In Oregon, Panera’s Pay-What-You-Want Experiment Is Threatened by a Classic Problem of Economics

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September 22, 2011; Source: Portland Tribune | The Panera Bread Company, a national chain of 1,450 restaurants, made headlines when it opened three experimental nonprofit cafés last year. Under the brand name “Panera Cares,” the three stores have the same layout and menu as other Panera locations, except for one significant difference: The Panera Cares cafés have donation boxes in place of cash registers. Customers pay whatever they wish for a meal, and a percentage of the proceeds are donated to youth employment training programs.

In theory, some customers will pay more than the suggested donation (i.e. the regular retail menu price), and some will pay less. With no need for cashiers to ring up orders, the company says the business model is viable if total donations equal 80 percent of the actual retail prices that would have been charged on customers’ selections.

The first two locations, established in St. Louis and Detroit, are meeting this goal, generating enough money to cover operating costs as well as donations to the training programs. But the Portland, Oregon location is losing money, only pulling in 60 percent of full retail revenue. As a result, it’s at risk of closure.

Panera founder Ron Shaich is not giving up just yet. Known for taking on challenges, he personally manned a station at the Portland café’s counter earlier this month and consulted with customers to learn more about why this location is underperforming. According to the Portland Tribune, Shaich learned that in Portland, unlike in the two other locations, the café was a popular place for people with “obvious needs for mental-health or addiction services” to hang out for hours. He also learned that some community organizations saw the café as a great place to refer people for “handouts.” Over time, the café gradually lost its appeal to a more diverse balance of customers who had more ability to pay at least full price.

It’s a classic case of the “tragedy of the commons,” the tendency for a mutually owned public asset to be overused to the point that it loses all of its value. The phenomenon was originally noticed by medieval villagers with respect to communal grazing lands, but it applies in many realms, such as when waterways and the atmosphere become dumping grounds for pollution.

In response, the company recently created a new “community outreach associate” staff position at the Portland store, something that it hasn’t needed to do at the other two locations. The job is held by Sam Sachs, a former county corrections deputy. He is working to delicately build the understanding among customers and local organizations that if too many people come in too frequently for free meals or stay too long, the café can’t stay open. Generally, moral suasion is not particularly effective in overcoming the tragedy of the commons problem, and regulations such as a time limit must be instituted. Still, Panera deserves credit for at least attempting to deal with the issue rather than simply closing the store.

Shaich is committed to open a new “Panera Cares” café every four months, as long as the business model works. We hope other nonprofits and corporations take note of what Panera learns.—Kathi Jaworski


  • Arlette Merritt

    As someone who is unfamiliar with the social geography of any of these cities, I am wondering whether some of this apparent failure in Portland may be related to location. Is there a concentration of non-profit agencies serving homeless people in one section of Portland, and, if so, is the cafe located there too? Is the location of this cafe like the locations of the others in their respective cities?

  • Jason Huff

    That is an interesting thought Arlette. I cannot speak for Portland or Detroit, but do know that the Panera Cares store in St. Louis is located in a vibrant suburb which houses several businesses, law firms, etc. who employ professionals with the capacity to make the business model work by paying at or above retail. In fact, this particular Panera Cares was a standard “full-pay” store previously. I do commend Panera and Ron Shaich for their commitment to this project.

  • Kathi Jaworski

    I only personally know about the Portland location– it’s in Hollywood, a pretty diverse and popular NE Portland neighborhood. According to the company’s 1/16/2011 press release, “Like other Panera Cares cafe locations, the Hollywood-area cafe is easily accessible via public transportation and attracts an eclectic mix of customers, exuding a genuine neighborhood vibe.”

    Definitely not upscale or suburban, though there is a Trader Joe’s next store.

  • Karen Swim

    I remember reading about this concept years ago – a restaurant in San Francisco operates on this model. Customers could not only pay what they wanted including nothing at all but could work for their meal. I loved the model and for them it worked. I would think that it would be difficult for a chain to have some fee and others pay what you want. The concept seems better suited to indie restaurants that also tend to cultivate a “family” vibe. Bravo to Panera for trying, now if only they would reduce the sodium and calories in their products!