We had Ron Shaich on our podcast this week and asked him about one of the more interesting decisions of his career. In 1999, he sold Au Bon Pain, at the time an established, publicly traded brand he’d led for 20 years, to focus on Panera Bread, an upstart little known outside of St. Louis.
It was not an easy decision. “Au Bon Pain was my first child, my first son,” Shaich said. But he also knew it had to be done, because Panera had the potential to become a “nationally dominant” chain, yet as one of four divisions of a publicly traded company it wouldn’t get the capital or resources to accomplish those goals.
It was riskier, in other words, not to take the step. “The risk we were in the middle of was risking blowing up the potential of Panera Bread,” Shaich said.
The decision highlights just how difficult it is for publicly traded companies to grow secondary brands, which is something we’re thinking about these days in light of news from my colleague Lisa Jennings that Chipotle is giving it yet another go with Farmesa.
Large, publicly traded companies typically struggle to develop growth concepts. But it’s especially difficult for them to create and grow their own secondary brands.
We could find few recent examples of truly successful development efforts on the part of big chains. Probably the best example comes from Texas Roadhouse, which has developed and is growing its Bubba’s 33 concept, which now has 41 units, along with the 7-unit Jagger’s. And, at least so far, those brands seem to be doing fine.
There are a few other examples, particularly within the casual dining sector. Yet examples of truly successful concept development efforts are generally sparse. A far better example comes from Cracker Barrel, which for years worked on a breakfast-and-lunch fast-casual concept called Holler & Dash. In 2019 it bought Maple Street Biscuit Company and converted all its Holler units to that chain.
Chipotle itself has a weak track record of concept development. Under founder and former CEO Steve Ells, the company a decade ago embarked on building ancillary brands, believing that the same type of customization focus that worked at Chipotle would work in other sectors. It created and grew the ShopHouse concept to 15 units. It started a burger concept in Ohio. And then it poked its nose into pizza with Pizzeria Locale.
None of them worked. It ultimately sold the leases on ShopHouse—it didn’t even sell the brand—and the burger concept lasted all of one location. It more recently gave up on the pizza concept.
Companies look to develop secondary concepts because they believe they can, and it’s the type of investment that makes sense on the surface. If it works, the company has a vehicle that can fuel growth for years that could in theory improve its long-term outlook.
The larger chain can likely afford to cover the cost of developing the new concept and can provide needed cash in its early years when such efforts lose money. The new concept gets the expertise of an experienced brand.
Yet they rarely work in reality. Companies have a better track record of acquiring companies and developing those, though that, too, has a weak overall track record (just ask McDonald’s). Indeed, much of the same concerns exist when large chains buy upstart concepts to develop. That was the case with Au Bon Pain, which bought St. Louis Bread Company and eventually turned it into Panera.
First, developing a restaurant chain is hard. Just because you’ve succeeded one time does not guarantee success a second time. For every chain that grows into a big national powerhouse, there are 1,000 chains that fail to get past a few locations. If not more. It’s just not easy.
Second, as the Au Bon Pain example demonstrates, large publicly traded companies spend most of their money on their large brands. They are not focused on developing their growth brand. The best talent often sticks with the large concept that makes all the money. And publicly traded companies can be careful with their spending to meet earnings targets. That can stunt growth concepts that need a lot of investment that often doesn’t yield immediate results.
Third, and perhaps most importantly, building brands is risky and Wall Street often doesn’t like that. If investors get a perception that these growth concepts prove to be a distraction—or if they can make that argument—then a board will hear about it. The activist Sardar Biglari used Holler & Dash and Maple Street to hammer company executives, though it didn’t work.
Fourth, it’s not what the company does. By the time these large chains become large chains, they are in the business of running a large chain, not developing a growth concept.
None of this is to say that Farmesa won’t work. And there are some other companies that are carefully developing secondary concepts, though many of them are virtual brands that come with less risk, such as Brinker International’s It’s Just Wings or Chick-fil-A’s Little Blue Menu. But the process certainly isn’t easy. Otherwise we’d see a lot more of these things work.