Chicago’s north-side neighborhood of Lincoln Park is yuppie heaven and I had the pleasure of living there for ten years. I’m still interested in what happens there and read the Chicago Tribune regularly. A recent article on Panera Bread (NasdaqGS: PNRA) turned my head because it discussed the company’s conversion of one of its regular restaurants into a communist “pay what you can” community café. Above the ordering counter is a sign that reads:
Take what you need, leave your fair share.
If this sounds familiar, it should because it is based off of Karl Marx’s famous saying: “From each according to his ability, to each according to his needs.” Marx, the 19th century German founder of the communist ideology, would be proud of Panera Bread. This is how it works: you order your food and put money in a donation jar nearby – or not. That’s it. No proof of financial hardship required. You can lie about your ability to pay and get a free meal – although the store can require a freeloader to volunteer to work an hour at the store in exchange for the food. However, I’m not sure that a homeless person who hasn’t taken a shower in three weeks is someone you want preparing food or bussing tables. There must be some discretion in deciding who must work. It’s also unclear whether this work requirement applies only to people who refuse to pay anything or also applies to people who pay something but virtually nothing – such as a penny for a $20 meal.
On the face of it, this idea seems preposterous and a sure money-loser. Communism has failed wherever it has been implemented. As Edward Bellamy wrote in his utopian 1888 book Looking Backward, capitalistic societies believed the following:
It was the sincere belief of even the best of men at that epoch that the only stable elements in human nature, on which a social system could be safely founded, were its worst propensities. Greed and self-seeking were all that held mankind together, and that all human associations would fall to pieces if anything were done to blunt the edge of these motives or curb their operation. In a word, they believed — even those who longed to believe otherwise — the exact reverse of what to us seems self-evident; they believed, that is, that the antisocial qualities of men, and not their social qualities, were what furnished the cohesive force of society.
Well, duh! Bellamy – an avowed Marxist – argued that this capitalistic view of human nature was wrong, but I think the 1991 collapse of the Soviet Union has proven Bellamy wrong. Some will point to Communist China as an economic success story, but a 2012 book by Harvard and MIT professors entitled Why Nations Fail argues that China’s economic growth is not sustainable without a change in the country’s communist political system:
Our analysis is that China is experiencing growth under extractive institutions — under the authoritarian grip of the Communist Party, which has been able to monopolize power and mobilize resources at a scale that has allowed for a burst of economic growth starting from a very low base, but it’s not sustainable because it doesn’t foster the degree of “creative destruction” that is so vital for innovation and higher incomes.
I don’t see any “creative destruction” in Panera’s “pay what you want” business model. It relies on good Samaritans who not only tell the truth about their financial ability to pay, but also agree to pay more than market price for their food if they can afford to. Relying on human angels is not sustainable. In the end, such charitable businesses require government funding (via coercive taxation) to survive. As an op-ed in the Chicago Tribune suggests:
Come on! This isn’t some hippie commune we’re running here. It’s USA Inc.
Teach Panera a lesson. Take a lot, and pay nothing. That’ll learn ’em. It should put them out of business in no time and send customers to the nearby diner, likely run by some hard-working immigrant family seeking a better life, one yummy omelet at a time.
The sooner this fantasy of a business model is squelched, the sooner we can get on with rebuilding America’s competitive spirit of building world-class real businesses based on real profits.
To be fair, Panera claims that its previous three community cafes — in Clayton Missouri, Dearborn Michigan, and Portland Oregon — all make enough money to be self-sustaining. The Portland location almost went under because homeless people used the store as a shelter and never left, but Shaich got tough and hired a bouncer to kick out drug-addicted leeches who abused the system. The key to success is choosing locations that include a healthy proportion of affluent liberals that are willing to support such left-wing causes. According to Panera co-founder and Chairman Ronald Shaich, 20% of customers voluntarily pay more than market price, 60% pay the market price, and 20% pay “significantly” less than market price.
Shaich’s communist experiment has not hurt Panera shareholders too badly – yet. The stock has performed fabulously over the past five-year, three-year, and one-year periods, beating the S&P 500 over all of those timeframes. Much of its success has to do with expanding beyond bread (original company name was St. Louis Bread Company) into delicous salads and soups, including my favorite Fuji apple chicken salad and chicken and wild rice soup. But so far in 2012, the stock has underperformed the S&P 500 as well as chief competitor Starbucks (NasdaqGS: SBUX):
Panera’s management claims that this communist experiment in free food doesn’t jeopardize shareholders because all expenses (rent, food, employee salaries) are borne by the Panera Bread Foundation, a separate legal entity. But the fact remains that Panera donates the real estate and existing assets to the community cafes and that amounts to a redistribution of wealth from Panera shareholders to the charitable foundation.
If Panera’s recent stock underperformance continues, shareholders may demand that asset donations to the Panera Bread Foundation cease. Shaich stepped down as Panera CEO in May 2010 to run the foundation and it worries me that he has a conflict of interest between his role as Panera Chairman and his role as leader of the foundation. Would Shaich have agreed to donate such a large amount of Panera assets to the foundation if he wasn’t running the foundation? Empire building — charitable or otherwise — is not conducive with the fiduciary stewardship of shareholder capital.
It may be advisable for Mr. Shaich to study the fate of former Denny’s (NasdaqGS: DENN) CEO Nelson Marchioli, who bet the farm on giving away two million Grand Slam breakfasts for free during Super Bowl week in both 2009 and 2010. The gimmick cost millions of dollars and fed a lot of homeless people, but – surprise, surprise – it did not result in any repeat paying business and restaurant sales continued to deteriorate. Marchioli was ousted from the company in June 2010.