Greggs’ results were healthy enough for the sausage roll specialists to confirm it is pushing ahead with opening more stores, despite the obvious pressure on its bottom line.
Revenues for the year ended 31 December were £1.5bn, 23% higher than 2021, although pre-tax profits only made marginal gains, up 1.9% to £148.3mln.
Inflation was to blame for profit growth lagging behind revenues, especially in energy and labour costs.
Despite Greggs believing cost inflation will continue to be a “challenge” in the year ahead, the group is pushing ahead with its store expansion programme.
Opening 150 net stores next year is part of its plan to have “significantly more” than 3,000 UK sites at some point, with 2,328 shops open as of now.
More stores will ultimately lead to greater energy and labour costs, albeit the former is expected to retreat from historical highs throughout the year.
Greater visibility
Greggs can commit to this further expansion by and large because it has greater visibility on its outgoings.
For example, it is locked in with regards to food and packaging costs, which represent about a third of its total outgoings, up until autumn.
Electricity and energy costs are also fixed until later this year, while wages, its single biggest cost, is already known, having committed to pay increases of about 10% in January.
This visibility on outgoings means it can plan accordingly and, barring any major world events such as another war, to enough detail where it can commit to 150 net store openings in 2023, utilising its “robust” cash position of £191.6mln to support “plans for future investment.”
Knowing how inflationary pressures will impact the company this year of course helps, but it is important to note that inflation has also played into Greggs’ hands.
While it has pushed up costs, it has enhanced its “proposition that is underpinned by value,” according to Joshua Warner, a financial markets analyst at City Index.
Greggs’ prices operate at the bottom end of the market, cheaper than the likes of Pret as well as many smaller chains and independent competitors.
At a time when consumers are being hard hit by inflation, with CPI still at 10.1% as of January, Greggs offers its customers a cheap alternative to lunch, highlighted by the 23% uptick in sales.
Appealing to customers amid a cost-of-living crisis is also allowing it power ahead, taking the opportunity to increase its market share by pinching customers and becoming more prominent in prime locations, such as Leicester Square and various airports last year.
The strategy is not without risks, however.
Russ Mould, an investment director at AJ Bell believes while the expansion is to be “applauded” the retailer needs to be “careful ambition does not tip over into hubris”.
Concerns centre on whether the chain will be just as popular in rosier times as consumers’ budgets improve and they turn towards the higher end of the market.
In that case, it could leave them with more than they can chew.
For now, the plan is clear. Store expansion thanks to greater visibility on costs, looking to bank in on its current popularity.