Greggs: Securing Top UK Breakfast Position One Sausage Roll at a Time

In its F2023 results Greggs plc (Greggs), a leading UK food-on-the-go retailer selling sausage rolls, other hot baked goods, and coffee, reported sales growth of 20% to GBP 1.8 billion. The chain of quick-service bakeries now holds the top spot in the UK food-to-go breakfast segment, accounting for roughly one in five breakfast-to-go visits.

Consumers with budget constraints appear to be trading down to quick service restaurants (QSRs) and dining at home, resulting in challenges for more traditional sit-in style restaurants. Such challenges are evidenced by closure rates and liquidity concerns, where a quarter of UK hospitality businesses report that they have no cash reserves. This divergence in performance is expected to continue as further cost pressure on hospitality establishments is anticipated following an upcoming 10% National Living Wage increase in April 2024.

Summary highlights include:
-- Greggs (not rated by Morningstar DBRS) announced an all-time-high share of the UK food-to-go market at 8.2% (2022: 7.7%). Moreover, it has been reported that almost GBP 2 of every GBP 100 spent in UK hospitality is going to Greggs. The growth of the popular bakery chain has benefitted from vegan menu offerings, partnerships with third-party delivery applications, and creative marketing campaigns reaching its target demographic.
-- Greggs has not been immune to the inflationary pressures, with some reported margin compression in F2023. However, the company's relatively low prices, popular offerings, and expansionary strategy have supported its revenue growth, resulting in strong cash flow generation sufficient to support its capital requirements.
-- In a stark contrast to the reported success of budget-friendly QSRs, the UK restaurant industry remains under stress following the shocks of the Coronavirus Disease (COVID-19) pandemic and recent macroeconomic trends. Hospitality operators have been forced to close their doors, and for those that stay open liquidity is a major concern.
-- On the other end of the spectrum, we expect that higher-end establishments that cater to less price-sensitive consumers will be able to pass on increased costs to their customers without a material loss in sales volumes.

“We expect that budget-friendly QSRs will continue to appeal to price-conscious consumers, supporting the revenue generation of these businesses, and the less labour-intensive operations of QSRs will not be as affected by the 10% National Living Wage increase, relative to their full-service counterparts,” said Chloe Blais, European Corporate Ratings, Diversified Industries and Energy, Morningstar DBRS. “However, midrange restaurants, particularly cash-strapped independent operators, are expected to face significant challenges and be at risk of closing their doors if they are not able to manage their costs or access alternate sources of liquidity.”