Panera Wasn’t Losing Enough Money So It’s Running Its Own Deliveries

We’ve given it to Panera before. And it seems they’re going to get it again over their delivery execution.

Panera gets our kudos for recognizing trends in the market before their competitors (though it’s not an exceptionally high hurdle to clear). But their execution — how they roll out and justify their methods for implementing strategies — is seriously lacking.

People have argued that Panera is increasing shareholder value, so our prior positions are nothing but bluster.

Wrong.

These are not mutually exclusive phenomena. Panera can have great execution AND increase shareholder returns. In fact it’s obvious that having great execution would only further Panera’s returns.

Panera can thank two root causes for their current successes:

  1. Debt-fueled growth
  2. Unsophisticated competitors

It’s number 2 that might start haunting Panera. (If you need to understand the financials behind leverage there are some great resources that will save you years as an investment banking analyst).

Panera shredded $60MM on their 2.0 efforts for online ordering. That’s no small chunk of cash. In fact, that’s how much the entirety of olo has received since inception. In other words, Panera could have built the industry’s most-used ordering technology, supporting over 30,000 sites with the amount they wasted on one effort for 2,000 stores.

Now Panera wants to add more losses to that $60MM figure.

Panera has talked about its rollout of a nation-wide delivery program that its franchisees must support. Launched in early 2015, Panera Delivery will provide lunch and dinner to offices, hospitals, campuses and homes within an eight-minute drive of a Panera bakery-cafe. Delivery is available between 11 a.m. and 8 p.m. seven days a week for as little as a $5 menu purchase plus a $3 delivery fee in most locations. To enhance delivery, Panera will let customers track orders with Bringg, which shows map status and arrival times.

Panera says it will hire 10,000 more drivers to roll out delivery to 35–40% of its stores.

Blaine Hurst, Panera’s President, said this:

For us, hiring our own drivers was the only way we could ensure that our delivery guests get the same high quality experience they have come to expect from our bakery cafes.

It’s not obvious from Blaine’s comments, but this 10,000 employee expense is being carried predominantly by Panera’s franchisees. And it’s going to hurt.

We covered the math of delivery services a while ago. The cliffnotes here are that today’s delivery services are uneconomic. Uber, the largest last-mile player in the business, charges a 30% order fee in addition to a $5 delivery charge. And they’re losing at least $100MM a year.

But at least Uber has demand from many more restaurants than will Panera’s drivers…

How much do Panera franchisees stand to lose on this poor execution plan? It depends on the specifics.

These 10,000 drivers will probably make an average of $7.50 per hour. I’m going to assume these drivers won’t work more than 30-hour weeks so we don’t need to worry about Obamacare cost ramifications.

For one location with one driver, there’s an extra cost of $217.50 per week ($7.50 * 29 hours).

But this would be disingenuous.

Panera wants to add 10,000 drivers to its ~800 locations (40% of all their stores where delivery will be rolled out), yielding 12.5 drivers per location. It feels fair to assume that each of these 12.5 drivers is part-time at 29 hours per week, so we need to 12.5x the previous weekly value to $2,718.75, or $10,875 per month.

Now let’s calculate the vehicle wear-and-tear.

Panera says orders must point to destinations that are within an 8-minute drive from the restaurant. We’re going to use Houston as the “All-American” city for this example and we’re going to assume these orders are placed during lunch rush — otherwise drivers would be able to cover more distance during hours with less traffic.

I went ahead and found a Panera in Houston and used Google Maps to give me a distance and time estimate for three locations within, on average, 8 minutes from this Panera.

Therefore it would appear that, during lunch rush, a driver would be expected to drive two miles on average. Round trip that’s four miles. According to the DOT, reimbursement stands at $0.54 per mile, making this trip cost $2.16, so Panera’s $3 delivery fee should cover these costs.

Now we need to turn our attention back to this labor costs. How many orders will these drivers be facilitating, and does the math make sense?

Let’s assume a best-case scenario, where each driver is fully utilized from the minute they show up. Assuming they deliver 3.75 meals per hour based on those 8-minute windows, that’s $37.5 ($10 check averages * 3.75 meals) per hour. If this were the case, assuming a third party delivery services charges 20% of the ticket price, Panera would pay $7.50 to a third party, exactly the same price they pay their drivers (assuming no overtime or fringe benefits).

But who’s car is being used? Is Panera making franchisees buy their own cars? Is it the employees’ cars? Are there customized insulated packages to handle the food? What training is required? And, most importantly,

are these drivers actually fully utilized every hour they work?

Let’s carefully review the math. If there are 12.5 employees per location each working 29 hours per week, delivering 3.75 meals per hour with an average ticket price of $10, that’s $706,875 annually from deliveries. This fully utilized rate translates to 28% of Panera’s business coming from delivery (each location does $2.5MM annually).

Does that seem accurate?

I don’t think it’s unreasonable for Panera to eventually reach this 28% figure, but I bet the real figure is more like half of that, or even less give the 8-minute constraints. This would make sense if for nothing else than the basic rules of life that show nothing is ever 100% efficient: even the most well-designed systems need correction.

If we ignore the costs of training, overtime, health insurance triggers, vehicle purchases and food containers for transport, I’d still bet these drivers are 50% efficient. Think of all the places where imperfections creep into the system: traffic accidents, road construction, inclement weather, spills, the literal hand change from store to delivery car and delivery car to end customer (on the 30th floor). Your average round trip now skyrockets from 16-minutes to substantially more, killing any sort of benefit Panera execs sold to their board based on excel sheets built in a lab. (Note: I am not considering that Panera would load multiple meals in the car at the same time since this would substantially worsen “the customer experience” they’re trying to control).

Thi would at least make Panera consistent with it’s past behavior: paying 2x for a service it should punt to a third party. By my math this looks like Panera and its franchisees will swallow an excess cost of $56,550,000 in labor for delivery.

If this wasn’t enough, I’d be worried that Panera will only take it further. If Panera believes it should own the whole process to “control the guest experience”, why not splash a few billion buying technology for automated vehicles? I wonder if Google, Uber and the auto OEMs even know that Panera is the biggest sleeper in advanced technology; that the industry that can’t even use analytics to manage their own labor and supply chain is going to be history’s first $1T entity with their super-sophisticated delivery tech.

Sure, Apple gave up on its auto ambitions after realizing they weren’t core to their skill set, but they weren’t smart enough to realize that panini-pressing sandwiches is the natural precursor to being an analytics savant. FedEx and UPS shareholders should be losing sleep thinking about the St. Louis bakery…

Eventually this is going to catch up with Panera. When you’re burning through hundreds of millions in a low margin industry that’s only getting more competitive, these dollars will at some point matter. With sophisticates entering the industry via private equity and hedge funds (I am not familiar with how Panera’s new ownership operates… funds are usually active in fixing issues, or active in financially engineering the asset, but rarely caught in-between), Panera cannot get away with this forever.

The clock is running out, even if Panera thinks it will build all time-keeping devices.