Do Paninis Boost Profits?
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When creating a financial report, many big words are used. Explanations get lengthy. Jargon becomes formal. Eventually the reader is presented with terminology that he/she is not familiar with. Just a few short years ago I was presented with just such a term. No, it wasn't senior notes, leveraged positions, or bidirectional partial fusion. The term can be found at some point in reports and news releases from Starbucks (NASDAQ: SBUX), Panera (NASDAQ: PNRA), Dunkin' Donuts (NASDAQ: DNKN), Tim Horton's (NYSE: THI), and Caribou Coffee (NASDAQ: CBOU). The term that I am referring to is: Panini.
Can I just say what we are all thinking: What the heck is a panini?! I am a college educated person and had to look this word up. (Yes, I know what a panini consists of, but why not just call it a sandwich?) Panini comes from the Italian word for bread. In English it has come to mean a sandwich that is pressed and toasted. You see, you can't simply call it a toasted and pressed sandwich. You have to call it something hip like Panini, in the same way that I have to order a venti sized latte at Starbucks. News flash: I don't speak Italian; I would just like some coffee. I dare you to ask them for a large someday, and see what happens. It's great fun...
All joking aside, I don't care if they call it a sandwich, a panini, or a mezurka. What I really want to know is this: why has there been an industry-wide rush towards fresh menu items like a panini? What exactly are these businesses trying to accomplish?
New Definitions
Offering a panini to your customers is more than just pressing and toasting a sandwich; it's about redefining your image. I think Tim Horton's report said it best when they said "Last year we introduced innovations to our guests that continue to change how we are defined in the quick service restaurant sector, and expanding the 'boundaries' of both how our guests perceive us and how we perceive ourselves." Paninis aren't about being cool. It's about a change in definition. It's about a change in perceptions.
What is wrong with the perception we currently have? Why is my definition of these companies insufficient? You know, I remember hearing the story of Max Baer Jr who played Jethro on the Beverly Hillbillies. The show is hysterical, and he's one of the many highlights. He played his part to the letter. But after the show, he struggled to ever find another acting job. He was so good at how he played Jethro, that eventually in the public's eye Max was Jethro. He couldn't ever play another part. He was forever doomed to be the country boy from the hills.
This is exactly what these companies don't want to happen. They don't want people thinking: Dunkin=Donuts. Starbucks=Coffee. Panera=Bread. These companies do want to have a main thing, they want to do it well, and they want to keep their main thing the main thing. But that's not all they want to do. When you are known for only one thing, people only need you for one reason.
New Profits
If management can successfully change their companies respective definitions, they can get people to walk through their doors for new reasons. And new reasons mean new profits. Please realize, I'm talking about way more than just paninis. I'm talking about new stuff. Tim Horton's offers lasagna now. Dunkin' has bagel sandwiches. Caribou developed a grilled aged cheddar roast sandwich. The bottom line is that these companies recognize they have got to have more streams of revenue than just one. A cool, casual menu is the way the herd has gone.
But is it really all that lucrative? To be able to gauge this venture's profitability, you would have to know what kind of costs are involved in making these new menu items, and unfortunately this kind of information isn't broken down in a financial report. But one thing that we can analyze is this: are these new menus really pulling more people in? Are same store sales going up?
Starbucks has dabbled in menu items for quite some time. But it seems like the menu has really taken off since the 2nd Quarter of 2010, coincidently when they launched their Paninis. (By the way, I don't want any comments on how Panini is already plural in Italian and how therefore I don't need the final "s". Let's focus on Starbucks) Since that time this is how same store growth has looked:
| Year | Same Store Growth |
| 2010 | 7% |
| 2011 | 8% |
| 2012* | 7% |
*These results only reflect through 3 quarters
Starbucks has realized very impressive same store growth ever since taking these new menu items seriously in 2010. These good numbers come after a dismal 2008 and 2009 of negative same store growth. Granted, we can't tell from these numbers if people are going for the food, or if they are just drinking more coffee. All we know is that numbers are going up. But this growth does coincide with the new menu initiative, which I don't believe is mere coincidence.
Adaptability
You have to adapt to grow and survive in this world. Love it or hate it, it is a fact. If you never adapt, you get left behind. I have highlighted 5 companies in this article who have adapted and offer paninis specifically, but obviously adaptability manifests itself in other ways as well. McDonald's just a few years ago had awful coffee. The general public didn't go there for coffee; it happened to come free with your breakfast combo. But now look at what McDonalds has done to redefine itself as a coffee destination with the McCafe. Presently, I prefer McDonald's vanilla ice coffee to anyone else in the business.
It may seem obvious that a business needs to look for new definitions and profitability, but not all companies possess this trait. In a recent article of mine I talked about how Krispy Kreme seems to be ignoring other potential revenue streams and is simply content with making more donuts. I love their donuts, but business wise they need to wise up.
I'm not saying that Starbucks, Panera, Dunkin', Caribou, and Tim Horton's are all buys just because they have a new cool menu. What I am saying is that all 5 of these companies have the ability to adapt, something that I appreciate in companies and believe makes them good longterm investments. Other factors would need to be considered, but these companies are looking good in an always changing world.
thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of Panera Bread and Starbucks. Motley Fool newsletter services recommend Panera Bread, Starbucks, and Tim Hortons. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
