Greggs Company Write Up £GRG / $GGGSF

Britain's most loved bakery 🥧🥖

$GGGSF Metrics

• Market Cap = £2.36B

• EV = £2.6B

• FCF = £110M

• FCF Yield = 4.6%

• ROIC = 17.67%

• EBIT = £155.4M

• EV/EBIT = 16.73

• 5 year revenue CAGR = 13.49%

Introduction

Greggs iconic signs and sausage rolls are a staple on every UK high street. The retailer operates as a food-on-the-go bakery chain. The company opened its first shop in Newcastle in 1951. The most recent quarter reported there are now 2,410 outlets across the UK. With 1,300 McDonalds and 2,200 Subways, Greggs is the most popular ‘fast food’ chain in Britain. As of the October 23’ earnings, the bakery had opened a further 82 net new shops during the past 9 months.

With branded merchandise and clothing selling out in Primark, the UK high street belongs to the cult of Greggs.

The Business

Greggs boasts a total of 2,410 shops, including locations in almost every train station in the UK. The company employs more than 28,000 individuals. Customers range from builders to investment bankers. Greggs has a presence of one store per 28,700 UK citizens!

During 2022 the business opened 186 new shops (70 of which were franchised), whilst closing 39. Of the total shops, 441 are operated by franchise partners. The cost of franchising a store is estimated to be between £260,000 to £390,000.

In 2022, Greggs announced selected shops would have extended opening hours. 500 shops are now open until 8pm or later. This allows the chain to compete for food-on-the-go sales into the evening. To coincide with the extended hours, an evening menu was launched to further attract customers. The company is planning to extend the opening of 300 shops to 9PM throughout 2023, as well as trialling 24-hour drive-through sites. According to the most recent earnings, sales after 4PM accounted for 8.8% of all trade.

Having conquered UK high street, the company is setting up shops inside supermarkets, transport hubs, retail parks and shopping centres. Across 2023, the company aims to refurbish 150 company managed shops, relocate 40 shops to larger sites, and open a further 150 net new shops, including 50 with franchise partners.

Greggs shop numbers until 2022 - source Statista

Greggs launched Outlet Shops, predominately in disadvantaged areas. An Outlet is a store where unsold goods are sold in bulk at a lower price. The company opened 10 new Outlets in 2022, to take the total to 30, and is targeting a total of 50 by the end of 2025.

The chain has opened almost 40% more stores in the past decade, 23% in the past 5 years. With such a concentrated UK presence, it’s challenging to understand whether company can maintain the current growth rate.

CEO, Roisin Currie, recently announced that expansion overseas would start with a number of small trials. A team of 3 is currently conducting research into the potential market.

Financials

Income statement

In the most recent quarter, the company reported that sales were up by 20.8%, whilst inflation costs had eased across the business.

Pre-tax profit was up 14.2% to £63.7m, YoY. An additional £16.3m exceptional net income was achieved due to an insurance settlement.

Greggs delivers a gross margin of over 60%. Distribution and Sales costs equate to 48.3%. The company employs a sizeable selling, general and administrative budget - reflecting on both the high staffing levels and marketing budget.

Based on Greggs reported fixtures and fittings costs in the 2023 interim report, it costs £370,000 to fit out a shop with equipment or £135,000 for a refit only. Each shop delivers, on average, £650,000 of annual revenue with pre-tax profit margins of 10%. A refit takes around 2 years to cover the cost of set up (without equipment) and 5 years with equipment. The company targets an annual 25% cash ROI on new shops and 30% on shops older than 2-3 years.

Revenue per employee is £54,000. With the average UK salary at £27,756, this clearly puts pressure on operating margins. It’s unfair to compare Greggs to the FAANGs, but in comparison, Netflix achieves the highest rate at almost $2.5m per employee. Amazon, the lowest of the group, generates $333,000.

The cost of living crisis has lead to innumerable strikes across the UK in recent years. Employers have been pressured to raise wages inline with inflation, which could lead to ongoing employee costs.

Balance Sheet

The company held a £138.6m cash balance as of 1 July 2023, with zero debt. Inventories at the end of 2022 were £40.6m up from £27.9m in 2021.

As of 2022, property, plant and equipment had a value of £393.0m (2021: £343.8m). Lease liabilities in 2022 were £335.1m (2021: £305.1m).

Cash Flow

Net cash inflow from operating activities after lease payments was £73.6m in 2023 (2022: £65.1m). An interim dividend of £0.16 per share was declared (2022: £0.15), with the board anticipating the full years dividend to be 2X covered by earnings.

Across 2023 the business anticipates capital expenditure will be around £200m. This is up from £127.4M in 2022.

Importantly, the company pays little VAT in the UK. The current Value Added Tax rate is 20% on most goods sold across the country. Despite being baked, most of the menu is not sold as hot food, ensuring items qualify for a loop-hole and remain VAT-free. Menu items ordered for delivery are kept hot, meaning the company pays VAT on them. Most of the desserts also qualify for the VAT free rate.

The Menu 🥖

The Greggs menu is one of the key appeals for customers. The chain sells a reported 2.5 million Sausage Rolls per week. The Sausage Rolls and Stake Bakes are more coveted by the fast food consumer than a Big Mac or Double Cheeseburger. Customers can rely on quality and flavour regardless of the location.

Although the chain is classed as a bakery, the menu includes Breakfast Rolls, Baguettes and Pizza Slices, to highlight a few. The hot drinks menu includes everything from Hazelnut Mochas to Pumpkin Spice Lattes. Greggs acts as a one stop shop for meals, snacks and hot drinks.

To remain relevant, the chain introduce the widely debated Vegan Sausage Roll in 2019. The bakery has since added further vegan items including a Sausage & Bean Melt and Southern Fried Chicken-Free Baguette, amongst others.

Marketing

Greggs growth in recent decades can be attributed to consumer perception. The launch of the Vegan Sausage Roll made national headlines.

The Sausage Roll Jesus, the final picture in the 2017 advent advent calendar, caused controversy, resulting in an apology from the company.

The Jesus Sausage Roll Image

The launch of the clothing line, in collaboration with Primark, arguably caused the most publicity. Hardcore fans had the option to select from an 11-piece clothing collection, which included bucket hats, pyjamas and crocs.

Greggs is not attempting to transform into a clothing company, but is keeping the brand front and centre of the public conscious.

Greggs branded clothing from Primark

Bear Case 🐻

Dietary shifts from the unhealthy option

A growing number of consumers, largely influenced by climate pressures or health concerns, are reducing the amount of meat in their diets.

Obesity is the chunky elephant in the room. According to the UK government, in 2022, 63.8% of adults in England, aged 18 years and over, were estimated to be overweight or living with obesity. Greggs is not a healthy option. A sausage roll contains over 300 calories.

Outlet Stores placed in deprived areas are a negative for the nations health. According to the NHS, evidence shows that those living in the most deprived areas of England face the worst healthcare inequalities. The Outlets provided deprived customers with more for less.

To combat a shift away from meat products, Greggs has unveiled a host of new vegan products for Veganuary 2023, including a chicken-free Cajun roll. However, these items calorie supply are comparable with their carnivorous counterparts.

Inability to break out of the UK

Greggs attempted to launch a 10-shop chain in Belgium under the brand “Engelse bakker” before retreating in 2008.

Expanding beyond the UK would mean the company loses its natural scale advantage it has created over many decades.

Despite researching the overseas market, Roisin Currie, has highlighted that the firm is in no rush to expand overseas as it still has lots of growth potential in the UK.

Limited capacity for growth

Greggs has struggled to expand into London due to the high rent costs. with only 31 locations across England’s capital. This is almost the same number of stores located in Leeds or Edinburgh, which are only a tenth of the size of the London.

With an aim of 3,000 stores, Greggs is more than 80% towards its target. After achieving ambitious scale, when does growth plateau? This is particularly challenging if the company cannot break into the UK’s largest city.

Bull Case 🐂

Dominant Scale

With 2,410 shops, the bakery chain is more dominant in the UK than any other fast food outlet. This achieves scale economies and network effects that smaller competitors cannot compete with.

Greggs scale ensures it is easily located and stocked with fast moving products. The menu covers a broad range. Each shop acts as the one stop shop for breakfast, lunch, dinner and hot drinks. The convenient and adaptable locations mean that even McDonalds cannot keep pace.

Smaller chains are now struggling with increasing costs and inflation, whilst Greggs can use scale to negotiate with suppliers. The company can maintain lower pricing without devaluing quality products. 

Inflation Proof

Greggs is a price led business. Customers purchase high quality products, whilst receiving value for money in a competitive food-on-the-go marketplace.

In the first half of 2022, there were price rises of 5p and 10p on some menu items. The business model ensures Greggs can pass rising costs onto consumers. It appears that the worst of the storm has now passed, with the group advising that inflationary pressures have eased in 2023.

Much loved brand

Any food business that can produce a range of sell out clothing is loved by its customers. Consumer have a ‘fun’ perception of the brand. The company has not been as badly affected by the stigma associated with fast food in recent years.

The blue and yellow sign on the high street is a draw for any customer looking for something familiar to eat. A consumer can purchase a Greggs branded product in almost any town in the UK with a guaranteed quality taste.

Shift To Digital

The company offers Click and Collect options through both the Greggs App and website. The app allows Greggs to upsell customers and capture data. Loyalty benefits within the app drive a higher frequency of purchase.

As of the most recent quarter, 13.1% of company-managed shop transactions were conducted through the Greggs App. This increases the speed of service and achieves more sales per minute whilst reducing waste.

2 million Greggs customers were served on Just Eat, the home delivery service, with 7.3 million orders fulfilled in 2022. 1,273 shops partnered with Just Eat as of the end of 2022. The company has recently partnered with Uber Eats and expects to have around 500 shops online by the end of October 2023.

Conclusion

Greggs has not lost sight of its cheap and cheerful offer and brand that keeps customers happy, despite inflationary pressures over the last year. It’s convenient, tasty and you know what you are getting.

With an EV/EBIT of 16.73 the shares are reasonably priced for a growing and well managed business.

The ongoing shift to a digital environment will reduce employee expenses, increase the addressable market and incentivise customers.

With a target of 3,000 stores, the company is well on the way to achieving the outlined goal. The versatility of the shop format ensures it can operate in anything from a kiosk to a drive-through unit.

With a UK only base, Greggs is able to evolve faster than global chains, adjusting styles and menus to meet demand. Whilst growth in stores ‘might’ slow in future decades, the company remains adaptable to challenges and is taking share from the likes of Starbucks and Subway.

Questions remain if the brand can achieve a global footprint. Greggs is undoubtedly an excellent British business, but can they be more than that? They attempted it once before and are currently researching an overseas trial. What could an ambitious or unsuccessful move to Europe or the US be worth to the business and shareholders?

Further Reading & Source Material

1. https://a.storyblok.com/f/162306/x/0ef60b8545/231003-greggs-q3-trading-update-final.pdf

2. https://a.storyblok.com/f/162306/x/cf4f96571d/greggs-interim-results-presentation-2023-final.pdf

3. https://a.storyblok.com/f/162306/x/c32d30b30d/greggs-annual-report-2022.pdf

4. https://www.thisismoney.co.uk/money/markets/article-12362035/How-Greggs-Britains-favourite-baker-humble-origins-Newcastle-2-378-UK-shops.html

5. https://www.theguardian.com/global/2016/mar/05/greggs-conquered-britain-bakery-profit-sausage-rolls

6. https://thenoiseletterteam.medium.com/the-sheer-genius-of-greggs-marketing-strategy-d41f42f0b0dd

7. https://franchise-cost.com/greggs-franchise-cost-uk/

8. https://pestleanalysis.com/greggs-plc-swot-analysis/