So much of Pret’s history has been steeped in a customer-first tradition. It is reporting best-ever business results. Every indicator shouts “success”.
So why does this great brand face a difficult future unless it quickly changes?
If you are an investor, you may be eyeing up the possible listing for sandwich and salad chain Pret A Manger. It is certainly a good time to consider an IPO. Combining its American, Hong Kong, and European divisions, the company reported a 39pc increase in pre-tax profits to £75.5m as it latched onto developing consumer trends such as dairy-free food. Total sales were reported to be £776m with a projected valuation of £1.4 billion.
Negative trends observed in the US, such as a decline in lunchtime out of office dining have not hurt the brand. In fact, Pret continued to grow in the US despite that decline.
The company has built a strong customer- and social agenda-orientated brand built on healthy and fresh food. It has expanded its meal options and choices significantly. The company is very much in line with the customer agenda, especially in places like Hong Kong where you might imagine there would be massive choice but in fact the healthy alternatives is surprisingly limited.
The company also has a strong sustainability agenda. CEO Clive Schlee reported on 11 October “Starting today, all three Veggie Pret shops will be encouraging customers to fill up their bottles for free using new filtered water stations (thereby reducing plastic waste)”. Pret has always contributed to the social agenda, donating any unused food to the homeless at the end of each day.
In short, Pret has built a truly tier 1 brand which has aligned itself to great outcomes for customer, company (P&L), stakeholder (e.g. investor), employee and social agenda.
If it carries on operating this way then the foreseeable future would appear to be assured. Or is it?
Pret HR chief Andrea Wareham already told the House of Lords 6 months ago “one in 50 people that apply to our company to work is British.” The rest are immigrants. About 65% of Pret employees are non-British EU nationals, she told the Economic Affairs Committee. The company relies on them to stay in business.
Brexit and labour supply
The problem they face is a real one and the seemingly aligned strategy of the company does come under threat. The problem is Brexit is still opaque and there is not sufficient clarity as to the outcome.
On one side politicians like Liz Truss (then UK Justice Secretary) have already said that EU citizens already working in the UK will not be affected but when you dig underneath that only applies to EU citizens who have been working in the UK continuously for more than 5 years.
Depending on the eventual outcome expanding companies like Pret could face labour supply problems. A 10% to 15% increase in wage levels to keep staff employed could halve profit figures – a difficult situation for investors to accept in a post-IPO situation.
Pret has a problem
Pret has a problem on its hands. An IPO in the next few months would raise a lot of money now but there is a real prospect that investors would lose out long term if the cost of the labour force rose due to Brexit implications.
Investors don’t tolerate this sort of uncertainty and Pret could see its stock price drop considerably as the cost implications become known and more widely publicised.
Does this have long-term, potentially negative implications on customers? Well – the answer to that is possibly yes – yet again. Pret CEO, Clive Schlee has to balance investor demands for profit with his cost base. The traditional service excellence model of cheaper, better, faster could very well predominate with an increased focus on cheaper.
Now for a company like Pret, it is not that they have a complete absence of strategies to follow:
- They could accelerate their diversification abroad – something they have already started.
- They could increase the number of UK citizens in their workforce. This creates an interesting dilemma. Currently only 2% of job applicant to Pret are British. The obvious implication is to adjust their payscales now so that those percentages are adjusted. This would drive down profitability and therefore valuation at IPO but investors are less likely to catch a cold long term, with some insulation from market forces pushing up the cost base and therefore pushing profit and stock price down.
- They could create widespread cost-cutting measures and that is where the threat of worsening customer outcomes and experiences arises. Reductionist thinking is supposed to focus only reducing the overall cost base. Service levels are supposed to be maintained but that rarely happens. Time and time again – cost reduction impacts service levels, product quality, customer outcome quality and overall experience. It is a cancer that effects so many companies and takes once great brands into mediocrity. Investors will be clamouring for short term profit so it will take a brave CEO to stand his/her ground and place the customer – and therefore long-term sustainability – first.
- A fourth strategy is to accelerate the overall rate of growth. Overall profitability may suffer longer term but absolute amounts would be maintained which would take some of the jitters away from analyst recommendations for long-term investors.
Pret remains an outstanding company but for no fault of its own it is potentially facing issues which could seriously impact the company’s future.