How Wall Street is hurting restaurants

Public markets discourage long-term investments. Here’s how Panera Bread founder Ron Shaich would fix it, says RB’s The Bottom Line.
Photograph by Jonathan Maze

The Bottom Line

Wall Street is ruining the restaurant industry.

Or so says Ron Shaich. The founder of Panera Bread believes that the public markets discourage long-term investments that can help build strong companies in favor of short-term moves such as stock buybacks.

“Our public markets have become increasingly short-sighted and indeed hostile to companies like Panera,” Shaich said at the Restaurant Finance & Development Conference this week in Las Vegas. “It’s difficult to make long-term transformations like Panera, and the market is hostile to it.”

Shaich has been on something of a campaign to fix the public markets. At the Restaurant Leadership Conference in April, he was critical of Wall Street and of activist investors. And he created his own investment firm, Act III Holdings.

Panera Bread several years ago undertook a major evolution known as Panera 2.0, which added technology and in-store kiosks in a bid to improve throughput during the company’s busy lunch times. The effort vaulted Panera into one of the most tech-savvy chains in the industry, and its sales grew as a result.

The company was taken private by JAB Holding Co., what Shaich calls an “evergreen investor,” for $7.5 billion last year.

Yet the 2.0 effort took years. And many current investors don’t quite have the patience for it, Shaich said.

In 1960, he said, the typical shareholder owned stock for eight years. These days it’s eight months. Investors are “renting shares,” he says.

Hedge funds look only at stocks' short-term movement. And high-frequency, algorithm-based trading strategies magnify a company’s quarterly performance.

But many of these short-term shareholders view management as an “agent of shareholders” who “should focus on maximizing value creation.”

One of these investors “can walk in owning 1% of the company and come up to me and say, ‘You work for me, I’m the new owner. Cut G&A, slice R&D in half, pay out dividend money and let someone else worry about the carpets in two years,’” Shaich said.

To be sure, there are some examples of companies that are making major investments while winning over investors. McDonald’s, for one, is helping franchisees invest in remodels and kiosks while adding mobile ordering as it seeks to become more of a technologically savvy chain.

McDonald’s stock has hit record highs this year despite some persistent traffic challenges in the U.S.

Still, the point is a good one. Quarter-to-quarter thinking makes it hard for companies to push long-term investments. It’s one reason why some of the smaller chains that went public from 2013 through 2015 have struggled.

Then there are activist investors that will target “undervalued” companies and then push managers and board members to make changes. Shaich believes activists worsen short-term thinking. He said activism on Wall Street has increased 18% a year since 2012. Panera had its own activists in 2008 and again in 2015—when Panera was in the midst of its 2.0 effort.

Not all activists are bad—indeed, an activist can light a fire under tired management teams—but often the investors operate with a generic playbook: avoid capital spending, refranchise restaurants and sell off assets. “Fear hangs over the decision-making process in most public companies as boards seek to avoid becoming a target,” Shaich said. “Boards are attempting to outmaneuver the activist. Everybody lives in fear of the next activist coming in the door.”

Guy Adami, host of CNBC’s “Fast Money,” also had some pointed words for the Federal Reserve, which has kept interest rates low for a long time. That has encouraged companies to borrow money at low rates to buy back stock. “It made corporate America lazy,” he said. “When money is cheap, they buy back stock or pay a dividend and the stock goes higher.”

So how would Shaich change the market?

First, he would provide differential voting rights based on how long an investor holds a stock. Long-term investors should have more power than short-term investors.

He would also put a moratorium on earnings guidance. Many short-term investors are only looking at the guidance and whether a company meets those expectations or beats them. Many critics of Wall Street at the moment view the amount of guidance as an industry problem. Some go so far as to say that regular earnings reports are a problem.

Shaich would also base executive compensation on long-term performance rather than short-term gains.

I’m not sure that ditching earnings reports or guidance is necessarily the right step. Earnings themselves are important, because they provide a constant window into the performance of a company, and investors deserve that. And guidance gives them an idea of what to expect.

But Shaich is right that long-term investments pay the greatest dividends for a company’s performance, as companies such as Panera Bread and Domino’s Pizza have proven. And shareholders who plan to be involved in a stock over the long term should have the most power in a company. Because any company wants to be around for longer than eight months.

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