Economy is Linked in Strange Ways

Until this year, I had been a loyal Wall Street Journal subscriber. I usually paid less than $200 for an annual subscription, but last year, the WSJ decided to increase the price to over $300/yr. I balked. For a while, I received only the local paper. The WSJ would call me once a month--usually very early in the morning--to try to get me to renew, but the sales rep wouldn't budge on the price.

After a few months, I grew tired of the local paper and signed with the New York Times, but just its Sunday edition. Some time thereafter, the WSJ sent me a renewal request with a price I was willing to pay. Apparently, if you wait 180 days between WSJ subscriptions, the WSJ finally offers you its "old" or "original" price, which--last time I checked--is less than $200. By this time, however, I thoroughly enjoyed the New York Times, especially its "Modern Love" Sunday pieces, and was unwilling to go back to the WSJ.

Why should anyone care about my newspaper habits? Because even small consumer habits, in the aggregate, create ripple effects. When I was receiving the weekday WSJ, I would go to Panera Bread (PNRA) for coffee and a cobblestone pastry every weekday. But once I stopped receiving the weekday paper, I skipped my Panera Bread morning outing. That eliminates over a thousand dollars from Panera's annual revenue, and they did nothing to lose my business--the Dow Jones & Company (NWSA), owner of the WSJ, caused me to change my morning habits with its strange marketing strategies. Now, with a much longer and more informative Sunday paper, I spend more time on the weekend at my local coffeeshop, which is usually Peet's Coffee (PEET). Dow Jones & Company basically transferred some of my money from Panera Bread to Peet's Coffee and Tea. Yet, no one at the WSJ intended Panera to lose my business and Peet's Coffee to gain it.

What is the point of this story? Basically, the economy is extremely difficult to manage because of the potential for unintended results. When the government tries to fix the economy, it, too, creates unintended consequences. Right now, we don't know the exact nature of those consequences, but at some point, we will be able to study how the stimulus package created unintended winners and losers. I agree that Congress should limit leverage on Wall Street. At the same time, Americans are losing sight of the big picture when it comes to federal spending. For example, the portion of the federal budget dedicated to defense spending continues to increase. It is now 23% of the entire federal budget. TARP, which many Americans bitterly protested, was only 4% of the 2009 federal budget. The ever-increasing defense budget has more than just financial consequences. Over 4,200 American soldiers have died in Iraq. Over 30,000 American soldiers have been injured in Iraq. Yet, many Americans, encouraged by mass media, pay more attention to "tea parties," golfer Tiger Woods' personal life, sports, and reality television. And so it goes.

Panera Bread (PNRA) Annual Report Review

Panera Bread (PNRA) is one of my favorite places to hang out. I believe it has replaced Starbucks as a middle ground between home and work. (As PNRA says, it "competes on the basis of providing an entire experience rather than price only.") The "cobblestone"--a sweet apple pastry with cinnamon and frosting--is my favorite product, and most weekends, they sell out if you don't get to the bakery early enough. (It may have a lot of calories, but it also provides some fiber.)

The company's HQ are in Missouri, and I wasn't able to go to the annual meeting this year. Here are some interesting tidbits from the annual report.

PNRA used to be Au Bon Pain Co. (I wondered what happened to those stores--I'd seen them sprouting all over S.F. and had expected them to keep growing all over California.)

PNRA indicated its summer salads would be a big hit, and that it was able to hold off temporarily on some price increases. It did have to remove the Crispani (pizza) from its menu to save on labor costs.

To give you an idea of just how small Peet's is, with its 166 stores, PNRA opened 169 new stores in 2007. Of those stores, 89 were company-owned, and 80 were franchisees. (PNRA has 1,167 stores total.)

PNRA played its hand well in the futures market for wheat, so wheat costs won't impact its bottom line, at least not in 2008. (Wheat costs won't "materially impact earnings growth" in 2008.)

PNRA's Board of Directors has a Berkshire (Dairy Queen's COO) member, Charles Chapman III--it's always a good sign when Berkshire Hathaway is involved.

PNRA's franchisee situation is interesting. Its arrangement seems fair and requires less start-up costs than a McDonald's or many other franchises. A franchisee must put a small percentage
of its sales into a national advertising fund and spend a certain percentage on local marketing efforts. PNRA receives 4 to 5% of the franchise's sales, in addition to 35,000 dollars as a one time franchise fee.

It costs 1 million dollars to open a PNRA store.

PNRA also owns 51% of Paradise Bakery and Cafe, as well SLB and Pride. It appears to be acquiring companies as part of its efforts to continue growing.

Most of PNRA's stores are in FL, IL, CA, PA, MI, and VA, in that order.

I don't have an opinion on how well this stock will do in the future. Chipotle (CMG) might be the newer growth story, because PNRA stock has already appreciated 1000% for its long time shareholders. I am guessing that PNRA shareholders who bought and held for years aren't complaining. I won't either, as long as I get my cobblestone pastry in the morning.