Panera Blows Through $120MM on In-House Tech. Blame Their Board.

The role of a company’s board of directors can be boiled down to the following list:

1. Recruit, supervise, retain, evaluate and compensate the manager.
2. Provide direction for the organization.
3. Establish a policy-based governance system.
4. Govern the organization and the relationship with the CEO.
5. Fiduciary duty to protect the organization’s assets and member’s investment.
6. Monitor and control function.

Yet somehow in retail (and especially restaurants), number five is ignored.

The latest example are the recent numbers put to Panera’s digital efforts over the past several years, which Panera calls 2.0. I’m going to copy-paste a lot of text about their program from a press release in early 2014.

A Better Way to Order

 Advanced Ordering for To-Go: An ordering option called Rapid Pick-Up enables customers to place an online/mobile order from their office, car, work or home – up to five days in advance – and pick up their food at a pre-determined time without waiting in line.

 Order from Your Table for Dine-In: An in-cafe dining enhancement that allows customers to place an online/mobile order from anywhere within the bakery-cafe and have the meal delivered directly to their table.

 Fast Lane Kiosks for Dine-In and To-Go Orders: A new way to order in-cafe from iPad® kiosks. Kiosks are available in addition to cashier stations so that wait time is reduced for all guests. The kiosk is highly visual and includes a product builder to assist with order accuracy and customization.

 Customized Ordering: At the kiosks, and through the web or mobile app, guests can save customizations, past orders, and “favorites” for easy ordering on their next visit. And, when linked to the MyPanera Loyalty program and a credit card, it creates a frictionless and faster experience for users.

A Better Way to Pay

 The new digital ordering processes are enabled by an online ordering web function on www.panerabread.com and a mobile app that will allow customers to store their purchase history and credit card information for future use.

A Differentiated Approach to Production

 Operational Excellence: New production processes are necessary to deal with the volume generated by new ordering pathways. Operational excellence – including a commitment to order accuracy – is required to fulfill on the promise of an enhanced customer experience. Beyond technology, Panera has invested in new production equipment and systems, such as upgraded Kitchen Display System (KDS), auto-load balancing, and a new, centralized phone system. Moreover, to increase capacity and accuracy, Panera 2.0 cafes feature customer-facing order displays at checkout and an expeditor station, where an associate confirms and verifies every order before it is delivered to the customer.

 Training: As with any system-wide upgrade, a comprehensive training program has been developed to help associates adopt and master the new processes and systems being introduced as part of Panera 2.0.

A Better Way to Receive Food

 Delivery to the Table for Dine-In Customers: Guests who order from cashiers or kiosks for dine-in orders will have their meal delivered to their table by an associate using an electronic table locator. This means that, once guests place their order, they simply walk to their table where the food will be delivered in a matter of minutes.

 Rapid Pick-Up for To-Go Orders: For customers who have ordered their food “to go” (from the web, mobile app, kiosk or cashier), Panera 2.0 bakery-cafes will be equipped with a special “to go” pick-up area, featuring dedicated seating, an order-status monitor providing real-time information as orders are prepared and completed, and shelf space, all to facilitate easy pick up. “To go” guests can claim their food without waiting in line using a travel path through the cafe that is unique and different from that of “eat in” customers.

Panera’s mind was in the right place: the market was undeniably changing and something should be done. Instead of applying duct tape to leaks, Panera decided it required an overhaul. Kudos to them for the self-awareness.

But somewhere between ideation and execution Panera seems to have greatly mislead its shareholders. At least, that’s what my math shows.

It came out that Panera splashed a hefty $120MM on its Panera 2.0 efforts over the past three years. The results seem to be paying off. It should come as no surprise to our seasoned readership that technology has immense benefits, but let’s highlight some of the numbers Panera mentions.

• Digital sales (those coming from a kiosk or online order) sit between 25 and 35%
• Panera corporate stores are seeing a 4.2% growth in same-store sales while franchisees without the tech overhaul are seeing a modest 0.7%
• Pickup has become 9% of overall revenue
• Half of catering done digitally, growing to 13% of their revenues

Decent results – especially relative to technophobe retailers – but can we rationalize the price tag?

I will admit I don’t have all the numbers Panera does. What I have instead, however, are numbers from hardware and software manufacturers to build my own cost model. I pulled this together over a handful of emails with industry colleagues in less than a weekend. When I look at the numbers (don’t worry, I’ll share them below), I wonder if Panera’s board of directors bothered to do the same sort of diligence.

We’ll start by dissecting the hardware components.

Running through Panera’s list of needs, I’ve cobbled the following:

• iPad kiosks for self-ordering (estimated at 4-8 per location)
• New KDS
• Customer-facing monitors on registers, and a monitor in the to-go area
• Table pagers
• New phone system… whatever that means

Coupled with the physical hardware I’ve assumed a one-time installation cost (worth 20% of the total hardware value), and an ongoing services and support agreement (worth 20% of the hardware value).

For software services, I gleaned the following from Panera’s release:

• Online ordering
• Mobile ordering, including payment in-app
• A seamless ordering software that can extend to self-order kiosks
• Centralized repository of customer data to rely upon for loyalty and marketing

Lastly, there are some nebulous items that we’ll acknowledge could add slop to the model. These are:

• Training (how much, how long?)
• Additional CAPEX (construction needed to change stores; new seats, table etc.?)

In aggregate, however, we’ll find these to be really small relative to other line items. This will become clear later on.

For my model, I assumed there were 1,800 Panera locations being upgraded. (Panera has something like 900 corporate stores, and if that’s as far as the $120MM was supposed to go then their numbers will look really bad.)

Here are my cost tables, starting with hardware. I went ahead and assumed that each Panera store would receive the max of 8 self-order kiosks to be as liberal as possible with my costs:

Software is much simpler. Even though Panera’s leadership is doing a lot of handwaving in the press release, there are only two systems needed based on their requirements: an online ordering (olo) software that transcends to mobile (including kiosks), and a data management platform (DMP) that centralizes all the information. Thus our software cost table is pretty clean.

I then added a cost for training. I assumed each location would get 40 hours of training at a cost of $20/hour.

At this point I want to mention one thing, but it’s pretty crucial. At 1,800 locations, Panera can negotiate some really good terms from its suppliers. That volume is so high there’s no telling what sorts of discounts could be applied. I wrote my model using MSRP, but keep this in mind when we get to the end numbers…

I ran the math from 2014 to 2017, inclusive.

[bctt tweet=”From my math it would appear that Panera has paid twice as much for their 2.0 efforts as they should have” username=””] [bctt tweet=”Putting the savings of $56MM into the stock market at long term rates of 8.65% would have paid the full $64MM price tag in slightly less than 8 years.” username=””]

Panera says this project has been rolled out “over three years” so one could subtract the expenses for 2017 (~$9MM) from the model. If this were true, Panera seems to have overpaid by nearly 250%. Further, if Panera’s expenses were only against their 900 corporate stores, then they would have paid 500% – that’s five times! – more than it should have cost. A Panera franchisee could opine on this factoid.

As we can see, the line items for training (and miscellaneous CAPEX) are relatively small compared to the other expenditures. Thus it would take a lot of fluff here to add material cost to the model.

But fluff seems to have been added somewhere.

Sadly, this example looks like retail business as normal: overpriced contracts paid to friends, family or dolled out to internal teams. The “technology” and “operations” people on the company payroll overseeing the project are more interested in padding their resumes than they are with fiduciary responsibility to the company’s balance sheet. Too often the internal conversation goes like this:

I’ve never overseen a project to build X before, and this will give me the opportunity to do it with an unlimited budget because nobody else in the organization knows technology or operations well enough to push back. Genius!

I could be wrong, but the litany of history in these verticals has always been the same: people paying way too much for way too little because they have no idea what they’re doing. Instead of consulting someone who knows how to do this, they turn to their management and board – many who have little experience in operating a well-run organization by any objective measure – to secure the rubber stamp.

I honestly feel like I’m crazy. Am I the only sane person left on the planet? Am I the only one that looks at data, sees the misbehavior, and speaks out?

I would love for someone to demonstrate more responsible numbers because I’m obviously the only one thinking about the poor shareholders.