May 23, 2019

Breakingviews: Pret’s veggie buyout more appetising than it looks

by Breakingviews.

Pret a Manger’s vegetarian revolution will be sufficiently tasty. The ubiquitous JAB Holdings-owned sandwich chain’s decision to gobble up loss-making rival Eat, increasing its store count by a fifth, may seem reckless when rivals are struggling. But using the outlets to roll out its vegetarian offering is a tried and tested way to boost sales.

Pret A Manger Chief Executive Clive Schlee’s meat-free expansion is already four years old. It started out as a vegetarian fridge, branched out into a dedicated vegetarian pop-up store, and finally became four permanent meat-free locations. Buying up Eat and repurposing its 97 stores to veggie outlets will mean that a big chunk of Pret’s outlets are for herbivores.

That could work. Recent sales figures from British baker Greggs, which launched a vegan sausage roll in January, show it played a key role in trebling sales growth to over 15% in the first 19 weeks of 2019. Such rapid sales expansion may be out of Pret’s reach – a doubling of the group’s 13% sales growth rate to 25% annual growth for those stores is a more reasonable target, according to a person familiar with the situation. But assuming it manages to increase the 95 million pounds of revenue Eat managed in the year ending June 2018 by 25% annually, and factoring in a 10% EBITDA margin and Greggs’ 12 times multiple, JAB’s investment could rise nearly sixfold in value to 350 million pounds in five years.

Trouble on the high street could scupper these plans. Celebrity chef Jamie Oliver is the latest casualty of the intense competition and razor-thin margins among UK eateries – his UK restaurant empire went into administration this week. Eat has also struggled to get out of the red, having nearly doubled its losses to 7.1 million pounds from 2017 to 2018. But a vegan and vegetarian offering may help to keep Pret’s army of white-collar customers coming back for more. If it can take a slice of the vegetarian spoils, the Eat buyout will yield a healthy return.

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