Ron Shaich had little reason to believe that the cookie shop he opened in downtown Boston when he was 26 would mean much more. But the 400-square-foot store transformed over the next four decades into a network of more than 2,000 cafes now known as Panera Bread.
As founder and chief executive, Shaich led Panera through multiple transformations, from its initial public offering in 1991 as Au Bon Pain to its sale in 2017 to European investment firm JAB Holdings for $7.5 billion. He also became a key figure in the development of the “fast casual” restaurant sector, now worth more than $100 billion.
Today, Shaich is managing partner and CEO of Act III Holdings, a multibillion-dollar fund that invests in public and private consumer companies and restaurants. He is also chairman and lead investor in Mediterranean restaurant chain Cava Group (ticker: CAVA), which went public in June.
Barron’s spoke with Shaich in mid-September about his time at Panera, his transition from CEO to investor, his outlook for the restaurant industry, and his upcoming book, Know What Matters: Lessons From a Lifetime of Transformations, which will be released on October 13, 2019. 24 by Harvard Business Review Press. An edited version of the conversation follows.
Barron’s: What lessons have you learned from your time as CEO of Panera?
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Ron Shaich: First, leading any business begins with telling the truth. We’re all afraid of the 800-pound gorillas, and yet those are exactly the things we should be talking about as leaders. Secondly, it is important to know what is important. So take the time to understand what drives your business and then choose three to five things you want to get done. In many companies we talk about a lot of things and very few of them get done.
To be a leader, you must also have the patience and empathy to listen and understand customers. That’s what drives these companies: finding out what makes your target customer choose you. That’s where Fast Casual came from. It was pretty clear to me that people wanted something more than what fast food offered, and yet the only alternative was good food. They wanted a special product – something that would boost their self-esteem. If someone could do that, it would be a great opportunity.
In your book you talk about how you reinvented Panera four times. How did you reinvent yourself as an investor?
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In many ways I do the same thing, in other ways I do something completely different. In any case, it’s about figuring out what’s important tomorrow and making sure we develop the business accordingly. I did this for 37 years with just one company, which I transformed four times.
I went and gave many public speeches about the pervasive short-termism in our capital markets. And then I started saying, “Let me put my money where my mouth is.” In the end, we — me and a few partners — raised $250 million of our own money and now have a portfolio worth well over a billion U.S. dollar. We achieved an internal rate of return of 40% to 45% for ourselves.
I’m still transforming companies and guiding them to think long-term: What are the strongest niches or categories across different consumer segments? Which categories will become increasingly relevant in five or ten years? Within these categories, I focus on helping them become the dominant brand in that category.
What’s in your portfolio now?
We were very early investors in Cava. I am the CEO and one of the company’s main investors. I helped Cava acquire Zoe’s Kitchen, a company several times larger, and transition its operations to Cava, leading to its dominance in the Mediterranean cuisine category. I believe Cava has the potential to become one of the industry-defining brands.
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We have another brand, Tatte Bakery & Cafe, which has 37 stores. I bought it for Panera, and when I left I bought it at Panera. It’s what you would call a Middle Eastern bakery cafe. We also have a restaurant called Life Alive, which is in the positive nutrition space – it’s vegetarian and appeals to the 4% or so of the population who eat a vegetarian diet and the 40% who want to eat more plant-based. Then we’re doing something in the area of immersive entertainment, a concept called Level 99, which includes interactive puzzles, a craft brewery and a restaurant with farm-to-table products.
We have another department that deals with strategic advice and investments in listed companies. We entered companies that needed either capital or strategic advice and took warrants in the companies as payment. The institutional investors support it and we advise. We did it with BJ’s Restaurants
[BJRI] and another listed company, Par Technology
[PAR]. We accompany them and bring capital to the table through our institutional connections.
How would you describe your investment strategy?
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We isolate categories and help build dominant brands within those categories. We’re not really coming from a venture capital or private equity context here. We try to create great companies, like we did with Au Bon Pain and Panera, and helped with Cava. Our portfolio consists entirely of evergreen money – it is fully funded by our partners. We could stay in one investment for decades.
We focus first on the customer. As investors, our first customer is the founder. We believe one of the biggest mistakes entrepreneurs make is viewing funding almost as an annual or lifecycle event. So when we invest, we also give [founders] a right of first refusal for follow-up capital rounds and pre-agreed multipliers.
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We also have a completely different role in the boardroom. We describe ourselves as working in Sherpa management. Starting a nationally dominant company is harder than climbing Mount Everest, and no one climbs Mount Everest without a Sherpa. So we believe we are there to provide guidance and experience – not to do the walking or climbing, but to guide and provide a range of resources.
How does the role of the investor differ from that of the CEO?
At the end of the day, it’s all about choice. As CEO, I have made the decision to tell the truth, determine what matters and how we get there. As an investor, I can’t force anyone to do anything. So my job became more and more about relying on my credibility and helping people think differently. I’m not saying, “You have to use these resources.” I’m saying, “Look, your job is to focus on being a more competitive alternative. If you need it, we have those resources.”
Cava’s IPO was a huge success. The stock has more than doubled and is still above its IPO price, even though shares have fallen with the market recently. Can we expect more IPOs from Act III and the fast-casual industry in general?
It’s about figuring out what is organically appropriate for a company. Ninety percent of CEOs who take companies public regret it. Cava had an extraordinary IPO. We attracted the right institutional investors early on and had a phenomenal CEO in Brett Schulman and CFO in Tricia Tolivar. Given the state of the company’s development, it seemed like a good time for us. This is a company that deserves to go public, and as a public company it will do great. Not every company will do this.
What do you look for when investing now?
Everyone talks about creating value, but you can’t create value any more than you can create happiness. It is a by-product, and there is a difference between means, ends and by-products. A company’s goal is to provide a better, more competitive alternative and get people to cross the street to come to you and pass the competition. The world doesn’t need another restaurant. The restaurant industry is a crap economy unless you create something that people want. How do you get that?
We don’t care about value creation. We’re focused on figuring out what niches and categories will work in the next five years to a decade. We’re all about Mediterranean, positive food, upscale cafes and captivating entertainment.
How do you expect consumer behavior to change as a result of the Covid pandemic?
Most things will be back where they were, except for a few minor changes like using Zoom and using delivery. Why? Because things ended up in a certain place for a reason. The pandemic created extraordinary conditions to which we adapted, but when that changed, people generally went back to where they were. They want food that excites them and an environment that appeals to them. They want to be looked after by people who care about them and they want things that will give them a better life.
There is currently a lot of debate about consumer health. Where do you stand?
We are careful. As a CEO or investor, I can’t control what happens in the economy. I’ll leave that to the Federal Reserve and the like. What I can control is my competitive position in the industry.
So are we sensitive to the economy? Yes. Are we thinking about maintaining price and protecting value? Absolutely. Are we concerned about the consumer? Secure. But do we believe that the way we deal with it is at the core of running a business? No. The core of running a business is ensuring that it represents a better alternative.
What are your prospects for the restaurant sector?
Some call this industry the second oldest profession. It won’t go away. It’s a powerful industry. It’s a big part of the economy. There are always opportunities for investors in this industry. The first problem is being able to separate the wheat from the chaff. The second question is: what are you paying for it? Because the rating is not irrelevant.
What advice do you have for investors navigating the consumer landscape?
I’m trying to prepare myself for the future. I want to invest in concepts and management teams that are able to succeed regardless of economic conditions. I don’t invest based on my ability to better predict the future, so I leave all that aside. I need a better niche and a better concept within those niches.
Thanks, Ron.
Write to Sabrina Escobar at [email protected]
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