…with a side of competitive advantage.
Pret a Manger has recently introduced a £20 a month coffee subscription that allows people to get up to 5 “barista beverages” a day at any location. People are working more from home and going out for coffee less, and this subscription will hopefully help to reverse this trend, get people out of their houses, and down the road to the nearest Pret. When the coffee has no additional cost, the barriers to getting a coffee are significantly lower. An additional benefit to Pret might be that people get their “free” coffee and spend a little on a snack, or complementary good, which should help with their bottom line.
But having recently read Competition Demystified, I can’t help but think about this move as a combative move rather than just a defensive “please buy coffee again” move. Signing people up for a subscription means that people won’t just go to the nearest coffee shop when they are out with their friends, but they’ll specifically go to the nearest Pret. The innovation in the coffee shop model puts everyone else on the back foot. I don’t know how much a coffee costs at Pret, Costa, or Starbucks. But I do know that when a coffee is £2.60, that is over a tenth of a monthly coffee subscription.
When the headline is £20 a month for unlimited coffees, the focus is all of a sudden on price. In a stable competitive environment where 10%+ profit margins are common, competing on price is a dangerous move (Costa had profit of £156MM on revenue of £1,168MM, Pret had profit of £93MM on £776MM of revenue).
In markets where a couple of large companies control a large % of market share, these companies have the option to act competitively or collaboratively. When they act competitively, they actively compete through price, marketing, and innovation. But when companies are collaborative, they spend similar amounts on marketing, and don’t innovate too fast for fear of setting off a price war. A collaborative market isn’t illegal, it is just sub-optimal for consumers.
When I look at Pret’s new offer, I see a deviation from the status quo. When the headline is “£20 for unlimited coffees” (actually a max of 150 coffees), people start to compare price, which means that companies start to compete on price. Why go to Costa when a coffee there is £2.60, when I could get a subscription and get coffees for less than a pound even if I only go once a day?
My prediction is that others will follow with their own subscription models, and will compete with various additional perks such as which drinks are free, what snack you can get with a free drink, whether you can bring a friend, and most importantly, how much the subscription costs.
Coca-Cola (owners of Costa) have already played with a subscription model for their carbonated beverages, so I don’t think they will be far behind with their subscription. Starbucks have a very strong brand so I think that they are well poised to do well in this, however I’m sure they’ll be cautious to proceed out of fear for introducing the subscription model to the US.
However, I might be wrong. Maybe lots of people will sign up and end up spending more at Pret than they were before. This might be a smart move, and the beginning of a revolution in food service subscription services. Maybe a Wagamama’s subscription is next.
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Callum Macdonald 