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Pay-What-You-Can Concept Challenged By Thin Margins

By Marty Daks - December 31, 2013

Panera Bread Co. wants to give something back to the communities it serves, and one way it has is to launch a series of “community cafés” where “suggested donations” replace fixed prices on the menu. The concept is fine, but “it is challenging,” said Kate Antonacci, director of social impact initiatives for the Panera Bread Foundation, which operates the Panera Cares cafés.

“It’s a complex business model, in part because we’re committed to delivering the ‘Panera experience’ at all of our locations,” she said. “Revenue at the Panera Cares cafés varies by month, so sometimes there’s enough to cover the operating costs. But in some months the Panera Foundation subsidizes the cafés.”

Successful pay-what-you-can establishments get a lot of press, but the failures don’t get as much publicity, said Phil Buchanan, president and CEO of the Center for Effective Philanthropy. The Cambridge, Mass.-based nonprofit provides data insight to assist philanthropic funders in improving their effectiveness.

“The concept of community cafés, or pay-what-you-can, is part of a broader trend that involves businesses stepping in to try to address social problems,” he said. “The problem is that businesses are sometimes naive about how difficult it is to do it successfully.”

For smaller operations that aren’t backed by a foundation, it’s even tougher. For example, an apparently successful operation is the two-year-old Soul Kitchen Community Restaurant in Red Bank, N.J., supported by the foundation of rock star Jon Bon Jovi. There are no prices on the menu and you might be seated with someone you don’t know. Customers pay the minimum donation or volunteer in some way to earn a voucher for a meal. The organization declined an opportunity to comment.

Theoretically, some customers will pay a posted, or suggested price that generally covers the cost of the meal. Others will pay less or even nothing, while a third group will pay more than the posted price, balancing out any deficit. In practice it’s more complicated, with issues that range from people who could easily afford the full price but instead skip the tab to actually connect with the people who the restaurants are trying to serve.

“Currently, we bring in about 70 percent to 75 percent of what would otherwise be the retail value of the food,” according to the Panera Cares website. To achieve this the firm estimates that 60 percent of people leave the suggested donation, 15 percent to 20 percent leave more and 15-20 percent leave less or nothing. The cafés are located in Saint Louis, Detroit, Boston, Chicago, and Portland, Ore. People who cannot contribute have the option of working for an hour in the café in exchange for a meal.

This past summer, however, a series of obstacles drove Panera to temporarily shelve another pay-what-you-can approach, called the “Meal of Shared Responsibility.” Under that initiative, one healthy meal menu item in a traditional Panera shop carried a suggested price. The concept was rolled out in one store in Saint Louis, and was later expanded to 48 stores as a test, according to Antonacci.

It was a challenge to attract needy people, Antonacci said, in part because the test markets were not located in direct proximity to the people in need. Further, once the initial marketing of the program subsided, awareness and participation dropped.

“The Meal of Shared Responsibility concept is currently being reviewed to see how we can make it more effective,” Antonacci added.

One wrinkle in the pay-what-you-can model is people determining value, according to Brian Mittendorf, a professor of accounting and management information systems at the Ohio State University Fisher College of Business who also maintains a twitter blog at @CountingCharity.

“Different people will put a different value on the meal, and some values might be below the item’s cost,” he cautioned. “I’m aware of some places where the model works, but because it is based on price discrimination, that’s a hurdle.”

In some industries, like music, it’s not such a big challenge, he added. “The rock band Radiohead distributed some of its music over the Internet using a ‘pay-what-you-want’ model. But in that case the marginal cost to the band for each additional download was effectively zero,” Mittendorf said. “With a restaurant, however, there can be significant costs associated with each additional item of food, and those costs have to be recovered.”

He also noted that some research [such as “Shared Social Responsibility: A Field Experiment in Pay-What-You-Want Pricing and Charitable Giving; Ayelet Gneezy” et al] indicates that sales will increase when for-profit organizations explicitly notify customers that a portion of the pay-what-you-can revenue will be donated to a charity.

The Panera model is praiseworthy, but it’s also unique because it is directly backed by a foundation, said Denise Cerreta, founder of the One World Everybody Eats Foundation in Idaho Falls, Idaho, which helps individuals and organizations establish nonprofit community cafés that utilize a pay-what-you-can business model.

“Most community cafés are ‘mom and pop’ operations,” she said. “So a visionary is needed to do the organizing and gather a core team to establish the café. We suggest structuring it with no debt, and working with a church or another partner, like another existing nonprofit.”

Community cafés compete with for-profit restaurants, so the organizations have to deliver “good, friendly service, and good food,” she added. “To keep costs down, many use a combination of a small core, paid staff, and lots of volunteers who may work for free or in exchange for meals.”

The profit margin for food establishments is slim, and that trips up some organizations, said Tara Berman, founder and managing partner of TaraPaige Group, a New York City-based management hospitality advisory firm.

“If a business wants to adopt the model at an establishment, the company could try offering the pay-what-you-want options only at a given hour or one time a week,” she advised. “Doing this could build loyalty within the community and create excitement about the company.”

Careful planning, attention to detail, along with some fundraising has enabled the F.A.R.M. (Feed All Regardless of Means) Café in Boone, N.C., to make a go of it, according to Renee Boughman, co-founder and executive chef.

“We use individual donations and organized fundraising to supplement our café’s revenues,” she said. “We simply have too many free meals given away — even though we often get volunteer help in exchange — to cover our costs.”

F.A.R.M. offers buffet-style meals in three plate sizes, tying the suggested donation to plate size. The suggested pricing is posted near the buffet in a highly visible spot.

Boughman and her associates also developed a thoughtful way to discourage those with the ability to pay but still want free food. “When someone walks through our door, a volunteer greeter is standing by the menu board and asks the person if they’ve been here before,” she says. “If they haven’t, we talk them through the concept.”

A buffet volunteer dishes out the food ensuring that each person gets a reasonable portion and at the end of the meal someone else will ask the patron how much he or she would like to donate.

“If they have no money, we ask them to volunteer instead, and most will do so,” she said. “We want to communicate in respectful and honorable way that if you donate a minimal amount or nothing, your meal is being subsidized. And if you pay a certain higher amount, you’re covering the cost of your meal; and if you pay more, you are helping someone else to have a meal.

The café is also located in an area that provides easy access for homeless and other people who benefit from its meal services. “We’re close to a stop on the AppalCART bus line, which provides transportation to people from a homeless shelter, in addition to Appalachian State University students and others,” explained Boughman. “We’re also near local businesses, so paying customers have access, too.”

F.A.R.M. café supplements its revenue through donations from a local brewery, and from fundraising events, including letter-writing campaigns. One fundraising event featured local bands and a silent auction. It attracted an estimated 500 people and brought in approximately $10,000, she added.

“Fundraisers are a key way we cover our costs,” Boughman said. “But it’s still a roller coaster of ups and downs.”  NPT

Martin Daks is a freelance business writer based in Bethlehem Twp., Pa.

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