Analyst reaction: Greggs swings back into black but warns over higher costs eating into profits

Greggs has warned that the price of its products could go up for the second time this year as it faces runaway increases in costs – with an analyst saying it has a “tricky balancing act to perform on that front”.

The cost of doing business is expected to rise between 6 per cent and 7 per cent for the company this year due to higher staffing and ingredient costs.

"This has necessitated some price increases, which were made at the start of this year, and further changes are expected to be necessary,” it said. "As ever, we will work to mitigate the impact of this on customers, protecting Greggs' reputation for exceptional value in the freshly-prepared food-to-go market. Given this dynamic, we do not currently expect material profit progression in the year ahead."

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'Greggs' is well-known for its long-term thinking, which has worked well for it in the past', says John Moore of Brewin Dolphin. Picture: contributed.
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However, boss Roger Whiteside said the company will have to assess whether it can change prices before it does. It comes down to ensuring that customers will still choose to spend money at Greggs even if prices go up.

"We've got no plans to raise prices currently, but obviously that's going to have to remain under review given the way the markets are moving around the world on commodity food prices in particular," he said.

"If the market allows price increases to move onto customers, then we will have to attempt to do that, if it doesn't then we won't be able to," he added. “You're trying to position price to make sure you maximise sales."

The business swung back to a profit last year after taking a hit in 2020 due to the pandemic. The chain notched up a £145.6 million pre-tax profit in the 52 weeks to January 1, from a loss of £13.7m the year before, and sales rose by 5.3 per cent compared with 2019, reaching £1.2 billion.

Bonus

Greggs plans to extend late opening times to 500 shops around the country, and will start offering delivery from 1,300 more of its stores. Delivery is currently available from 1,000 sites.

Staff will also be able to expect a bonus as Greggs shares 10 per cent of its profits with employees. For staff who have on board for more than six years and work 20 hours a week, it will work out at around £800, Mr Whiteside said.

He added that the business has no direct exposure to the war in Ukraine, but will be affected by expected resulting global price rises. Russia and Ukraine supply around a third of the world's wheat exports, and Ukraine is a major supplier of sunflower oil.

John Moore, senior investment manager at Brewin Dolphin, said: “Greggs has benefited from the return of increased footfall as the UK returned to a more ‘normal’ way of life. The company’s results are strong at a headline level and the business is highly cash-generative with a rock-solid balance sheet, allowing it to pay out a special dividend to shareholders.

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“The question, as alluded to in today’s statement, is how the business reacts to cost inflation being ahead of its expectations. Greggs has a tricky balancing act to perform on that front, at least in the short to medium term. But the company is well-known for its long-term thinking, which has worked well for it in the past.”

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