Greggs’ market: On-the-go value food
We consider Greggs in the context of the eating out market and also as a value food retailer.
The UK eating out market: Mind the definitions
Eating out in the UK is a £95bn market, which has grown strongly in recent years:
Exhibit 6: Out-of-home food market growth (£bn)
Source: ONS. Note: Year to September, current prices. Annual growth % shown.
However, what was once a well-defined restaurant market has fragmented under the influence of lifestyle changes, time shortage and cost pressures. As the market develops, there is an increasing distinction between three categories: dine-in restaurants, takeaway and delivery.
Dine-in model under threat
Traditional terrestrial, sit-down restaurant models are being threatened by over-supply and at best flat demand, while margins have been threatened by higher food, labour and rent costs. The Restaurant Group, which first signalled trading problems in January 2016, recorded like-for-like sales down 3.9% for that year and 3.0% for 2017. Following a review, the company identified the loss of value-conscious customers as the primary cause, resulting from significant price increases and the removal of popular value offers. Byron, the premium hamburger restaurant, entered a restructuring deal in January 2018 in which 20 of its 67 restaurants will probably close. Jamie’s restaurant organisation also announced in January 2018 that 12 of its 37 outlets would close.
Delivery sales model positive
By contrast, Domino’s Pizza increased like-for-like sales by 4.8% in 2017. Just Eat’s app-based delivery operation recorded 40% UK revenue growth in 2016 and 27% at interim in June 2017. We believe the Just Eat example, while relevant to the sector as a whole, should be treated with caution. Just Eat, like its more premium competitors, Deliveroo and UberEats, is a platform for home delivery, which tends to convert existing takeaway and dine-in restaurants to its model to the extent they participate. This is not necessarily relevant to Greggs, whose customers are already out and about.
The takeaway sector itself has performed strongly. The number of dedicated takeaway outlets increased by almost 10% between 2013 and 2015, to 36,855. Spending on takeaways grew to £9.9bn in 2016, up 34% since 2009 (according to research commissioned by Just Eat). It is forecast to grow by a CAGR of 2.6% to reach £11.2bn by 2021. On this basis, Greggs would be supplying c 10% of the market, which seems questionable.
Not all commentators reflect the distinction between delivery and food-on-the-go, but MCA has publicised the forecast from its Food-to-go report that this market will grow by 2.8% in 2018, despite the headwinds facing the consumer economy. BFFF, the UK’s frozen food association, presented to its conference in June 2017 that food-to-go is growing 16 times faster than grocery, at 6.5%, and is forecast to continue growing at a CAGR of 6.2% to £21.7m in 2021. On that basis, Greggs currently has around 6% of the market.
While Greggs retains some seating, it is predominantly a takeaway operation, as the company’s strapline food-on-the-go indicates. In this way it is different from either dine-in or delivery models. Following refurbishments over the last five years, the vast majority of the Greggs shop estate now operates in a food-on-the-go format. To the extent it is represented on high streets it is exposed to declines in terrestrial shopping footfall. However, the company is taking action to address this, with increasing presence in workplace, travel and leisure locations.
In addition, the rebalancing of the offer towards food-on-the-go itself means that revenue is not so dependent on high street shoppers, as the customer base increasingly consists of working people, including those who are on the move in their jobs.
Greggs social media presence
In 2016 the company relaunched Greggs Rewards, its digital loyalty scheme. Greggs Rewards includes an app which customers can scan in the shop to get free coffee and other products. The app extends payment options through a reloadable account. Greggs Rewards has now been upgraded to include satisfaction ratings and is growing rapidly, providing better information on customers and so helping the company meet their needs.
As noted on page 5 above, a trial partnership for ‘click and deliver’ with Uber is being tested under the name Greggs Delivered. If rolled out, this would expand the scope of social media to Greggs’ business model.
Greggs within the value retail market
Another relevant dimension in which to view Greggs’ market presence is that of value food retail, its London Stock Exchange sector. With 2018 CPI inflation forecast at 2.4%, real household income growth at 1% (source: BoE), and personal borrowing set for some degree of correction driven by interest rate rises, consumers are increasingly under pressure. While staple food and drink is to some extent insulated from pressures affecting discretionary purchases, even here the consumer faces challenges. It is well known that value food retailers are gaining market share from traditional supermarkets. In the two years to December 2017, a group made up of Aldi, Lidl and Asda increased UK market share by 1.2% to 27.1%, whereas Tesco, Sainsbury’s and Waitrose slipped 0.9% to 44.4%, according to Kantar’s online indicator.
Management: Energetic and task driven
The team under Roger Whiteside has engaged with the change task with a sense of conviction and urgency. Whiteside is a career retailer originally from Marks & Spencer, where he acquired experience of operating multi-site food retail. He was on the founding team at Ocado, and CEO of Threshers before joining Punch Taverns. On becoming CEO of Greggs in 2013, he set out his vision for the brand’s transformation, which has since become his mission.