Notes

Panera had invested about $52 million in a network of 17 regional fresh dough facilities (16 company- owned and one franchise-operated) to supply fresh dough daily to both company-owned and franchised bakery-cafés. These facilities, totaling some 313,000 square feet, employed about 830 people who were largely engaged in preparing the fresh doughs, a
process that took about 48 hours. The dough-making process began with the preparation and mixing of Panera’s all-natural starter dough, which then was given time to rise; other all-natural ingredients were then added to create the different bread and bagel varieties (no chemicals or preservatives were used). Another period of rising then took place. Next the dough was cut into pieces, shaped into loaves or ba- gels, and readied for shipment in fresh dough form. There was no freezing of the dough, and no partial baking was done at the fresh dough facilities. Each bakery-café did all of the baking itself, using the fresh doughs delivered daily. The fresh dough facili- ties manufactured about 50 different products, with 11 more rotated throughout the year.
Distribution of the fresh bread and bagel doughs was accomplished through a leased fleet of about 140 temperature-controlled trucks operated by Panera personnel. Trucks on average delivered dough to six bakery-cafés, with trips averaging about 300 miles (but in some cases extending to as much as 500 miles—management believed the optimal trip length was about 300 miles). The fresh dough was sold to both company-owned and franchised bakery- cafés at a delivered cost not to exceed 27 percent of the retail value of the product. Exhibit 8 provides financial data relating to each of Panera’s three business segments: company-operated bakery-cafés, franchise operations, and fresh dough facilities. The sales and operating profits associated with the fresh doughs supplied to company-operated bakery cafés are included in the revenues and operating profits of the company-owned bakery-café segment. The sales and operating profits of the fresh dough facilities segment shown in Exhibit 8 all represent transac- tions with franchised bakery-cafés.
Management claimed that the company’s fresh- dough-making capability provided a competitive advantage by ensuring consistent quality and dough- making efficiency. It was more economical to con- centrate the dough-making operations in a few fa- cilities dedicated to that function than it was to have each bakery-café equipped and staffed to do all of its baking from scratch.
Panera obtained ingredients for its doughs and other products manufactured at the fresh dough facilities from a variety of suppliers. While some ingredients used at the fresh dough facilities were sourced from a single supplier, there were numerous suppliers of each ingredient and Panera could obtain