Au Bon Pain Co., Inc.

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Au Bon Pain Co., Inc.

19 Fid Kennedy Ave.
Boston, Massachusetts 02210
U.S.A.
(617) 423-2100
Fax: (617) 423-7879
Web site: http://www.boston.com:80/aubonpain

Public Company
Incorporated: 1981
Employees: 1,587
Sales: $226.5 million (1995)
Stock Exchanges: NASDAQ
SICs: 5812 Eating Places; 5461 Retail Bakeries; 6794 Patent Owners and Lessors

A relatively small player in the overall retail food service industry, Au Bon Pain Co., Inc. is a leader of the bakery café category. The company’s upscale urban cafés operate under two banners: Au Bon Pain (literally “where the good bread’s at”), with over 280 units in the United States, Chile, Thailand, the Philippines, and Indonesia; and Saint Louis Bread Company, a 59-store chain acquired in 1993. French-baked goods like croissants, baguettes, and pastries form the core of the chain’s menu, which has expanded over the course of its 20-year history to include sandwiches, salads, soups, gourmet coffees, and other beverages. Although Au Bon Pain has since the mid-1980s registered an impressive record of sales growth that continued into the early 1990s, its internal operations have been spotty. Revenues increased at an average annual rate of over 35 percent from the time of the chain’s initial public stock offering in 1991 to 1995, but a steady string of profit increases ended in the latter year with a $1.6 million shortfall. Co-chairmen Louis I. Kane and Ronald M. Shaich forecast “improved operating results in 1996” following a comprehensive reorganization encompassing everything from the managers to the menu.

Late 1970s Origins

The company was founded in 1976 by Pavallier, a French manufacturer of baking equipment. Established as a showcase for the foreign company’s ovens in Boston’s historic Faneuil Hall Marketplace, the Au Bon Pain shop was staffed with French bakers who painstakingly produced authentic baked goods like flaky croissants, mouth-watering pastries, and crusty loaves of bread.

In 1978, the concept caught the attention of Louis I. Kane, a venture capitalist who was involved with a Columbo Frozen Yogurt franchise also located in the mall. That year, his family-owned Kane Financial Corp. paid $1.5 million for Au Bon Pain and set out to turn the original concept upside-down, selling baked goods instead of ovens. The 40-something Harvard graduate likely realized that U.S. demand for French breads and pastries was on the rise. Wholesale revenues in this category rose 40 percent from 1977 to 1982. By 1984, sales of loaves and croissants attained $1.7 billion in U.S. sales.

Kane soon found, however, that the bakery business—and especially the elaborate specialty bread craft—was not well-suited to retail food service. It was very labor intensive, for instance, requiring an entire night of dough preparation and attentive baking, yielding a product with a shelf life of only 24 hours. By 1980, Kane had added two new shops in choice locations, had developed a thriving wholesale trade, and was generating over $1 million in sales, but was still unable to cover his overhead.

That’s when Ronald M. Shaich (pronounced “shake”), a 20-something fellow Harvard MBA graduate and native Bostonian, entered the picture. Shaich, who had set up and operated a non-profit convenience store as an undergraduate, was managing a Cookie Jar franchise in Boston in 1981. In an effort to boost morning sales, he asked Kane for permission to sell Au Bon Pain’s breads in his cookie shop. After four months of observing Shaich’s operational know-how, Kane invited his young colleague to help overhaul Au Bon Pain, which by this time was nearing bankruptcy.

Reorganization, Concept Development in 1980s

Kane assumed the title of chief executive officer with responsibility for site selection and financing. As president, Shaich was in charge of internal operations. With additional help from Shaich’s father, Joseph P., the new partners reorganized their tiny chain as Au Bon Pain, Inc. and developed a multifaceted plan to invigorate the stalling firm. In an effort to focus squarely on the core retail business, the partners discontinued the wholesale division.

Perhaps most importantly, Shaich sought to simplify the tedious and costly bread-making process. Assembling a team of Au Bon Pain’s French bakers, along with researchers from the Massachusetts Institute of Technology and the American Institute of Baking, the company developed a method of forming and freezing the bread dough for later baking. This process promoted uniformity from shop to shop, allowed for more precise stock control, and eliminated the need to have a professional baker on staff at each unit. Furthermore, by removing some equipment, it freed floor space previously devoted to production for seating, displays, and counters. Specially designed ovens later brought virtually full automation to what had been a labor-intensive craft. In 1983, Au Bon Pain centralized dough production at a Boston facility.

These technological breakthroughs nearly halved overhead, bringing not only profitability but also freeing capital for growth. Au Bon Pain resumed its wholesale business under the St. Patisse brand. By 1985 the company’s more than 30 cafés in the northeast U.S. were generating an estimated $15 million in annual revenues.

Kane and Shaich were very particular when it came to site selection, placing Au Bon Pain’s cafés, carts, and kiosks in high-traffic, upscale, urban office buildings and shopping centers like Boston’s Copley Place, New York’s Empire State Building, and Cleveland’s Tower City Center. Airports, with their high concentration of hurried business travelers, comprised another ideal location. Au Bon Pain “clustered” its metropolitan outlets, hoping that “saturation marketing” would promote brand identification as well as operating efficiencies. In 1989, nearly 40 percent of its 76 units were located in the Boston area.

Cafés featured black and white ceramic tile, brass fixtures, and soothing classical music. Marble counters evoked images of handmade pastry. The 1,000 to 3,500-square-foot cafes’ dining rooms averaged 60 seats. In order to boost lunch time sales, the company added gourmet coffees and sandwiches like brie and ham on a croissant or tarragon chicken on a baguette. The corporate slogan, “Good food, served quickly,” reflected Au Bon Pain’s use of fresh, quality ingredients and its commitment to serve customers in under three minutes. By mid-decade, sandwiches and beverages were generating more revenues than the core baked goods.

With the key elements of their French bakery café concept in place by mid-decade, Kane and especially Shaich turned their attention to a nagging dilemma: personnel. Shaich had in fact made a clean sweep of the employee roster in 1981, sacking “everyone who didn’t care about the business.” This move was predicated on his conviction that “friendliness and personalized service” were two of the keys to repeat business within Au Bon Pain’s target market of white collar professionals. Nevertheless, the ensuing years had been plagued by high employee turnover, especially at the store manager level, and low morale, which in turn undermined training efforts and eroded motivation. Shaich found himself promoting unqualified employees to fill frequent vacancies at the fast-growing chain, then micro-managing these novices. A regional shortage of competent labor only exacerbated the predicament. These internal problems were manifested in poor customer service, causing an untenable, yet deeply intractable situation.

With the help of Harvard Business School professor and business consultant Len Schlesinger, Shaich and Kane undertook a comprehensive analysis and transformation of Au Bon Pain’s compensation plan, testing several formulas throughout the early 1980s and finally settling on a program in 1986. (An in-depth article by Inc. magazine’s Bruce G. Posner detailed the process in July 1987.) They combated turnover among hourly employees with increased training, premium wages (for the foodservice industry), and seniority bonuses. In order to give each manager a vested interest in his shop’s bottom-line performance, they adapted a concept that had been used successfully by restaurant chains like Golden Corral steakhouse and Chick-fil-A Inc. In addition to a base salary, managers received a minority stake in their café, usually 20 to 30 percent. Along with this increased income potential came increased responsibility for everything from inventory to staffing to advertising. Following a successful test of this “manager/partner” plan in 1986, Au Bon Pain took the concept chain wide in 1987. The 1988 institution of a “mystery shopper” evaluation program helped keep front-line employees on their best behavior.

Company Perspectives:

Au Bon Pain believes in the careful selection of talented and entrepreneurial individuals. It is our firm belief that people are our most valuable resource.

Au Bon Pain Co., Inc. ‘s success relies on team members who can make a major contribution to our company’s growth. In return, we are committed to providing an environment in which everyone can develop to their fullest potential.

Au Bon Pain supports a strong commitment to quality. This is the cornerstone of our Corporate Philosophy. The quality of our products and service will be second to none in the world. But, equally important, we want our commitment to quality to go beyond our products and encompass all of our business activities.

Au Bon Pain maintains a pledge to open communication. We strive to achieve open and meaningful dialogue between all team members. Our pledge is demonstrated throughout the company by our “open door policy.” Every employee is encouraged to meet with any level of management to resolve issues and plan career paths within the company.

Au Bon Pain believes that the company and its participants must all succeed together.

In a 1988 follow-up interview with Bruce Posner of Inc., Shaich pronounced the new compensation plan a success, noting that same store revenues had increased by an average of 24 percent from 1986 to 1987. The trend continued throughout the remainder of the decade, with chainwide sales jumping from $30 million in 1986 to $70 million in 1990 on a doubling of locations from 40 to 80. Moreover, Shaich, Kane, and the other members of the executive team were freed to ponder larger corporate issues, including the company’s 1991 initial public stock offering.

Acquisitions Fuel Continued Growth in 1990s

Au Bon Pain common made its debut June 6, 1991, with 1.875 million new shares at $9 per share, rising to over $13 by that fall. The proceeds were used to fund a series of acquisitions that contributed to a near tripling of the size of the chain in the early 1990s. Au Bon Pain had made two relatively small acquisitions in the late 1980s, including the two-unit Cafe Creations of Philadelphia in 1987 and the Washington, D.C.-based Potomac Foods’ four-store Le Cafe chain.

But these purchases paled in comparison to the 1992 acquisition of Warburtons Bakery Cafe, Inc., a $16 million (sales) chain of over 100 units in Chicago, Pittsburgh and Boston. In 1993, Au Bon Pain paid $24 million for Missouri’s Saint Louis Bread Co., a 20-unit chain of bakery cafes in and around the Midwestern hub for which it was named. Although both Au Bon Pain and Saint Louis Bread used the same basic menu and concept, the new affiliate differed slightly from its parent in both its site selection and its target customer base. Saint Louis Bread concentrated its cafes in suburban areas and cultivated a more family-oriented clientele. By maintaining that strategic focus, Au Bon Pain hoped to penetrate two previously under-exploited markets: the suburbs and the Midwest. It cemented this commitment with the 1994 acquisition of ABP Midwest Inc., a 19-unit franchisee based in Madison, Wisconsin. This purchase boosted the parent company’s presence in northern Illinois, Minnesota, and Wisconsin.

While investing large sums in unit growth via acquisition, Au Bon Pain was also plowing capital into operations during the early 1990s. In 1992, the company completed its installation of a customized, chainwide computer network. The database management system processed and tracked sales, inventory, payroll, food costs, and average order amounts, among other factors, thereby enabling individual store managers as well as top corporate executives to monitor day-to-day operations. The construction of a new frozen dough plant in Missouri was completed in 1996, but implementation of the facility was delayed until that fall. A catering department launched in 1991 grew from less than $1 million in revenues during its startup year to over $5.5 million by the end of 1993. Au Bon Pain also went international during this period with franchising of the French bakery cafe concept in Chile late in 1992 and the addition of franchisees in Thailand, the Philippines, and Indonesia by the end of 1995.

Although they raised costs in the short term, the massive cash outlays represented by Au Bon Pain’s acquisitions, computerization, bread plant, and international foray were logical investments in the company’s efficiency and competitiveness. And indeed, Au Bon Pain performed well during this period, despite what Shaich called “an extraordinarily difficult environment for the retail food industry.” Revenues increased from $67.9 million in 1991 to $182.9 million in 1994, and net income multiplied from $2.6 million to $7.8 million during the same period. However, this apparently healthy bottom line belied several underlying difficulties.

Au Bon Pain executives and industry analysts found a number of problem areas both within and beyond management control. Following the “clustering” strategy that had worked so well for Au Bon Pain, the parent company expanded its Saint Louis Bread chain from 20 units in 1993 to 59 by the end of 1995. But instead of promoting brand awareness, this ambitious plan backfired, resulting in cannibalization without the hoped-for efficiencies. At the same time, comparable store sales began to stagnate, while food costs (especially for basics like flour, coffee, butter and lettuce) and personnel expenses rose. Throw in increasing competition from the likes of Seattle-based Starbucks coffeehouses, and you had a recipe for disaster. Having been named “Gold Chain 1994” by Nation’s Restaurant News, Au Bon Pain suffered a $1.6 million loss in 1995.

Reorganization Begins in 1995

Au Bon Pain attacked its problems from several angles, implementing a reorganization program in 1995. The company hired several new top executives, added new products to the menu, reined in unit growth, remodeled existing stores, and emphasized international franchising. The management shuffle actually started in 1994, when Ronald Shaich became the sole chief executive officer. (Sixty-three-year-old Louis Kane retained the title of co-chairman.) That same year, the company hired former Burger King vice president Samuel Yong as president of Au Bon Pain International, as well as new leaders of wholesale and operations. Au Bon Pain created new divisional presidencies for both Au Bon Pain and Saint Louis Bread mid-decade, installing Robert C. Taft in the former and Richard Postle in the latter. With 21 years’ experience in food service, Taft had previously served as president and CEO of the Papa Gino’s chain of pizzerias, while Postle had held top positions with Wendy’s and Checkers.

Au Bon Pain also scaled back its 1996 growth plans from a proposed 50 to 60 units to 18 to 20 (8 Au Bon Pains, 10 to 12 Saint Louis Breads), and closed nine less than satisfactory units by the end of 1995. In reducing its emphasis on unit growth at Au Bon Pain, the parent company shifted its focus to remodeling existing stores in a warmer scheme featuring primary colors. Menu updates included bagels, new hot sandwiches, and soups in a fresh-baked “bread bowl.” In 1995, Au Bon Pain agreed to make Peet’s Coffee, headquartered in Berkeley, California, its exclusive brew. Other operational improvements cited in that year’s annual report included “newly automated production, labor and food cost management tools; a more effective centralized training program; an ongoing ‘customer intercept’ system which tracks customer satisfaction; and a re-engineered partner manager compensation plan.” Building on its presence in South America and Southeast Asia, Au Bon Pain hoped to expand its global reach via franchising to the United Kingdom, Eastern Europe, and the Middle East.

Notwithstanding their 1995 earnings setback and subsequent retrenchment, Co-chairmen Louis I. Kane and Ronald M. Shaich predicted that Au Bon Pain’s bakery cafe chains would more than triple to a combined total of 1,000 units by the year 2005.