business model, many were skeptical.
For instance, in 2015, Panera invested in technology to offer digital alternatives, clean food, and a better loyalty program. But activist investors weren’t happy and Panera’s stock dropped. They wanted Ron to reduce expenses so Panera could pay dividends, and so they could cash out at a profit. They were more interested in their own short-term returns than in what was in Panera’s best long-term interests.
But Ron stayed the course, and Panera went on to have a phenomenal 2017.
Focus On Long-Term Results
Ron Shaich believes shareholders deserve management teams that are willing to look beyond the next quarter or even the next year and can move the company into the future. Steve notes that some corporate CEOs are now hitting back against activist investors.
Ron believes the first step is to get lay investors to focus on long-term results. Forty years ago, the average stock-holding period was eight years. Today, the average has dropped to eight months because money managers churn stock for short-term results and hedge funds use algorithm-based trading, which also increases volatility.
Consider this: In 2017, about one-in-five publicly-traded restaurant companies were attacked by activist investors. To defend their companies against such assaults, businessmen are wary of taking their companies public. Instead, they are turning to private investors with a long-term focus, thereby reducing public-company investment opportunities for small, everyday investors.
The Long-Term Stock Exchange
This backlash against short-term orientation has led to calls for a long-term stock exchange. Warren Buffet wants to change the way companies give sales and earnings guidance. Others want differential voting rights where someone who has held the stock for 20 minutes should have less say than folks who have held it for ten years. Additionally, corporate compensation systems need to be tied to long-term performance.
Corporate America has an intense focus on short-term results. This makes corporate boards and management myopic, keeps them from investing in forward-looking business transformations, and hurts our economy, says Ron Shaich.
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Steve Pomeranz: Ron Shaich is the Founder of Panera Bread, having taken his company from a 400-square foot store to a restaurant brand that has more than 2,400 bakery-cafes, over 120,000 employees, and nearly $6 billion in annual sales. The result, Panera was the best performing restaurant stock for the past 20 years, delivering a total shareholder return 44 times better than the S&P 500 from 1997 to 2017. Ron has now turned his attention to fixing some of the corporate weakness that he sees, that may be causing unintentional damage to our country. Let’s find out more. Welcome, Ron Shaich, welcome to the show.
Ron Shaich: Hey, Steve, how are you?
Steve Pomeranz: Fine, thanks for taking your time, I really appreciate it.
Ron Shaich: Good.
Steve Pomeranz: The restaurant business isn’t easy, you’ve been quoted as saying, the business is like dirt farming. The world doesn’t need another restaurant, you need to be crystal clear about what you’re focusing on. Going back aways, did you have big picture when you started Panera so many years ago or did it develop over time?
Ron Shaich: I think it’s continued to develop over the 36 years I ran our company, and the 26 years I ran a public company. The reality is that unless you’re able to deliver a total experience that is materially better than other competitive alternatives, unless you’re able to provide an experience that customers walk past your competitors to come to you, you don’t win here.
Steve Pomeranz: Yeah.
Ron Shaich: And this is a very difficult industry. Nine out of ten restaurants go out of business. You need to deliver for the guest in a profound way, and that’s always been the focus.
Steve Pomeranz: Well, you also were around and starting to develop this at the beginning of what turned out to be a $40-billion segment of the restaurant industry—this good quality food, fast casual, as they say. So I guess the trend was your friend as well, but you saw pretty far ahead, and you took the actions to take advantage of those trends, tell us a little bit about that.
Ron Shaich: Well, I believe the most fundamental role of a CEO is to sit back, understand what’s going on, discover today what’s going to matter tomorrow and make sure my organization is there as that future unfolds. And you don’t need me to tell you what they did yesterday, you don’t need me to tell you what my competitors are doing, you need me to lead this organization into the future. And so we’ve had a continual history of that. Panera has existed for 36 years as a company. It was originally a French bakery and we took that French bakery and converted it into a French bakery cafe. We let the croissant bread no longer be the product, but a platform to sell soup, salad, and sandwiches.
Steve Pomeranz: I see, yeah.
Ron Shaich: And then I can remember in the mid-90s, it was very clear to me as I traveled the country and I listened, I tried to listen with empathy to our guests. And you’d hear, I don’t know, one out of three, one out of four consumers complaining about fast food.
Steve Pomeranz: Yeah.
Ron Shaich: And they’d say, I want something better. And just listening you could see they wanted real food, they wanted environments that engaged them. They wanted people that cared, they wanted environments that actually, as currency, give them a sense of self-respect. And so for us, we began to build Panera around that kind of model. Later, people began to call that stuff casual. We led the way, my friend Howard Schultz at Starbucks followed, the folks at Chipotle later. So it’s really about seeing there was a niche, and there always are niches within fast food that offer an extraordinary opportunity for us. And as of today, that’s a $50 billion business.
Steve Pomeranz: You decided to take Panera public, and that was to raise capital to fund your expansion. Kind of a typical story there. However, in 2007 and 2000-
Ron Shaich: And I will add to your listeners what happened to so many companies to give liquidity to some of our investors.
Steve Pomeranz: Ah, of course. Good point, right. Unfortunately, though, in 2007 and 2015 you ran into significant challenges from activist investors, really in the form of hedge funds. And that shaped the course of business from that point forward. Tell us quickly about that and what direction it led you?
Ron Shaich: Well, Steve, most of the kinds of transformation that led to us to beat the S&P 500 by 44 fold, what led us to deliver 25% annual returns annually over the last 2 decades was about 5 and 6 year transformation efforts, and really betting on a way we would go to market. And the truth of the matter is when you’re going through that, nothing is proven, and nothing is proven until it’s done. Quick story, I can remember when we made that bet on fast-casual and this new vision, everybody was saying, all there is is fast food and fine dining, and people would say to me, Ron, Ron, this isn’t going to work. Well, now, 30 years later, people say to me, Ron, why didn’t you tell me about it? And I look at them and I go, I was telling you. Nobody wanted to listen.
Steve Pomeranz: They don’t want to listen.
Ron Shaich: You could have bought my stock by the wheelbarrow for one penny on the dollar of what it eventually traded for, but nobody wanted to listen then. And my point is, again, nothing’s proven until it’s done. The most important thing is to understand it takes a leap of faith to move into the future. And what I have found is each time I’ve taken this company through transformation, in the end, it worked. Everybody got excited but when I was going through it, there were folks that really wanted to short-term the company.
And I can remember in 2015, it didn’t take very much, we were investing in technology as part of a program to offer digital alternatives, to offer clean food, to improve the loyalty program, to ultimately positioned Panera as the best competitive alternative. All those things became the themes of the restaurant industry by 2017 and led Panera to have a phenomenal 2017, led the industry in what are called same-store sales. But in 2015, we were spending, at that time, $15 million a year to build that.
And it doesn’t take any skill to walk in the door say, hey, I bought 1% of your company in stock, I got another 7 or 8% in option. I’m now the owner. You work for me. I need you to cut the G&A by a third. I need you to wipe out all this technology investment. And you know what? You can dividend it out whatever the cash flow is. The investors will sell out at that point and somebody else can worry about the carcass.
Steve Pomeranz: Okay, so you-
Ron Shaich: The truth of the matter, yeah, it doesn’t take much to press for the short-term. And straight up, as somebody who’s run a public company for 26 years, I could always short-term it.
Steve Pomeranz: Yeah.
Ron Shaich: And as a large shareholder, what I want and what I believe shareholders deserve are management teams that are willing to look beyond the next quarter or even the next year. And do the hard work of leading or managing, which is figuring out what’s going to matter tomorrow and then get this company to deliver on that.
Steve Pomeranz: I’m speaking with Ron Shaich, the Founder of Panera Bread. And we’re going through his experiences and what he’s learned, and what he’s trying to basically tell us about what’s going on in business today and with some fixes.
Because he’s not just talking about it, he’s actually actively working to change things. So it’s this pressure or this tension between short-termism which is what did you do this quarter? How are the profits looking? And if profits are weak, then we’ll take your stock outside and shoot it, even though the business seems to be building and so on.
Ron Shaich: Not only if your profits are weak, if you’re investing. We’re going to question every investment.
Steve Pomeranz: And best you make it, because that’s easy. As you said, it’s easy to go in there and say, well, stake out this 15 million. Look what’s left over and that will pump the price of the stock up and then as an activist investor, I can go in and sell it and then I’m in and I’m out and then what do you really have left in the businesses is the question and that’s what you’re basically saying.
So this short-term thinking versus long-term thinking. But now there’s starting to be a backlash, and I think you’re on the vanguard of this backlash. We’ve started to see some companies say, well, we’re not really going to report certain things every single quarter. We’re not going to get caught up in the minutia of what exactly we’re doing, and trying to focus more on the long term. However, it seems to me that that’s going to be quite an uphill battle. What do you think?
Ron Shaich: Well, Steve, I think that the first step is for your listeners, for the citizens of our country to understand how this has happened and how it doesn’t serve us. The reality is, 40 years ago, the average shareholder held a stock for 8 years. At this point, they’re renting that stock for eight months. There’s a lot of reasons that’s happened. You have hedge funds that are increasingly trading on the next inflection point. What are the comp store sales next quarter?
Steve Pomeranz: Right, sure.
Ron Shaich: You have money managers, active money managers that are themselves incented on short-term results, so they’re pressing for short-term results. You have the prevalence of the index funds that are essentially outsourcing corporate governing, to IFS and Glass Lewis, which are outside consulting firms. All of this is magnified by what’s called the flash-training, algorithm-based training, mathematical-based training, which increases the volatility. All of this and it leads to an environment in which activists are fostered.
The restaurant industry had approximately 20% of their public companies attacked by activists last year. If we really think one in five of our management teams are so bad that they need to be run by somebody that’s got a financial engineering playbook based in some office tower in New York, we’ve got bigger problems. And here’s the point and why I raise it. Our public markets are fundamentally broken. People don’t want to raise money in the public markets at this point. You’ve got less companies going public last year than you had going public at the height of the recession. That’s a big problem. That’s a serious problem.
Steve Pomeranz: Yeah. Why is that a problem?
Ron Shaich: Long-term money is increasingly become private, not public. The reason it’s an intensely challenging problem for the society is our public companies are going to go away. Small investors are not going to have an opportunity to participate. And large investors through private equity will.
Steve Pomeranz: I see.
Ron Shaich: The reason it’s a problem is because if we want real GDP growth, that’s what we all talk about.
Steve Pomeranz: Right.
Ron Shaich: In my view, it doesn’t just happen through a sugar-high tax cut, the only way people believe GDP growth occurs is through productivity increases and innovation. If you want productivity, and you want innovation, you need to make long- term commitments, you need to make long-term bets. If you’re only thinking quarter-to-quarter, the only kind of investments you make, the only kind of ROI you focus on is cost-cutting.
And if that’s what we want, that’s what we’re going to end up with. And the challenge is most people don’t understand it’s our system. It’s our country. We’ve got to ask ourselves, is this really serving us? And if it isn’t serving us, we’ve going to challenge ourselves to do better, and there are real structural mechanisms to do better.
Steve Pomeranz: Okay, let’s discuss one of these that’s actually quite new to me. It’s called the long-term stock exchange. Are you involved in this? Do you know about it? Do you have a comment on that?
Ron Shaich: I am not involved in it, but I do have a comment about it. I think that there’s a number of people that are searching for answers to this. Jamie Dimon has written about it; Warren Buffet has written about it. They called for a change in the way guidance works. You’ve heard President Trump himself really challenge quarterly-earnings reports. You have Larry Fink at Blackstone, one of the largest investors in the world, speak to this. You have many academics speaking to this problem.
My fundamental view is that we need to first address this problem by being aware of it. And then, secondly, there needs to be structural remedies. We have the potential, as there are in other countries in the world, to have differential voting rights, based on how long you hold the stock. So somebody who’s held the stock for 20 minutes shouldn’t have the same influence as those folks that have held it for ten years.
Steve Pomeranz: Okay.
Ron Shaich: There are other ways to get there, but effectively, it’s differential. Secondly, our compensation systems need to be focused much more on long-term results. This world, in which compensation is highly focused on short-term, is getting us as a society and as an economy the wrong answers. And then third, very importantly, we’ve got to be thinking about the nature of guidance. I don’t have a problem with reporting quarterly.
Steve Pomeranz: Yeah.
Ron Shaich: I actually have much more of a problem with reporting and providing guidance, which by its very nature forces the whole discussion, not about the growth of the company, but how do you perform against the guidance.
Steve Pomeranz: Okay, hold on a second. For those who don’t know, when you’re talking about guidance, what does that actually mean?
Ron Shaich: Well, public companies are guiding investors relative to future performance.
Steve Pomeranz: So they’re saying, this is what we’re planning, this is what we think we’re going to do next year or next quarter? That type of thing?
Ron Shaich: Yeah. Yeah, absolutely. But I want to say that this to your listeners and to you, Steve. And it’s not that difficult, right? The most successful companies in the market are what are called the FANG companies—Facebook, Amazon, Netflix, and Google. What do they have in common? What they have in common is the ability to have a long-term capital structure. It’s like so many other things. I have a son who’s 19-years-old, he’s in college, freshman at Wash U in St. Louis.
If he wanted to go out and party for the next month, he could have a great time. But I don’t want to encourage him to do that; I want him to make an investment in his education. I want him to make an investment, frankly, to exercise in himself. I wanted him to take care of himself because I want him to think long-term. It’s not any different for our company.
And we’ve created a system that puts intense pressure on the short-term. Puts our boards and our management in a position where they get very myopic. Why? They’re not bad people. They want to please. They want to win. They feel a sense of vulnerability. So what do they do? They go short-term to provide what is essentially asked of them. And the problem is, we as an economy suffer. The very things that drive that long-term growth from the same companies are off the table in those kinds of companies.
And truthfully, for me, we built Panera up into a multibillion-dollar company. Again, the most successful in the restaurant industry. I chose to take it private, to sell it into the private marketplace because I profoundly worry as a man of 65 years, how would Panera keep driving what drives his competitive advantage its ability to make transformative changes? How would we do that 5 and 10 and 20 years in future if it didn’t have my credibility and it didn’t have the 17% of the company that I vote? That’s the challenge.
Steve Pomeranz: My guest, Ron Shaich. Ron, do you blog? Is there any way people can follow you to go along with you and see what you’re thinking?
Ron Shaich: They can follow me, I have my own website, RonShaich.com R-O-N-S-H-A-I-C-H dot com, they can get to me through that. They can Google me. And I also have a couple hundred thousand followers on LinkedIn. So if they’re on LinkedIn, feel free to reach out to me.
Steve Pomeranz: Very good.
Ron Shaich: Ron Shaich, R-O-N-S-H-A-I-C-H.
Steve Pomeranz: S-H-A-I-C-H is the spelling of the last name and of course, if you’ve been listening, you know that Ron’s the Founder of Panera Bread and so many other things. Ron, we are out of time, I need another hour with you [LAUGH] quite frankly, but time won’t allow. So, thank you very much.
And listeners, if you have a question about what we’ve just discussed or if you want to get a discussion going on this, we would love to have some back and forth. If you’ve got a money issue on your mind, join the conversation and contact us through our website at stevepomeranz.com. Ron, one more time, thank you so much.
Ron Shaich: Thank you, Steve, thank you, listeners.