FINANCE DIRECTORS are not generally known for giving away something for nothing. But in the case of Pret A Manger – colloquially known simply as ‘Pret’ – the UK sandwich chain’s FD is directly involved in doing just that.
Pret, a UK business that has revolutionised the concept of sandwich- making since its creation in 1986, gave away a staggering 2.4m sandwiches and salads in 2011. All of Pret’s sandwiches are made on site on the day of purchase, and those left unsold at the end of the day are collected by charities and are given away to the homeless.
Judging by his passion for the subject, Candler is clearly the driving force behind some of the company’s more philanthropic policies. In addition to providing food for the homeless, Pret donates money on a long-term basis throughout the UK, while also providing three-month apprenticeships for ex- offenders and the homeless.
In 2011, Pret took on 58 apprenticeships and Candler says that the company hopes to take on 70 this year. The apprentices are not just consigned to cleaning the toilets and various other kinds of menial labour. In this respect, Candler can be said to lead by example.
“One of the girls working in my team is on day release from prison. She goes home to prison every night, which is quite an extraordinary thing,” explains Candler. “I think we have a phenomenal success rate. More than 75% of the people we take on apprenticeships are with us six months later, which is an extraordinarily high percentage.”
Candler admits both the apprenticeship scheme and the “rational” decision to hand out produce that would otherwise be discarded make sense for the business in more than just the philanthropic element. However, he is adamant that these things can’t be done only because of business benefits.
Talking about values may seem distant in its relation to the finance function, but for Candler it is a discussion that underpins the fundamentals of the business. It is not enough for the company to succeed financially – he wants Pret to succeed in a way that is consistent with what is important, whether by doing the right thing vis-a?-vis the customer or by doing so in the “context of society as a whole”.
“If your values are just a veneer tacked on to an otherwise valueless business, then I think people see through that very quickly – whereas if your values are actually embedded in the business and what you believe, you are not perfect but it is what you do, and it is real and it is true,” explains Candler.
Looking at strengths
Values aside, Candler is clearly doing something right. Pret has recorded steady growth since he joined the company in 2006, with results for the year to 29 December 2011 revealing that operating profit rose 14% to £52.4m, and total sales increased 15.2% to £377.3m.
Although this success can in part be attributed to the healthy performance of the sector as a whole – Whitbread, the hotels and restaurants group that owns Costa Coffee, increased sales at the coffee chain by 27.5% and saw underlying profits jump by 38% – the reality is that Pret’s strategy of providing fresh food made from natural ingredients, combined with efficient but friendly service in a clean, modern environment is clearly paying dividends.
For some, Pret’s approach is seen as quite revolutionary, but for Candler it is just common sense. He says the secret at Pret is to focus on what it is good at.
“We are not a company that looks at our weaknesses and says that we should try to strengthen our weaknesses. We look at our strengths, which is the quality of our food and the shopping environment we provide, and then we try to make those stronger,” he says.
“It’s like Usain Bolt – you don’t say to him: ‘You have done the 100 metres, so why don’t you do the decathalon?’ It’s about how you get faster at the hundred metres and it’s the same for us. We are good at what we do and so we just focus on that: the shop environment, the customer experience, the food.”
And it is the food where Pret really tries to carve out a competitive advantage. The store defines itself by producing its fare on site, every day. But surprisingly, the emphasis on freshness does not have a particularly negative effect on margin. This is in part a result of the autonomy handed down to store managing when forecasting supply and demand.
“They don’t just shoot out and produce everything first thing. They produce something and then see what the weather is like and produce a bit more or a bit less, and then go to on-demand production and actually produce as people come into the shop. That degree of production is a competitive advantage,” says Candler.
However, results are not quite as stunning as first appears. According to accounts filed by Pret’s holding company, PAM Group, at Companies House, the sandwich and coffee chain actually posted a pre-tax loss of £30.2m for the year, largely as a result of a £35.8m charge for non-cash shareholder liabilities – including loan notes and redeemable preference shares – due to the group’s ownership structure.
Like-for-like sales growth also slowed from 9.8% to 6.5% – hardly surprising given the economic environment – while total net debt increased 5.9% to £456.6m. Importantly, however, Pret’s £123.9m of net external bank debt was cut by 8%.
Pret was the subject of a management buyout in February 2008 that saw private equity house Bridgepoint acquire a majority stake. Bridgepoint’s leveraged buyout indebted the business, but – as Candler explains – the majority is held by management and Bridgepoint, while private equity structures typically include an element of debt. Indeed, some debt within the funding structure theoretically makes sense in terms of weighted average cost of capital, which means that it is sensible for the business to have some debt.
“Private equity structures include debt and that’s obviously because there are tax advantages to some debt structures. So having debt is not a bad thing per se. And some of that debt is obviously to shareholders: it’s not payable; it doesn’t accrue cash interest until an event; and external debt in multiple terms is less than 2.4 times,” says Candler. “We don’t have a debt burden. The multiples we have at debt to EBITDA are probably less than most public quoted companies tend to have and is in no way problematic.”
Candler’s assertion seems credible. Pret recently announced expansion plans that will see it open another 24 sites in the UK in 2012 as well as a further 20 branches overseas, which will increase its stable of stores to 330 from 286.
Pret’s UK expansion will create 550 domestic jobs, yet it is the company’s overseas expansion – most notably the opening of two stores in Paris – that excites the most. However, its overseas exploits have not always been that smooth.
Starting in 2000, Pret opened scores of branches in the US, Hong Kong and Tokyo. But the expansion was a troubled one. Following the dot-com crash, Pret closed down a tranche of its US and Hong Kong stores and pulled out of Japan completely.
On joining Pret from Allied Domecq in 2006, Candler exhibited great timing as the company began expanding once again in the US and Hong Kong, businesses which Candler now says are “doing well”. But the next stage of Pret’s overseas expansion is perhaps its most daring.
The French connection
The opening of two sites in Paris – one in business district La De?fense and the other near the central Champs-Elyse?es – has seen Pret undertake the ambitious move of selling coffee to the French. Asked about the wisdom of a faux French UK upstart – the name ‘Pret A Manger’ translates as ready to eat – targeting a culture known for its exacting tastes when it comes to coffee, Candler is less than impressed.
“We’re not faux,” he says. “Pret is an urban model in the main, so we look around other urban centres and we have seen success in New York; we have seen success in Washington; we have seen success in Chicago; we have seen success in Hong Kong. Somewhere like Paris has a fine concentration of people – it is a bread-based culture and it seemed an obvious place to expand in.
“The shops are doing very well indeed – versus our expectation, and indeed versus other retail units in the same street. The emphasis on service, the emphasis on product quality and the emphasis on beautiful shops – it’s the same formula that works here as it does there.”
There are other routes to growth available to Pret. In April, Costa Coffee announced that it is to begin selling coffee and other products to supermarkets in a move designed to take on Starbucks, which already sells a number of brands in the aisles.
However, listening to Candler, it seems unlikely that Pret is going to deviate from this growth strategy any time soon.
“Never say you wouldn’t do things, but I think the key thing for Pret is that there are a lot of the things we haven’t done yet,” he explains. “We have three cities in the US – could we be in more? We are in one city in Europe – could we be in more? There are lots of other things we can do before we consider those kinds of activities – not that those aren’t valuable activities potentially.”
IN BLACK AND WHITE
2006 – present finance director, Pret A Manger
2001 – 2005 UK finance director, Allied Domecq
1989 – 2001 Culinary finance director USA, Unilever