Analysis: Can Greggs' robust ambitions withstand the heat of inflationary pressures?

It started out in 1939 in Newcastle as a door-to-door bakery round, but over the years it has harnessed the red-hot appeal of its steak bakes and sausage rolls to become a major stalwart of the UK high street.

Now a FTSE 250 firm, Greggs has more than 2,100 stores, with a long-term target of at least 3,000 in the UK, part of an unfolding strategy to help the chain be a “resilient brand, better able to cope with an unpredictable retail environment and economic uncertainty”.

But while its latest trading update has seen the group lift its profit outlook for the year after surpassing pre-pandemic sales, it also provided opportunity to flag inflationary pressures rising towards the end of this year.

Food input inflation pressures are increasing, it noted, but “whilst we have short-term protection as a result of our forward buying positions, we expect costs to increase towards the end of 2021 and into 2022”.

Greggs has served up its new medium-term growth strategy 'at a time of notable operating challenges across the British food system,' according to analysts. Picture: contributed.

It was revealed last month the consumer prices index (CPI) measure of inflation jumped from an annual rate of 2 per cent in July to 3.2 per cent in August, the highest level since March 2012.

Furthermore, the Bank of England said recently the figure is expected to rise in the short term, projecting it will move "slightly above 4 per cent" in the fourth quarter of 2021 – largely due to developments in energy and goods prices – although some experts forecast that it would be nearer 5 per cent.

The UK is suffering widespread staffing and supply-chain disruption. Greggs said it “has not been immune” to these factors, which are pushing up prices.

Richard Hunter, head of markets at Interactive Investor, said regarding Greggs’ trading update that inflationary pressures were “elevated, especially in food, although the fact that the company has been forward buying has given Greggs some short-term protection”.

Greggs has outlined its long-term strategy helping it to achieve its goal of being a “modern, food-on-the-go brand that stands for so much more than sausage rolls”.

It says its transformation from bakery to food-on-the-go began in 2013, and the process is “nearing completion”, having involved major capital investment and business change, and that is already bearing fruit.

Continued amends to its offering include the firm revealing seven new items, including two more vegan options, on its autumn 2021 menu.

Analysts Clive Black and Darren Shirley of Shore Capital Markets addressed how Greggs is adapting its business model amid inflationary pressures, with the pair saying it has announced its new medium-term growth strategy “at a time of notable operating challenges across the British food system”.

But they added that while Greggs is “not immune from cost pressures for sure, the strategy is very much more than the current obstacles faced by the group”.

The firm “is setting out notable ambitions – doubling an already quite large business in five years is quite big stuff – and [Greggs] will be hoping to exit the currently pressurised UK market into more orderly conditions in the medium term”, they added.

As for retail margins, Mr Black and Mr Shirley deemed Greggs’ as “quite robust ... given its price leadership in the market, and we would expect net margins to remain stable out to 2026 if it meets its targets”.

The firm has also outlined its goal of turning over £2.4 billion in 2026, a target that prompts the analysts to sound a note of caution.

“It goes in the face of the wise expectation words of Morrisons' chairman Andrew Higginson, when he was group finance director of Tesco; 'set a target but no date’,” they said.

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