How Does a Sandwich-and-Light-Meals Company Make It to an IPO? React Fast Enough | Market Inventors

Scaling up while staying flexible and keeping its character is the biggest challenge Pret A Manger faces next.

The restaurant business finally has some good news again.

According to a Reuters report, Bridgepoint, the private equity fund that is the majority shareholder of British light-meals chain Pret A Manger, has hired the US advisory firm Solebury Capital to prepare the company for a listing on the New York Stock Exchange.

Pret A Manger is by now an old brand, yet in the 31 years since it was founded it has opened only a little over 400 stores worldwide, three-quarters of them in its home UK market. But while most food brands, fast food above all, are trying everything to win back a shrinking core of customers, Pret A Manger's revenue grew 15% last year, and its EBITDA (earnings before interest, taxes, depreciation and amortization) rose 10.6% to £93.2 million.

In fact this brand — the name sounds vaguely French, the glass cases are stacked with salads, sandwiches and thin wraps — has only grown fast in the past few years, and nowhere is that clearer than in the pace of its overseas expansion.

It was not until 2001 that Pret A Manger entered the US market. Paris came in 2011, Shanghai in 2014, and in 2016 it opened its first Middle East store in Dubai. Of the 50 stores it opened last year, 19 were outside the UK, and overseas sales grew more than 28% year on year.

At a moment when the whole restaurant industry is working to win over young consumers, Pret A Manger — healthy light food, a fashionable position — had young people from the start. Given how hard the global appetite for healthy eating has taken hold, the smooth overseas expansion is no surprise.

By the standards of what is popular now, Pret A Manger is simple and healthy.

The stores are designed clean and bright: wooden tables, red brick against white-framed walls, and the words that catch your eye first are "organic," "fresh," "natural." Pick any sandwich or salad off the hot or cold shelves and read the packaging closely and you will find no shelf-life date on any of them. Staff will tell you it is because everything is made that day in the store's own "in-store kitchen." Pret A Manger means "ready to eat."

In the 1990s all of this was not just fashionable but ahead of its time. Italian sandwich bars were everywhere in London, everyone was carrying bread slathered in butter, the tables were permanently greasy and still wet where staff had wiped them without drying them.

Julian Metcalfe once put it this way: "Eating out in London in 1986 was a nightmare. Italian food was great, but it seemed like all the worst Italian chefs ended up here." As in many identical startup stories, he and his university friend Sinclair Beecham decided to open a clean, fresh light-meals shop selling carefully made healthy food, and borrowed £17,000 to do it. The first Pret A Manger opened that July on Victoria Street in London.

The market did not rush to it. Because its ingredients cost more, Pret A Manger priced about £1 above other sandwich shops, at roughly £3. Add the founders' inexperience, and the first year lost £80,000.

The next opening came five years later. The British had finally had enough of the flat consumer mood left by the economic slump of the 1970s. The new prime minister, Margaret Thatcher, pushed privatization and stressed market mechanisms, which drove the service economy and produced a consumer culture that brought along a set of young shoppers willing to try new things. The new generation of yuppies drank French champagne at night and was not going to settle for an ordinary ham sandwich during the day. That is how Pret A Manger stood out and got on track.

Fresh food and a relaxed, unfussy meal quickly won over office workers, and in London Pret A Manger became close to their default lunch place. It has plenty of small ways of pleasing customers. It promises that any customer can finish paying in under 60 seconds, and while you are at the till the cashier might hand you a free coffee or a croissant straight from the oven simply because you are wearing a good tie that day. That gesture is a privilege Pret A Manger grants its staff: 28% of customers get this kind of favored treatment.

Besides office workers, travelers are its other large source of revenue. Last year 16% of Pret A Manger's total revenue came from airport and railway station stores, and the store at Terminal 5 of London Heathrow brought in the highest annual sales of any location.

CEO Clive Schlee told The Guardian that the "in-store kitchen" is their biggest advantage in traffic hubs like airports. Supermarkets and most other sandwich chains process food in factories and then ship it to stores; every Pret A Manger has its kitchen in the store, so it can keep turning out fresh food for travelers.

Last year Pret A Manger opened a new store at Terminal 1 of Dubai International Airport, and it has decided to return to Singapore this June, choosing a busy terminal at Changi International Airport.

But the real reasons Pret A Manger has come this far are designing dishes for local markets, changing the menu to keep up with trends, and selling a wide range of them.

Pret A Manger rarely advertises, saying it puts its energy into developing food instead. Its food department is there to listen to customers and update the menu in step with the newest healthy-eating trends. Its new brownie bar, for instance, went through 35 rounds of changes before it reached the shelves.

What shows their feel for a shifting market better is vegetarian food. In April the company added a run of vegetarian options in the US and drew a huge following. On social media it started a #notjustforveggies hashtag vote, asking customers for "love it or leave it" verdicts on the recipes. Under the #pretvegan hashtag plenty of people left warm reviews: "So many choices I want one of everything," "I wasn't a vegetarian and I fell in love with eating vegetarian here."

The first taste of that success actually came from a vegetarian pop-up Pret A Manger opened in London's Soho last June. Customers responded so strongly that revenue in the first two weeks ran 70% above what the shop took before vegetarian and meat menus were separated. Veggie Pret decided to stay open through the whole summer without a break, and it is now a permanent vegetarian-concept store. Customers have even suggested the restaurant turn one of its two Cambridge stores into a Veggie Pret.

The second Veggie Pret opened on April 4 this year in Shoreditch, east London, along with 20 new vegetarian products including vegetarian mac and cheese and vegetarian chocolate brownies. Pret A Manger's best-selling vegetarian dish is an oversized bowl of salad mixing beetroot, pumpkin and goat cheese; at 17,000 servings a week it far outsells the chicken and salmon salads.

Pret A Manger has been just as quick on avocado, the "superfood" the middle class loves. In 2015 sales of in-store items containing avocado rose 26%, and the avocados it put into salads and sandwiches came to five million.

Fortune has argued that a restaurant which made its name on sandwiches now offers such a variety of salads that it plainly wants to be about more than lunch.

That is right. 59% of the food on Pret A Manger's shelves now sells outside lunchtime, and breakfast and afternoon tea keep taking a larger share. Pushing harder on breakfast has become the brand's main job at the moment. CEO Clive Schlee says the company has introduced hot egg sandwiches and oatmeal in recent years and filled out its organic coffee line.

At the store in Shanghai's Jing'an Kerry Centre you will often see posters on the wall for breakfast sets: usually a soft roll, a pastry or a burrito with a cup of coffee. Between 2 p.m. and dinner the seats are almost all taken. Pret A Manger moved into Shanghai's K11 mall in 2014, its first store on the Chinese mainland. Twelve weeks after opening, the company used customer feedback to replace 15% of the original menu outright, and it made a mildly spicy crayfish sandwich for the Shanghai market. But half a year ago, when the lease ran out, the company left K11, and early this year it found new ground at the Lujiazui International Finance Centre. Jing'an Kerry Centre is its second store.

This habit of following trends and changing fast came out of the company's own trouble adapting when it first entered the US.

Pret A Manger arrived in the US market in 2001. The British brand carried its signature ingredient — the mayonnaise the British love — straight onto the menu, and American diners would not have it. After watching sales fall two years running, Pret A Manger brought out sandwiches without mayonnaise.

Eleven years into the US market, by 2011 Pret A Manger had 34 stores in New York, Chicago and Washington and revenue up 40% year on year, which caught the attention of mainstream American media. The New York Times even ran a story of its own on Pret A Manger's distinctive way of managing people.

Selling only food made that day and giving what is left to charity has earned the company very high outside marks for "social responsibility." Staff turnover inside the company is just 60%, against 300% to 400% in the fast-food industry generally, a gap that also has to do with the brand's clear system of promotion and rewards. Every week the company sends a "mystery shopper" to each store to look around, assess the staff and rank the branches, and the results feed straight into bonuses and benefits. That is why Pret A Manger's "warm service" is a phrase people keep mentioning on the review app Yelp and on social media.

The founders had in fact already thought about going public back in 2001. Pret A Manger had more than 100 stores by then, and its first New York store had been open a year. Fast-food giant McDonald's bought a 33% stake at the time, and Pret A Manger hung its later expansion plans in the US and Asia on that international brand.

Hong Kong, by contrast, went far more smoothly when Pret A Manger arrived in 2002, thanks to cultural closeness. It was also the company's first stop in Asia. The Asia-Pacific commercial director once described the restaurant's core advantage: "30% of the ingredients are shipped directly from our UK headquarters, and that is hard for competitors to copy." Even so, the store count in Hong Kong is not large — 20 at present, all in the central business district.

But in another Asian market, Japan, Pret A Manger met its Waterloo. Eighteen months after opening, all 14 Tokyo stores closed. McDonald's Japan announced it was withdrawing from the partnership, saying it wanted to put its resources and energy into its own burger business. That sank the grand ambition of running 80 stores in Japan by the end of 2004.

The company had assumed Japan already had a base of Western fast-food eaters, and that local white-collar workers fond of foreign brands would clear the shelves of rye-and-corn wraps and flatbreads wrapped around salmon and arugula the moment a British Pret A Manger appeared. What it found was that on price alone the company had no advantage in Japan's food market.

Analysts have said that lunch in Japan comes in many forms and is mostly cheap — even good sushi is within an ordinary person's reach — and Pret A Manger, at twice the price of a normal convenience-store sandwich, ended up filed under "luxury food."

Overseas markets turned out to be far more changeable than Pret A Manger had imagined. Another store, shorter-lived still, sat in an office building in Singapore and closed in 2007 after a year. Reports analyzing it said the company had read the market wrong: organic food was still an unfamiliar idea to Singaporeans at the time.

One failure after another in Asia set the stage for McDonald's to sell its stake to the private equity investor Bridgepoint Capital in 2008. That change cost Pret A Manger a second run at an IPO before the financial crisis, but it also let the British brand finally act on its wish to expand abroad.

What followed were good years, as consumers moved away from junk food: the green, organic and fresh selling points Pret A Manger leads with fit the global appetite for healthy eating exactly.

At home in the UK, though, Pret A Manger now faces a labor shortage after Brexit. Only 1 in 50 applicants through its website used to be British; to attract more local hires the company has started posting job notices on social media. In April it even announced internships for 500 teenagers, but the unpaid terms were seen as exploiting students, and after members threatened a boycott the company canceled the recruitment.

Outside the UK, Pret A Manger's only other European market is France, where it has more than 20 stores since arriving in 2011. Europe's unsteady economy has also left the company short of confidence in the continent.

The planned New York listing is read as a bid to expand in the US, which is now Pret A Manger's largest overseas market, with 74 stores and revenue above US$200 million last year.

But fast-casual restaurants going public is a route the industry has been copying for years. In 2006 the American burrito chain Chipotle listed on the New York Stock Exchange, and its share price at one point climbed past $670, above McDonald's and KFC, the highest-priced fast-food stock in the country. Over the following decade the Colorado noodle company Noodles & Company, the Chicago sandwich chain Potbelly and the popular New York burger shop Shake Shack all listed in turn, but the past two years have not been as strong for them as the start was. Even with the broader market climbing, their share prices sit below their IPO prices.

All of them are Pret A Manger's competitors, and competition in the American restaurant industry is fierce. The latest figures show Americans eating out less often. And for all its healthy momentum, revenue of £776 million (in 2016) still leaves Pret A Manger a small company.

To expand quickly, Pret A Manger, which used to insist on running every store itself, has begun to open up franchising; 12 of its stores are now franchises.

Young consumers' tastes are so changeable and so hard to pin down that being both large and quick on its feet is probably the biggest challenge Pret A Manger faces once it is public.

Images in this article, including the cover image, come from Pret A Manger, Rex Shutterstock, Pinterest, healthista and others.