How big can the bakery chain Greggs get? A trip to Glasgow offers a clue: a dozen of its sausage roll-selling outlets surround the central train station. With that kind of concentration of stores, there’s clearly room for the FTSE 250 chain to continue expanding elsewhere.
More than 1,800 of its shops are on the high street, up about 500 in a decade. The chain, founded in 1939 as a Tyneside baker, talks about growing “substantially beyond” 2,000 outlets.
Lately, things have got tougher. Ingredient prices, which make up about a quarter of costs, are expected to have risen by about 7% since last year. That’s forced
Greggs to put up prices: sausage rolls went from 85p to 90p last year. A tide of new employment rules, from an increase in the minimum wage to the apprenticeship levy, has increased wage costs (41% of its cost base) by 3.1%.
This week Greggs will update on trading in the final quarter of 2017. With consumer confidence waning, it might be looking down the barrel of a gun. Yet its shares, aside from a recent cooling, have climbed steadily north. They ended last week at £13.29, a 40% gain on a year earlier, valuing the company at £1.3bn.
Chief executive Roger Whiteside has turned around Greggs during almost five years at the helm. He got rid of unprofitable ventures such as fresh bread baked in-store, shifting from take-home food to “food on the go”. Healthier fare, such as a Cajun chicken flatbread, now makes up 11% of sales.
Diversification is the key to future expansion. More high street stores are no longer on Whiteside’s target list; he wants to open in stations and motorway pit stops. Unprofitable shops are shutting and others are being refurbished. Last year Greggs opened its first drive-through outlet, and Whiteside is keen to expand into hospitals and office deliveries.
The backbone that underpins this operation is being overhauled. Fewer factories, and a network of integrated distribution hubs and bakeries, will cut costs. Algorithms are being used to forecast stock demand.
Greggs’ finances are in good shape, too. In July it had £20m of net cash and analysts at Shore Capital expect it to have ended the year with £41m of net funds. They see the chain reporting profits of about £83m for the year on revenues of close to £1bn.
However, there will be limits to growth. Amid a national obesity epidemic, it will be a brave hospital chief who allows Greggs to open on site. For all its expansion plans, the shares look fully valued. Hold.
@jcollingridgeST
