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203. Bull, Bear & Beyond – Greggs: executive interview
2 Plays9 days ago
In our interview with Richard Hutton, CFO of Greggs, he discusses the general trading backdrop, highlighting that while the business has outperformed a challenging market, negative volumes reflect broader consumer weakness rather than any loss of its value-led positioning, and outlined how it is responding operationally. The discussion also addressed suggestions of ‘Peak Greggs’, with management reiterating confidence in the group’s long-term growth potential through continued estate expansion, product development and daypart opportunities, albeit with a more balanced approach to new store openings as it weighs near-term returns against the opportunity to gain market share. Richard also covered efficiency savings delivered in FY25 and the scope for further opportunities, alongside commentary on slightly lower-than-expected capex in the coming years, with the peak capital investment cycle behind it. Looking ahead, the outlook for limited profit growth in FY26 in the absence of a consumer recovery was discussed as well as an update on cost inflation and potential commodity risks in light of recent geopolitical developments. Finally, we explored the potential impact of GLP-1 drugs, including the work undertaken to understand the trend and how product development is evolving in response, highlighting both the risks and opportunities for Greggs.
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Transcript
Introduction to Greggs' Performance
00:00:07
Speaker
Hello, I'm Russell Poynton from Edison Group, and it's great to have with me again, Richard Hutton, who's the CFO of Greggs. Thank you for joining us again, Richard. My pleasure.
00:00:17
Speaker
so ah So let's go back to the results. um I think there's a very clear message that you're giving that Greggs is outperforming a very challenging market. um But also, I think equally, there's some surprise that you so you've've You've got negative volumes, comping negative volumes um despite your value leadership.
Market Challenges and Economic Factors
00:00:36
Speaker
So can you just give some insight into what you think is happening in the market?
00:00:41
Speaker
Yeah, no, it's been ah it's been a tough year and you're right. i mean, we've we've shown that we've grown market share over 2025, but it was a market that measured in transaction volumes went backwards 3% over the year. So it was a tough environment. We've been both growing the Greggs footprint, but also actually taking share on ah a more like-for-like basis as well. So...
00:01:04
Speaker
um There's been a lot of conversation, I guess, about what what is it that's driving it. you know um There are various factors in there. um I think the the the biggest one of all is economic in terms of just the the lack of confidence in consumers to spend. And I think that's backed up by the fact that what we've seen is a a lack of footfall as well. It's not it's not simply eating behaviors or patterns in in diets, although you know there may be some of that. We think the biggest factor out there has been footfall. Some of it very short term in terms of you know things like the heat waves last summer, but but more more generally um there's just been a slightly slow economy and and you know despite people progressively having a bit more money to spend, um there's been a lack of confidence to go out and do that.
Understanding 'Peak Greggs'
00:01:51
Speaker
And a phrase that has been heard quite a lot in the last year or so is Pete Greggs. And as you were saying earlier, I think we have first heard that from the previous CEO five years ago, and just to say, you're not Pete Greggs yet.
00:02:04
Speaker
um And it obviously comes against the background where you are you do have soft volume. So perhaps it'd be interesting to find out why you think you're not Pete Greggs. Very confident that this. Pete Greggs is a long way off. um ah Essentially, i mean, that the challenge has been, are you sure, Greggs, that you're not cannibalizing your own shop sales by just expanding a bit too much?
00:02:24
Speaker
um We can be super confident in this because we we can measure the behavior of consumers that use our app. and We did some studies last year which showed on a ah very big sample basis that consumers who use our new shops maintain the frequency at which they use the existing store portfolio, but they add additional visits to the new shops. And that's because the majority of the new shops are expanding us into areas where we're currently very underpenetrated. And they're on a very different mission. So the traditional customer who might be on foot around a high street where we traditionally trade it, they're still doing that. But there are occasions when they're in the car because they're either on a journey or they're going to the supermarket or they're at a retail park. Places like that where traditionally you couldn't find a Greggs, now we're starting to pop up. And that's a different occasion, it's a different mission, and we're showing that we can build frequency by being more penetrated in those areas. And that's that's the basis for the next level of expansion in the Greggs estate.
Strategic Store Expansion
00:03:23
Speaker
And you you're continuing to grow the estate, but at slightly slightly slower rates than you you previously intended. So it'd be interesting in your thoughts because um one focus is to actually and maintain returns whilst the environment's tough. But the other view could be, well, if you are taking share, the market's challenging for your competitors. Why not actually put the foot on the gas and open more stores and take even more market share? Yeah, no, you could you could take more more stores, but we've always been very disciplined about it capital investment and the the returns that we make on that. So there is a there's a ah very well-established process that goes on within Greggs when we're looking at new shop opportunities and filtering out those that are not right for us.
00:04:06
Speaker
um Last year we added a net 120 stores on that basis, i.e. those were the stores that came through the filtration process and made it over the line.
00:04:18
Speaker
um And that that process determines the number. So people are asking me how many shops this year Richard, i'm saying well probably about 120 but the reality is I don't know because it will just depend on how many come through that assessment process and I think that's the right way to approach this. so that you are getting good shops and making sure that you're not filling up your capacity just because it's available. You're filling them up with good shops and depending on how many of those you'll reach the next investment point either sooner or or later. But it's clear from the white space review we've done and the level of penetration we have that there are plenty of good opportunities up there. They just come along at a certain pace and it's important that you don't just jump to hit a number. You always kind of take the right number based on the investment criteria.
00:05:02
Speaker
and And how much of that is driven by external third parties in terms of you know whether their pipeline has slowed down a bit so there's there's fewer coming to you um There is a little bit about investment because obviously kind of landlords are having sometimes, particularly on the new builds, um they're having to invest themselves and ah the pace of that can change. So that that can be a factor. Equally with franchise partners, depending on the circumstances that they're finding themselves in, they may be investing in you know more or fewer ah say garage forecourts, those sort of locations. So, you know, we're working in partnership with these people. And again, it's it's right that we we go at the pace that that good opportunities come up, not ah not a predetermined
Efficiency and Cost Reduction Strategies
00:05:43
Speaker
pace. yeah
00:05:44
Speaker
And against that challenging market last year, you actually got some efficiency savings out of the business to help to help the profit. So perhaps be useful to find out where those efficiencies came from and how much more there is to come in the coming year if it if it is going to be a slightly challenging year again.
00:05:59
Speaker
Yeah, no, it's an ongoing program. um we We challenge ourselves in the business to constantly try and find, i guess, costs that we can structurally change within the business because there are always new things coming in that we we either have to or want to spend money on. So you have to be looking at the costs and the things that you just don't need anymore. um Very often it comes from working on what we'd call an end-to-end process review. And because we're vertically integrated,
00:06:26
Speaker
you know all the way through from bringing ingredients into our manufacturing sites and products through the distribution chain, all the food all the way through to the shops. um There are often opportunities in the way that we handle goods through the system, the amount of packaging or waste that's involved along the way. And we we we we basically work very hard to try and sort of minimize that. Some of it comes into our shop operations because you know um small differences can make a big a big impact when you multiply them by the number of transactions we handle every week. So, for example, investment in new till systems that work faster, they give the customer better experience, but the transaction itself speeds up.
00:07:04
Speaker
And when you multiply that by X million a week, these these small marginal gains add up. So it's its it's looking at all sort of aspects of the business and trying to say, how do we kind of make the business more efficient without affecting what the customer gets, hopefully making that experience better in the process.
00:07:22
Speaker
And slightly off a tangent to that is um the capex numbers that you've guided to for the coming years, they're slightly lower than what you'd indicated a few years ago. Peak capex is just behind you now. So what are the reasons for that slightly lower capital spend going forward?
00:07:38
Speaker
There's a few things. I mean, we've we've been looking very hard at that and trying to, um I suppose, you know, typically when we we we guide, we are slightly conservative. We've probably been less so and said, look, you know, we've committed a lot of capex to this next investment phase.
00:07:51
Speaker
We do need to make sure that we're running things as as lean as we can over the coming years because we want to see the return on capital in the business return to where it was, which is around a 20% Rokey. And we think that's a sensible ongoing sort of level to target for the business. And, you know, controlling capex well and making sure you're getting great returns on what you spend is ah is all part of that.
00:08:13
Speaker
um Some of it is good work that's been done on procurement, some of it is the phasing of the refit program and um we found that the actual, the last refit program that we put in place for the estate is is is proving to have good life in it. um And so, you know, in a couple of years time, we will need to increase the pace of these refits. But it's been quite good to be able to sort of just moderate those a little at the time when we've been going through what was peak capex year last year. And as you say, it comes down significantly this year and again next year, which is reducing the kind of the the capital and cash requirement on the business.
Profit Growth and Consumer Recovery
00:08:49
Speaker
and And for the coming year, you're you're guiding to limited profit growth in the absence of a consumer recovery. It feels quite tricky out there at the moment. yeah So what are the what's the key things that you're looking for to for a slightly better consumer?
00:09:02
Speaker
Yeah, I guess it's's it's confidence, um you know, to some degree. You know, we may see a weather bounce because we did have this very hot spell last year. But who knows? Maybe it'll happen again this year. We we shall see.
00:09:13
Speaker
um But essentially, um it's really about consumers feeling a bit more confident to be out there and and and spending money because very often we're not the primary reason they're out. We're feeding them while they're out and about doing other things.
00:09:25
Speaker
um whether it's working or leisure or out shopping, that sort of thing. So it's activity in the economy fundamentally. um So you know we we we can you know make some of our own luck in that respect by the work that we do on product development and some of the sort of the the activity that we do to to highlight what we're doing. And ah we'll continue to do that to the best of our abilities. But you know there's also an economic backdrop to this.
00:09:52
Speaker
And a month or so ago, you felt um relatively happy about the outlook for input costs over the coming year. We did, yeah. the coming year um I suspect what's happened in the last few weeks ah might have changed that little bit. So um perhaps worth talking about where you think the inflationary pressures may come, but equally, you're quite well hedged on a number of costs.
Inflation Concerns and Risk Mitigation
00:10:13
Speaker
So perhaps worth giving an advice on where that protection is.
00:10:16
Speaker
Yeah, I mean, there we were at the start of March, um really sort of saying that we thought actually inflation was coming our way. But of course, things were starting to ah to move geopolitically. um Here we are now, ah sort of tipping in towards April, and we've got a very different different outlook. But we've got about four months forward cover in terms of the ingredients and packaging that we bring into the business. So,
00:10:43
Speaker
Really, it's an H2 exposure if there is more inflation in food and packaging. We're very well covered on electricity, which is the bulk of our energy requirements. So we're 100% covered for 2025, six, we're already in six, of course. And we're um half covered for 27 as well. So that's that's a pretty good place to be. um So I think if there is more inflation coming, it'll be H2 weighted and, you know, we will probably have to move prices a little more in response to that, but we you know we have the scope to do that within our plans for the balance of the year.
00:11:17
Speaker
Good.
Adapting to Dietary Preferences
00:11:18
Speaker
And um the topic du jour for any food or beverage company at the moment is GLP1s. Now, at the start of the year, Rasheen got some headlines by saying there's been some so minor effect on the business. so I'd be interested to hear about, one, how you you looked at that, how you gay you know determined what effect there had been, and and then potentially, do you think it's it's a big risk for Greggs, or do you think that's it's a good opportunity for Greggs in the medium term? Yeah, I mean, the reality is nobody knows how to quantify this because it's hidden and amongst all the other things that you're doing um and all the other kind of economic impacts on the business. And, you know, it's very hard to to pull anything out, but it would seem odd to be sitting here saying, no, no, no, this won't affect us. That would be madness.
00:12:04
Speaker
um So there must be some impact on the food industry overall. And I think Greggs will be part of that. So we can't really pin it down to anything specific other than we don't want to be seen as deniers.
00:12:15
Speaker
um But we genuinely feel that the the bigger factor is the kind of the macroeconomic position and and consumers' reluctance to spend. But, you know, We are responding to a broader dietary change that we've seen over a number of years, actually. And it's not just since GLP-1s. I think even even leading into this period, people were already starting to make choices which involved more protein, for example. And we'd we'd seen this in our own sales mix and seen the things that were becoming popular in the market, such as, you know, sort of
00:12:46
Speaker
chicken goujons, those sort of things were selling really well when we introduced them. So we've continued to back those sort of product lines. They continue to go well. We've introduced other options in terms of you know, snacking egg pots and protein shakes and plenish shots, which all lean into the idea that if people are eating differently, and I put it that way rather than necessarily less, because I think it there's only a small number that are eating less,
00:13:14
Speaker
then there's a broader number who are changing the way they eat and changing their diet. And that that is something we can follow and we always have done. Gregg's has been um successful over decades because it's followed food trends. you know So once we were the bakers who sold bread and rolls.
00:13:31
Speaker
We don't do that anymore. You know, the whole brand has followed market trends and this is another one that we will absolutely follow. So you'll see products coming in through this year which lean into that, but they they need to have broad appeal as well. There's no point in trying to just launch things for a particular people on particular diets. So we just got half baguettes in the store this year and in a trial basis to see what happens. And the early evidence is that they're popular with some people, but also others want to bundle them with other food items. So if you like if you like having potato wedges with your sandwich, it's easier to accommodate a half a baguette with potato wedges than there's a whole
Innovation and Market Adaptation
00:14:07
Speaker
one.
00:14:07
Speaker
So it's interesting and it's um ah sometimes that sort of stimulus makes you innovate in a positive way that can, but it but it it's great if it has broader appeal because it's much more sustainable than trying to run something for a very small part of the population. So that was a long way of saying i have a lot of faith that Greggs will evolve its range to follow whatever trends the market throws at us. that's That's what keeps us new and interesting over the years and keeps customers coming back.
00:14:34
Speaker
Good. Well, Richard, we we seem to cover a lot of varied subjects there. So thank you very much and good luck with the the coming year. Thanks, Russell.