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Pastry parlay: From Au Bon Pain to Panera

How Panera Bread founder Ron Shaich sold his first business to build his second.

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Ron Schaich at a Panera Bread outlet in Needham, Mass.
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Loaves of labor.
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Former staffers at the Culinary Institute of America helped create Panera'a daily bread menu.
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Hot from the oven.
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An original Au Bon Pain store sat in Faneuil Hall.
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Shaich's first bakeshop, circa 1981.

(FSB Magazine) -- He started college thinking he would end up working in politics. But after he was falsely accused of shoplifting and then kicked out of a convenience store while still a student, Shaich launched a rival shop - and his business career. Twenty years later, Shaich made a name for himself as the owner of Au Bon Pain, an East Coast bakery chain he grew from three stores into a $200 million a year company.

Many thought Shaich was crazy when, in 1999, he sold Au Bon Pain to concentrate on developing Panera (Charts), its small bakery division. But today Panera is the country's 17th-largest food-service company, boasting some 1,115 U.S. locations and annual revenue of $1.9 billion.

Shaich met with FSB at one of his bakery shops near the company's headquarters in Needham, Mass. After busing a few tables he talked about his journey from that first general store to the top of the food chain. This is his story:

My first interest in life after high school was politics. I worked on George McGovern's campaign in 1972 and majored in political science at Clark University in Worcester, Mass. Then during my sophomore year I was unjustly accused of shoplifting and got kicked out of a Worcester convenience store. To fight back, I opened a rival shop nearby on campus, and it became quite successful. Everyone said I should go to business school, so I went.

Two years after I earned my MBA, I took a job working for a chain in Boston called the Original Cookie Co. I wanted to open a store downtown, but the company preferred suburban mall locations.

One thing led to another, and I decided to quit and open my own cookie place, with a goal of creating the kind of company I had always wanted to work for.

I requested a third of my inheritance from my father. That way, if my idea didn't work, I'd still have two-thirds left over to try again. My father, who was a CPA, thought I was nuts but gave me $75,000. I combined his money with $25,000 in personal savings and opened the Cookie Jar in downtown Boston. I ended up subletting a store from a jewelry store owner who wanted to consolidate his two locations.

I'll never forget that first day: Our doors opened at noon, and I had two employees. I can't remember ever working that hard. I was the baker, mixer, chief salesman. I think we made $400. The first six months were stable, and I was making a nice living, but I wasn't satisfied. A business is like a sculpture: It's about creating something that's three-dimensional. And I wanted more dimensions.

Building and promoting

At the time, Au Bon Pain was a Boston pastry chain that was having problems expanding and had taken on a lot of debt. The business was founded in 1976 by a French oven manufacturer and later sold to a venture group headed by a man named Louis Kane. After I realized that people don't buy cookies before noon, I decided to add French pastries to the Cookie Jar's menu to attract a morning crowd.

Louis always said he remembered me as a kid walking into his office with flour on my shoes. I told him I wanted to buy his business (at that moment I had no idea how troubled his company was). Louis was a real estate guy; he had no one running his place on a day-to-day basis. He saw me as a "concept guy" who could help turn the business around. So we merged Au Bon Pain's three locations with my cookie store.

Over the next three years I observed Au Bon Pain's shops and identified problem spots. Many had to do with employees who just didn't care. I remember walking into a store in Faneuil Hall and watching as a cashier put money from a sale into his pocket. I also fired about six bakers I caught doing cocaine in the middle of the night. After I let those guys go, they chased me in a car through the parking lot. It was a mess! It wasn't about building a company back then - it was about survival.

I also made efforts to retain the good employees. I wanted to take care of the folks who cared about my business. One night when I was on a date in that same Faneuil Hall location, I discovered the assistant manager's wife washing dishes because the store didn't have enough personnel to handle cleanup. So for about two hours my date and I helped clean dishes. The girl on the date is long forgotten, but that assistant manager is now a Panera executive.

We grew Au Bon Pain into a 250-store chain by paying close attention to our customers. One day in 1984, I was working behind the counter waiting on customers (which I still do today). A woman walked in and asked me to cut a baguette for a sandwich. Then she pulled out a bag of lunch meat from the grocery store and threw it on my bread. You didn't have to be a Harvard MBA to figure out that there was an opportunity in sandwiches. That same year, we expanded our menu and became one of the first companies to create an urban bakery, selling high-quality meat on fresh bread along with soup and salads.

Around that time Pepsi (Charts, Fortune 500), Sara Lee (Charts, Fortune 500), and several others all tried to acquire us. We resisted and took the company public in 1991. By this point Au Bon Pain's profits were growing about 30 percent annually. We had 250 stores and were opening about 50 new shops every 12 months.

Au Bon Pain worked best in really dense marketplaces like Boston, New York City, and Washington, but we felt that growth was limited in smaller cities such as Cleveland, Indianapolis, and St. Louis. We needed a concept that would work across America in a wide range of communities.

Reaching the heartland

One day in 1993, an investment banker I knew asked me for some advice that he could relay to the owner of a Midwestern bakery chain called St. Louis Bread Co. I met the owner, Ken Rosenthal, and we developed a nice relationship. (Little did I know that this would be the beginning of Panera.)

Six months later I flew back to St. Louis and offered to buy his company for $23 million. Its success in smaller cities made it attractive as an additional vehicle for our company. Rosenthal had incredibly loyal customers, and we wanted to preserve what made the brand so special.

For two years we traveled the country, talking to customers and employees and observing buying patterns. We were trying to figure out how the world of fast food was changing. Rosenthal loved to say that even he didn't understand the St. Louis Bread Co. as well as we did! He must have trusted us, because he used his proceeds from the sale to buy our franchises in Cincinnati, Columbus, and Denver. Today Rosenthal's Panera franchise is four times bigger than the company he sold to us.

I concluded from our research that the St. Louis Bread Co.'s customers weren't looking for commodity food. They wanted to feel special in a world in which they were not. I grew up outside Newark in the 1950s, when folks frequented the neighborhood Italian bakery, the local beer brewery, the independent coffee roaster. Everything was local. What happened to all that? Post-World War II, the only bread option was three loaves for 99 cents at the A&P. Coffee came from a Folgers can. And fast-food chains became self-serve gasoline stations for the human body.

By the early 1990s, Americans wanted to feel good about what they ate. There was a big opportunity for businesses that could deliver that. In our eyes there was no more powerful platform than artisan bread. Other entrepreneurs had opened independent bread shops, such as Amy's Bread in New York City. We decided to build a company selling freshly made salads, sandwiches, and soups. In 1995 we sat down and wrote a vision for how we would compete.

During the first year, we opened a few new locations. Growth was very slow; we tried to make sure that the ground was solid. In 1996 we rolled out a breakfast menu built around bagels.

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.