Dec 14, 2020

10 min read

Few Want the Brew: Panera Can’t Even Give Free Coffee Away

“Coffee as a service” is hard to swallow

In Consumer Chronicles, David Leibowitz offers insights and provocations surrounding the ways retail and consumer brands engage with you in the past, present, and future.

In February, Panera launched an unlimited coffee subscription service in-store, at $8.99 per month. It was the company’s attempt to cash in on the “as a service” model, or an uplift to the age-old “all you can eat plan.” They can’t be faulted for the ill-timed campaign; the pandemic which struck on a wide-scale a month later would hurt the restaurant industry globally.

However, after an updated campaign promised the service (and brewed coffee daily) for free through October, the company declared success. Eduardo Luz, the chief brand officer at Panera, was “excited” about the registrations which exceeded their “best-case” predictions, as reported in QSR Magazine.

But a closer inspection of the numbers suggests that discerning customers felt otherwise. In some ways, the math suggests that Panera can’t even give away free coffee.

Only 1.75% of the company’s 40 million most ardent fans believed there was value in free Panera coffee. As is no cost. Nada. Zilch.

Panera was founded in Boston, Massachusetts as a single cookie store in 1980. Now, it has more than 2,200 bakery-cafés in the United States and Canada. About half of those are franchised, and the balance is company-owned. Panera operates as a fast-casual restaurant which mixes the fast-food concept of Burger King with the cookie-cutter casual dining experience of Friday’s or Outback.

Though it used to be publicly traded (as PNRA), in 2017, Panera went private in a deal worth $7.5 billion when it was acquired by JAB Holding Company. Luxembourg based JAB isn’t new to the breakfast and brunch experience, they also own majority interests in Pret A Manger, Krispy Kreme, Peet’s Coffee & Tea, Einstein Bagels, Caribou Coffee, and Keurig Dr. Pepper, among others.

Up until the acquisition, Panera was in desperate need of a change, as they had been trailing the competition when measured by growth. Through 2016, same-store (the more commonly used industry term preferred over bakery-café) sales (a metric used to measure year-on-year growth) was less than 3%, so they rolled out a chainwide upgrade called Panera 2.0.

Although 70% of stores had received a facelift, the response was weak that year per an SEC annual report filing: 2.4% same-store sales growth, nearly the same as the year-on-year progress in the time without any refurbishment.

Within that average hid another detail: progress was only seen in company-owned stores. That’s because franchised locations only saw a .7% growth, while company-owned cafes achieved 4.2%. Still, that was dismal compared to McDonald's reported 10.5% U.S. same-store growth during the same period.

Coffee as a Service at $9 per Month

In February of this year, Panera launched a service where customers could drink as much coffee as they wanted, for $8.99 a month. The goal? To add in-store traffic, increase the frequency of visits, and attach food sales. Simply put, the company hoped that a customer might arrive for their free daily cup of joe, and likely add a pastry or other food item to the transaction.

This wasn’t an entirely new concept, as Burger King kicked off a $5 per month coffee service in 2019.

According to CEO Niren Chaudhary, the initial results of the Panera program were good. In the first 150 pilot stores, the frequency increased 200% for unlimited coffee subscribers, with a 70% increase in attached sales. Monthly visits increased from about four to more than ten.

And of the 100,000 paying subscribers added, nearly 25% were brand new to the loyalty program. Most importantly, the company says that churn (the percentage of members that cancel a recurring subscription) during this period was lower than 10%.

But that didn’t last as most states went into lockdown and many of their stores shut down in March. The deal fell to the back burner.

Though Panera is now private and doesn’t report on specific restaurant figures, a look at similar companies reveals the challenge brought on by pandemic closures: Starbucks’ same-store sales fell by 40%, and McDonald’s decreased by 24% in the second quarter.

Coffee as a Service at $0 per Month

To jumpstart the reopening of stores, Panera relaunched the campaign at the end of May with a twist. This time, the unlimited coffee was available entirely for free through Labor Day.

And the coffee is so cheap; it’s easy to give away. Typically, the profit margin on a cup of coffee is 300–400%. In Panera’s last annual report, they shared the cost of all bakery ingredients as not exceeding 27% of the retail value.

In the first three weeks of the relaunch, Panera added 700,000 members and marketing executives were publicly thrilled. “It’s way above what we predicted in our best-case scenario,” said Luz of the results.

What they were hoping for with the new campaign is that customers would onboard to the premium paid model in October, after trialing the service. This concept of trials or freemium is typically employed in the software-as-a-service or app space, which Panera hoped to emulate.

But that’s not likely to stick, because that best-case scenario demonstrates the more significant problem — that few see value in free coffee.

Fuzzy Math

With 40 million loyalty members as of July 2020, Panera has doubled Starbucks. And catering to this crowd is paramount. According to Panera, loyalty members represent 50% of their store sales and are five times more valuable than non-members.

But those most lucrative customers didn’t come running in droves.

First, the number of free members added was only a seven-fold increase over those who paid for the service in February. Second, after a massive marketing blitz, the number of loyalty members who signed up accounts for less than 2% of the total loyalty program base.

Specifically, only 1.75% of the company’s 40 million most ardent fans believed there was value in free Panera coffee. As is no cost. Nada. Zilch.

So why is that?

Could it be that the “coffee as a service” model doesn’t meet customer expectations? You know: availability of coffee, temperature, free of grounds, and milk containers that are fresh and full.

Perhaps the value of a cup of coffee isn’t worth the hassle. Even at full retail, the $9 per month averages out to be 30 cents per day if you managed to grab a cup every day using their largest size at about $2.50. That slides down to about 45 cents per day for brewed coffee on Monday through Friday workday stops.

That requires rolling out of bed. Putting actual pants and shoes on (not pajamas and slippers for the work-from-home crowd) and then walking or driving to the café. By the time you arrive, half of the tables are closed off due to social distancing mandates. So that’s an average of 15 minutes round-trip to get a cup of coffee, which is valued at less than two quarters.

Though you might add breakfast items to the trip, the numbers don’t add up. The price of that daily cup of coffee is now the same had you purchased the grounds and prepared them at home. Still comfortably in your sweats and slippers.

And that’s the next retail problem for Panera — they’ve shot themselves in the foot. Once customers quantify the cup at approximately 30 cents based upon the monthly rate, they will be hard-pressed to value a full cup at $2.50.

The “as a service” model isn’t the same as an “all you can eat” buffet. Customers have expectations of service levels. I’m a Panera customer and do enjoy their freshly brewed coffee. That is when I can get it. My experiences at their cafés over the years have been sporadic.

At times, the carafe isn’t full, and I’ll have to request that an associate refill. Other times the coffee might not be hot, or grounds spill into my waiting cup. And I’ve had to ask the staff to refill the half-and-half on too many occasions.

I know. First world problems and all that. But given the lackluster experience, I’ll never be a monthly subscriber. I suspect this is what most companies forget when they enter the as-a-service model. That it’s about the service and the experience too. Not just the product.

Imagine if your monthly unlimited broadband service was subject to sporadic outages, random throttling, or had no guarantee of connection — would you continue paying for that service? At any price?

Few Want the Brew: Panera Can’t Even Give Free Coffee Away

“Coffee as a service” is hard to swallow

Coffee as a Service at $9 per Month

Coffee as a Service at $0 per Month

Fuzzy Math

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