Why Did Panera’s Pay-What-You-Can Social Experiment Fail?

This article originally appeared in Philanthropy Daily on March 13, 2019. 

Four years ago I wrote about community cafes, social enterprises that resembled restaurants except when it came time for the bill. There, instead of paying a fixed price, the customer paid whatever she thought the meal was worth. The idea behind community cafes was that those who couldn’t afford full price for meals could get a good meal—and the dignity of eating in a restaurant instead of lining up in a queue for a free meal at a homeless shelter or soup kitchen.

Panera entered the community café business with Panera Cares, a nonprofit division of the restaurant chain that at one point had five stores. The restaurants tried to offer the same meals as in regular restaurants, with some extras, such as day-old bread offered for free. If you didn’t want to pay for a meal, you could volunteer for an hour as payment.

Last month, however, the last of the five Panera Cares stores, based in Boston, folded, even though they took measures they didn’t expect to take, such as having 10-digit codes for their bathrooms that were changed several times a day. As Bloomberg reporter Leslie Patton noted, the closure “highlighted the tensions that arose when private businesses try to be welcoming to everyone.”

Rev. Ben Johnson has the story on the Action Institute blog. As he describes it, the problem that Panera found is that, faced with a freebie, far too many people abused the privileges Panera provided.

The Portland Oregonian noted in 2013 that when the Panera Cares opened in that city, homeless people began to treat the place as a soup kitchen. They spent all day there with their smelly stuff. Students “mobbed the place every day, ordering many meals and not paying for them.” The bathrooms were full of junkies. The neighbors complained of an increase in drugs and other crimes.

But the Portland store took action. They banned anyone from having more than a few meals a week. They highlighted the art some people drew in exchange for their meals. Parents came in with their truant children and paid for their kids’ meals.

But, as Panera founder Rob Shaich noted in an interview with the NPR show Planet Money, part of the problem was that people who walked in off of the street to a Panera Cares didn’t understand the economic model behind Panera Cares. Some people didn’t know what a pay-what-you-can-model meant. Business school professors explained when interviewed by the Boston Globe about Panera Cares’s failure, part of the problem is that in contrast to a typical transaction in a store—you pay for something, you get what you paid for—a “pay what-you-can model” is a lot more hazy transaction between buyer and seller, since it mixes the market with charity.

In addition, Harvard Business School professor Shelle Stewart explains that many people feel, when they’re buying something from a business, part of the price they’re willing to pay depends on how they feel about a particular business. People thought that Panera was a rich, powerful company and therefore would be willing to pinch pennies they wouldn’t do at a struggling nonprofit.

“The more deserving a company or an organization or a seller is perceived by the buyer,” she said, “the more they’re willing to pay for their item.” Many customers thought Panera was hugely profitable and were willing to cut corners or pay less than they would at a charity.

Planet Money interviewed Brad Reubendale, whose SAME Café in Denver was the model Panera used for their Panera Cares restaurants. In fact, Ron Shaich decided to found Panera Cares after seeing a segment about SAME Café on the NBC Nightly News in 2009. Reubendale made clear that although his café looks like a restaurant, customers quickly know it isn’t a restaurant. For example, they have cubicles for homeless people to store their stuff in case they wanted to sit for a while. And while Panera hoped that people would donate enough to cover 70 percent of costs, SAME Café is a nonprofit whose business model is based on fewer than half of their customers paying for their meals. They regularly fundraise including one big gala a year.

Finally, there are no prices at SAME Café. This makes clear that it’s a nonprofit that welcomes donations rather than a social enterprise with a confusing mission. A large sign at the entrance explains that payment at SAME Café is volunteering for half an hour or making a donation.

In his interview with Planet Money, Ron Shaich was disappointed by the failure of Panera Cares. “I fundamentally believed that there were enough good people in the world that they would do the right thing,” Shaich said. “But I particularly loved torturing the cynics, who were arguing, you know, no way this would work. Everybody – you know, it would be lunch on Uncle Ron.”

However, although Shaich may have founded Panera, he no longer owns it; he sold 87 percent of the company in 2017 to Germany’s JAB Holdings, who also own Au Bon Pain, Pret a Manger, Krispy Kreme, Dr. Pepper, and a majority share of Jimmy Choo shoes. We don’t know what JAB Holdings thinks of the Panera Cares experiment.

What the Panera Cares failure shows is that community cafes work as long as people understand they’re charities. A “pay what you can model” confuses many honest customers and encourages freeloaders and the dishonest.

I hope Ron Shaich, with the wealth he has acquired with the sale of Panera, will open a community café serving the St. Louis suburb where he lives. I’m sure he’ll do a great job—as long as the café loudly signals to customers that it is a charity and not a business.