M&C Report takes an in-depth look at this morning's full-year results update from Greggs.
Trading
Ken McMeikan, chief executive, said that the year ahead would “undoubtedly be another challenging year for UK consumers”, with disposable incomes expected to continue contracting well into the second half. He said: “However, the severe inflationary pressure on fuel, domestic energy and food costs that the consumer suffered in 2011 is not expected to continue at the same level, and sentiment should benefit from major national events including the Diamond Jubilee celebrations, the London Olympics and the Euro 2012 football championship.
He said the fall in sales in 2012 reflected a 4% drop in shopper numbers on the High Street so far this year, but it was too early to say if this was the start of a prolonged trend. He said: “As we expected, there has been a slow start to 2012. The pattern of Christmas and New Year holiday trading that contributed to the strength of our sales at the close of 2011 reversed in the first week of January and two weeks of severe weather, with snow and ice in many parts of the country, also had an adverse impact on sales.”
Total sales for the first 10 weeks of the current financial year to 10 March 2012 increased 3.3%, with like-for-like sales down by 1.8%. McMeikan said: “It is too early to tell if this slower start is a sign of a more prolonged trend in sales, however we have managed costs well through this period and our profit performance remains on target.”
McMeikan said that cost pressures were easing as inflation falls but he could not guarantee there would not be price rises in Greggs this year.
Moment
The company opened its first Greggs Moment, 104-cover coffee shop, in Newcastle last year and McMeikan plans three more shortly. The decision to roll them out nationwide is expected to come before the end of the year. He said: “The reaction to the first coffee shop has been brilliant. It is drawing a different kind of customer to those who use our bakeries. Our coffee is 10% to 15% cheaper than other coffee shops on the High Street and the food is 30%-50% lower priced. This is a market forecast to grow from £5.4 billion today to £7 billion by 2015 so there’s plenty of room for growth.”
High Street
McMeikan said he believed Greggs still had a future on High Streets, but the firm was increasingly following customers to where they work and travel. “There are growth opportunities for us and some others,” said McMeikan, “We are finding greater opportunities to offer really good sites. We are still finding if we get the right location on the High Street, those shops are still performing well wherever they are in the country.” He said that in some cases, Greggs has benefited from the closure of stores by allowing it to get cheap deals on prime High Street locations.
Other locations
Greggs has opened sites at Swansea and Bristol bus stations. The first franchised Greggs shop opened at Lymm services in Cheshire in January 2012 and McMeikan said it was performing well. He said: “We will be exploring further opportunities to open shops in partnership with Moto in the year ahead.” He said the link up had the potential to lead to 30 more motorway sites.
Savings
The group said it bore “substantial cost increases in commodity prices during the year”, which affected most of its key ingredients as well as our energy-related production, distribution and retailing costs. McMeikan said that this pressure was partly mitigated by “our continuing drive to identify and unlock cost savings of almost £5m throughout the business”. He said that these savings were generated by further improvements in the effectiveness of the group’s purchasing, and continued overhead savings following the centralisation of its business. He said: “Our supply chain cost reduction programme is ahead of plan, and is now delivering annual savings of £6.8m compared with the position two years ago. We now expect to achieve our original target of £10m of annual savings in 2012, two years ahead of schedule, and to increase the total annual saving to £15m by 2014.
Wholesaling
During the year, the group diversified into wholesaling as part of its strategy to access new markets. McMeikan said: “We believe that Greggs has the potential to expand significantly into the 'take home' food market. The successful trial of Greggs branded four-pack frozen sausage rolls was extended to all 750 Iceland stores nationwide in October, with strong results, and we are now working closely with Iceland to add more Greggs products to their range. Importantly, we have seen no cannibalisation of sales from existing Greggs shops and have received very positive comments from Greggs customers.”
Promotions
Greggs has introduced a range of new deals in a third of its stores in some of the worst-hit parts of the UK, mainly in Scotland, the North-East and the Midlands as it looks to increase trade. These include two sausage rolls for £1 and a new range of baguettes that sell for £1 with fillings such as cheese and pickle.
Analyst reaction
Wayne Collins at Collins Stewart said: “Whilst current trading is subdued in the first 10 weeks of the current year, (total sales up 3.3% and like-for-like sales -1.8%), we expect the benefits from refurbishments (c.25% of estate in the last two years alone), the shift away from the high-street, and the investment behind the centralised supply chain should underpin short term profit delivery.
“We expect 2012 to be another year of challenge for UK consumers, but Greggs is doing all it can against this tough backdrop. An increased focus on value offers (meal deals, & promotional offers) should deliver further progress, and better leverage the investment in the supply chain and the c.5% estate expansion between 2011-2015E. FY2012E should see improving sentiment from the Diamond Jubilee, the London Olympics and the Euro 2012 football championship.”
