Explaining the secret behind Panera’s crazy unlimited coffee subscription for $9 per month

Posted on Posted in How to Guide for Marketers

Panera is not really known for coffee. Yet, this month, Panera is launching a highly innovative subscription model that gives consumers unlimited coffee for $9 per month. This classic loss-leader strategy will cut through the clutter of fast-food marketing and create some energy for Panera. With many coffee addicts, this will certainly make you take a second look. 

There is a method to the madness behind this strategy. It will bring new consumers into their restaurants who will then be tempted to buy their high-priced, high-margin treats, and food. For current Panera consumers, coffee is a great addictive product to build a routine around, and this might drive up the trips per buyer. can’t do these because they don’t have enough sales per consumer. 

Panera

Some of the numbers behind the madness

Panera is the #10 quick-serve restaurant (QSR) in the U.S., just Dunkin’ who sits at #8, and dramatically behind #2 Starbucks. In the last few years, Panera has experimented with a few options with a revamped breakfast menu, faster drive-thru, the use of their app, and even table service for in-restaurant dining. All reasonable attempts, but not enough to make a quantum leap in the highly competitive QSR market. Every brand is trying something to move ahead.  

As I dug into the numbers, the first thing that stood out for me is that Panera’s sales per store is at $2.74 million, which matches up with McDonald’s, and is twice that of Starbucks who sells only $1.35 million per store, and nearly three times that of Dunkin’ who sells only $933k per store. Given how we might not even think of Panera as having coffee makes me Panera must sell a whole lot of pastries and sandwiches. 

Panera’s current price for a cup of coffee is $2. Without access to Panera’s numbers, let’s assume the cost of goods for a cup of coffee (product alone) is a generous 25 cents per cup. The break-even on margin alone is 36 cups per month. So even at once a day, Panera can cover the cost. Panera’s 150 store test showed that subscription-based consumers visited the store every other day, which would be 15 cups per month. 

The test showed that consumers who signed up dramatically increased their food consumption at Panera. With a revamped breakfast menu, this is an excellent opportunity to move Panera’s after 11 am base (75% of Panera’s sales are after 11 am) 

Panera’s 38-million-member loyalty program, which connects across channels, is among the largest in the business. For perspective, Starbucks has 18.9 million active U.S. members. That’s shocking. 

Playing with the math of marketing

Marketers have to be good at being able to forecast. Using consumption data helps you understand what’s going on in the marketplace and will match up to what’s happening at the store level. A brand can get more people to use your brand (drive penetration) or try to change the way they use your brand (drive purchase frequency). The tool below uncovers the data; then, you need to put a story to that data.

  • A: Penetration is the percentage of households who purchased your brand product at least once during a measured period. 
  • B: Buying rate or sales per buyer is the total amount of product purchased by the average buying household over an entire analysis period, expressed in dollars, units, or equivalent volume. 
  • C: Purchase frequency or trips per buyer is the number of times the average buying household purchases your product over a time period (usually one year).
  • D: Purchase size or sales per trip is the average amount of product purchased on a single shopping trip by your average buyer. It can be calculated in dollars, units, or equivalent volume.
The total sales number is a combination of the size of the market, what percent of that market you can penetrate, and how much you can get them to buy.

With Panera, let’s play around with a few best-case and worst-case scenarios based on assumptions. For starters, I’m also going to assume all outlier purchases will be the same in either model. The one-time rare $112 purchase or the $2 total bill will be the same in either model because this program influences neither. 

Here are the assumptions: 

  • Currently: The coffee price is $2, and the cost of goods is $0.25. Panera consumers currently buy coffee 5x a month and buy food every second trip. When they buy food, they spend $12 each trip, and the margin on their food is 40%. 
  • Best case: The program attracts a gain of 5% of new consumers, and they double their coffee buying to 10 cups per month. The buying rate of food stays the same at 50% of the time, and the price per trip stays the same. The profit gain from the best case is a gain of 67%. 
  • Mid case: The program attracts only a 2% gain of new consumers, and they love the $9 program so much, they triple their coffee trips to 15 cups a month. With more visits, the buying rate can’t hold, and it now falls, as consumers only buy food 25% of the time. The mid-case scenario shows a profit gain of 23%. 
  • Worst case: Panera gets no new consumers, and current consumers now buy 30 cups a month. As the program attracts coffee only trips, the food buying rate falls dramatically to once every eight visits. Even with this worst-case scenario, Panera would see a profit gain of 7%. That’s still 2-3x the growth rate of the economy. 

What Panera's actual test results showed

In their test, Panera saw frequency jump by more than 200 percent for customers after they signed up compared to before. Next, Panera witnessed a 70 percent increase in food attachment for subscribers, which Panera called “staggering.” Another alluring result was the fact close to 75 percent of coffee redemption occurred off-premises through their app using the drive-thru or delivery programs that are set up. 

At this point, Panera believes they are the only ones who can launch this program. 

“We’re the only people who have coffee and food. We’re the only ones who have an e-commerce platform that’s robust enough to handle this along with omnichannel ways for you to get it. So whether it’s Rapid Pick-Up, drive-thru, delivery, or on-premise. And we’re the only one with a loyalty program to really enable it.”

This is a disruptive strategy

Disruptor brands move into a blue ocean space, alone. They use a new product, distribution channel, target market, or price point. They are so different that they appear to be the only brand that can satisfy the consumer’s changing needs. When successful, the disruptor brand repositions the major players, making them appear unattached to consumers. 

What I like about this program is Panera recognizes that no one else can do this. McDonald’s $1 Coke is the closest thing, believing every Coke drinker will buy more food to compensate for the lost sales. Starbucks can’t do this, because they are a coffee-first brand, and don’t sell enough food to offset any lost sales in coffee. They might have to charge $50 or $75 a month, which might be less than my daughter currently spends, but certainly won’t disrupt the market!!!  Dunkin’ can’t do these because they don’t have enough sales per consumer. 

 

Does Panera have enough coffee awareness to make these numbers work?

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