The accounting behind Pret A Manger's subscription overhaul

Pret A Manger, the popular UK-based food and coffee chain, recently announced significant changes to its subscription model, Club Pret.

This decision marks a  shift in the company’s strategy, with far-reaching implications for its financial structure and customer relationships.

In 2020, amidst the Covid-19 pandemic, Pret introduced its innovative coffee subscription model. For a monthly fee, subscribers could enjoy up to five free barista-made drinks per day, along with a 20% discount on food items.

This strategy proved remarkably successful, with Pret serving over a quarter of a billion coffees through the program over four years. The subscription model played a crucial role in retaining loyal customers and attracting new ones during a challenging period for the food service industry.

The New Model: Financial Implications

Revenue Recognition

The shift from offering free drinks to providing a 50% discount on up to five drinks daily represents a significant change in revenue recognition. Under the old model, the subscription fee was the primary source of recognized revenue from the program. Now, Pret will recognize revenue from both the reduced subscription fee and the discounted drink sales. This change allows for more granular revenue tracking and potentially more predictable cash flows.

The removal of the 20% food discount and the elimination of dual pricing simplify Pret’s revenue structure. This change may lead to more straightforward financial reporting and easier comparison of performance across different product lines.

Pricing Strategy

Pret has made a bold move by reducing its subscription fee from £30 to £10 per month, with an introductory offer of £5 for both new and existing subscribers until March 2025. This significant price reduction might lead to a short-term decrease in subscription revenue. However, it could potentially be offset by increased subscriber numbers and higher retention rates.

The reintroduction of 99p filter coffee for all customers and price reductions on popular items like the All Butter Croissant (now £1.99) represent a strategic shift towards offering “better value for everyone.” While these price reductions may impact margins, they could drive higher sales volumes and attract more frequent visits from non-subscribers.

Cost Structure Analysis

The new model’s impact on Pret’s cost structure will be significant. While the discounted drinks may lead to lower margins per transaction, the removal of completely free drinks could result in better cost control. The elimination of the food discount might help maintain food product margins, potentially offsetting some of the costs associated with the drink discounts.

Customer Lifetime Value Recalculation

Pret will need to recalculate its Customer Lifetime Value (CLV) metrics under the new model. While the lower subscription fee might attract more subscribers, the value per subscriber could decrease. However, if the new model successfully increases customer visit frequency and spend from non-subscription products, it could potentially increase overall CLV.

Break-even Analysis

The break-even point for the new subscription model will likely be lower due to the reduced subscription fee. However, Pret will need to serve more discounted drinks to reach the same revenue levels as before. This change might affect how Pret covers its fixed costs, potentially requiring higher sales volumes to maintain profitability.

Financial Reporting Considerations

These changes will be reflected in Pret’s financial statements through altered revenue recognition patterns and potentially changed cost allocations. There may be one-time costs associated with implementing the new model, such as system updates and marketing expenses, which would be reported as extraordinary items in the relevant reporting period.

Risk Management

The new model presents both opportunities and risks. While it may attract more subscribers, it also exposes Pret to potentially higher costs if subscribers maximize their daily drink allowances. Pret will need to carefully monitor usage patterns and be prepared to adjust the model if necessary to maintain profitability.

Strategic Considerations

But it’s decision to overhaul its subscription model represents a significant shift in its business strategy, with wide-ranging accounting implications. While the lower subscription fee and increased discounts may pressure margins in the short term, the potential for increased customer engagement and higher sales volumes could lead to long-term financial benefits.

As Pret implements these changes, careful financial monitoring and agile decision-making will be crucial to ensure the new model’s success and sustainability.