Greggs Regulatory News (GRG)

20 Oct 2009 07:00



20 October 2009

GREGGS plc

INTERIM MANAGEMENT STATEMENT

Greggs is the leading bakery retailer in the UK, with 1,400 retail outlets serving six million customers per week throughout the country.

TRADING UPDATE

Robust performance in a challenging market

So far in our current financial year (42 weeks ending 17 October 2009) total sales have increased by 3.8 per cent and like-for-like sales by 1.0 per cent, in line with our expectations.

In the first 16 weeks of the second half, up to 17 October, total sales have increased by 2.5 per cent and like-for-like sales by 0.2 per cent. Selling price inflation is falling and is now running at its lowest level for five years, whilst our underlying volumes have remained in line with those of the first half.

Cost inflation is easing overall, in line with our expectations. This year's good wheat harvest and reduced energy costs are contributing to this positive trend, which is partly offset by continued cost increases in some ingredients, particularly meats. 

Overall business performance in the year to date is in line with our plans and our financial position remains strong.

Chief Executive Ken McMeikan commented "I am pleased with our sales performance against the background of continued tough high street trading conditions. We are committed to helping our customers make their budgets stretch as far as possible and the exceptional value we offer, combined with the freshness, quality and taste of our products, is a key strength.  We are on track to deliver our targets for the year although the final outcome will depend on consumer sentiment and spending over the important Christmas period."

BUSINESS STRATEGY UPDATE

Delivering Growth

During 2009, we have been progressively simplifying our business and building the foundations for future growth.

Key to this has been:

Creating one brand by converting our Bakers Oven shops to the Greggs fascia

Withdrawing from our Belgian business

Harmonising our product range to be 80 per cent national and 20 per cent local

Completing the change from a decentralised to a centrally-run business

Great progress has been made against all of these objectives. This now puts us in a strong position to bring the qualities of the Greggs brand and product offer to many more customers.

Our Brand:

Greggs offers an exclusive product range with a strong reputation for quality and value. We make all our sandwiches fresh in our shops each day by hand, bake our savouries 'little-and-often' to deliver great taste and quality, and provide bread, rolls and confectionery fresh from our bakeries each day. Our customers value this highly and we will place increasing emphasis on our freshness and bakery skills in our national advertising.

Accelerated Shop Expansion:

The growth opportunities within the UK are significant. It remains our belief that a further 600+ shops can be opened in the medium term with little cannibalisation of sales from our existing shops. This will take our shop numbers above 2,000, making us accessible to many more consumers and creating some 6,000 new jobs.

We see opportunities for expansion across the UK but particularly in areas where we are currently under-represented or have no presence at all. Southern England (particularly the South West), the East Midlands, North East Scotland, North West England and North Wales are good examples of areas with further potential for us.

We also see the continued opportunity to expand into locations where consumers work and travel such as transport hubs and industrial and retail parks, in addition to our more traditional presence on high streets.

We intend to open 50-60 (net) new shops in 2010 and from 2011 onwards at least 70 (net) per annum. This is more than double our historic rate of new shop opening.

At the same time, we plan to double the rate of shop refits to 120 per annum from 2010, allowing us to improve the ambience of our shops, accelerate the roll-out of successful service innovations and increase the accessibility of our products.  This will drive further growth from our existing estate as well as from new shop openings.

A Supply Chain with further potential:

Our supply chain is built around regional bakeries that provide fresh products and distribution services to our shops around the country. These are supported by a national savoury manufacturing facility and two national distribution centres. We have undertaken a fundamental review of our supply chain to determine how we can achieve the optimal production and distribution network to support our planned growth of an additional 600+ shops.

The review has re-evaluated the costs and performance of our integrated bakery and logistics model on a number of different bases, including comparison with outsourced alternatives. The review has concluded that continuing to make and bake our own products is a competitive advantage as well as being a profitable part of our business. It has also highlighted the potential for us to supply substantially more shops through our existing supply chain, thus achieving significant efficiency improvements.

To fulfil this potential we plan to:

Renew older bakeries to improve quality, efficiency and capacity for growth

Extend other bakeries to facilitate greater expansion than previously planned

Provide the capability for new shop growth in the South by replacing our bakery in Twickenham

Build an additional new bakery to support growth in the South of England.

Our supply chain is central to the Greggs offer and provides a great foundation on which to build for the future.

Financial impact:

The development of our supply chain will require an increase in capital expenditure over the next 3-5 years but deliver eventual annual efficiencies of at least £10 million per annum.

We have previously highlighted some of the benefits that we are beginning to see from the simplification of the business and we expect this momentum to continue as the business grows.

The growth that we expect from accelerated shop expansion will progressively contribute to performance as new shops mature and as we raise awareness of our brand in new areas.

Overall we expect that our plans to deliver shop growth and greater efficiency will require total capital expenditure in the business to rise to between £50 and 60 million per annum during this period. We will finance this investment from our ongoing cash generation.

The Future:

Chief Executive Ken McMeikan commented: "The fact that Greggs is a baker, with wholesome, tasty products that are made in our own bakeries and shops remains a key point of difference versus our competitors. This gives us a great opportunity to attract new customers who are less familiar with the brand, particularly as we move into areas where we are new or under-represented. Although high street trading conditions remain tough we are building for the long term and remain confident in our ability to build an even stronger, more profitable business. We look forward to making the unique Greggs proposition available to many more customers throughout the UK as we embark on our major programme of accelerated expansion."