Greggs – An Investment Case?

The traditional bakery has indeed been decimated from the likes of Tesco on one front, and by fast food retailers on the other front. That’s been in motion for maybe thirty years or so – although there are still around 3000 independent bakeries in Britain.  Greggs has suffered no such decline though – in fact, it’s been a big driver in the demise of many old fashioned bakeries, who cannot compete on cost and brand.

The Art of good governance is scaling up operations without forsaking quality of product or customer service. Specsavers managed it. Do Greggs make everything on site that morning, or do they outsource? Do their staff have a stake in each franchise and how carefully is quality and consistency managed across the group? A motorway outlet should be providing exactly the same standard of product as in a well-to-do high street. McDonalds manage it! There’s no excuse for feeding customers a lower quality product than advertised, Greggs should be ashamed of the difference between the picture and the plate. They wouldn’t last 5 minutes in North America and deserve to get taken out or go under if they don’t buck up….sorry, that doesn’t mean to sound like a rant!

Here’s what a pal told me about his opinion of Greggs:

Apparently Greggs shops are getting makeovers which involve :-

1. Getting rid of the existing tables and replacing them with wobbly ones.
2. Getting rid of knives and forks – there are some sort of plastic/wood sticks given to customers to use instead.
3. Getting rid of plates. Customers now have to use the brown paper bag in which their pie or cake was given to them as a plate.
4. Bringing in new lines like giant-size cup-cakes with green icing
5. Getting rid of seating arrangements which allow more than four people to eat together.
6 Sticking a Hovis-type bike (complete with wicker-basket) on the walls.
7. Oh – and repainting the outside a kind of dark khaki-colour

Their current USP is to provide for fresh, quick, take-away bites – not fancy, schmancy sit-down cupcakes sans kives, forks, or plates. They will alienate existing punters, and the new intended ones will already be heading for Starbucks etc. Even MacDonalds (surprisingly drinkable coffee).

Only their move into motorway sites makes any sense at all to me. But right now, I’d be a seller. I could always gatecrash the party if proven wrong.

I reply: On the quality of your Greggs sandwich — but how many times have you heard someone complain about McDonalds food?   People have made entire films showing how unhealthy their food is, how rubbish the quality is etc. Does it stop being one of the world’s greatest businesses? Of course not. Has the quality of Greggs’ food stopped it from enjoying one of the best track records on the UK stock market? The last 28 years says no 😉

On the comparison front, why not do the same with a Burger King Whopper, or a Big Mac, and compare it to the enlarged juiced up burgers they show on the TV adverts? You’re mistaking a fundamental flaw with how mass food retail advertising works.

If every food business deserved to go bust because one of its sandwiches wasn’t up to scratch (in a store over which it has limited control), then there wouldn’t be a single food outlet in the country.

McDonalds have never served a bad meal? How about KFC, Burger King? And they serve meals exactly as presented in their adverts? These are the most successful, profitable food businesses in history.

The sandwiches are made on site by staff with materials sent from Greggs’ central production sites. I’m less worried about anecdotal complaints (like I say, they aren’t hard to find with any food retailer).

I’m not saying Greggs should get away with serving sub-par produce, but it would be naive to pin an investment case on whether or not someone had a bad sandwich at a franchise store. I think they’ll be fine.

It does help that I don’t view the current high street problems as being permanent, and that I think more blue-collar workers will eventually be back in work compared to this year. New stores continue to be opened, total sales in this lousy quarter were up 1.5%. They have their problems – but none they can’t solve easily enough in my view. I’m very happy to take that risk at 11 times earnings or so.

So long as Starbucks and McDonalds keep their paws off the sausage roll and bakery markets, this one should work out over time!

Here’s what I say to your bad meal complaint.  I spoke to a group of 20 something’s to 30 something’s on Saturday.

They were eating Greggs produce. I asked them why they didn’t go for a healthier option or to a supermarket. The response was resounding, they love Greggs products and made a point of reminding me you can have everything in moderation! They loved the fact that sandwiches were fresh and their own choice of filling and fresh fillings at that. They all said if Tesco etc did sell the produce it wouldn’t taste the same and you’d need to have a microscope to see the filling lol.

It should be recognised though, a good business isn’t always best judged by anecdotal experience. Ryanair shareholders might agree — there’s another company that seems frankly detested by the very people who ring in the profits. Since we last spoke of chronically-unpopular Tesco, you can almost set your watch by the amount of £££ they’ve made in the UK alone, with every tick of the clock. Sometimes the long-term results speak for themselves, pictures not included!

And on whether 400 odd grand in sales is adequate on a per store basis, on a mass scale as market share continues to increase, I have no problem with that. It compares to £282k for every Sayers store, £252k for every Coopland store, £472k for every Costa Coffee, £523k for every (unprofitable) Starbucks UK store.

Pret A Manger is a different case though, and they take in far greater sales per store. Would I rather be in their shoes? Well, they enjoy most of their sales in the affluent London market. Greggs can outproduce and outprice them, but they can’t command the same kind of prices on average per-store.  I’d be interested to see how that would play out over time, but in my view, it’s better to be aligned with the company with better scale/economics.

I think it’s worth mentioning too, that when it comes to business success, I can’t think of many large-scale winners that have focused on being “healthy” eateries or pretentious cuisine. That’s despite “healthy eating” supposedly being a trend for the last two decades!

Domino’s Pizza, McDonalds, Greggs, they’ve not suddenly turned unhealthy overnight, yet they’ve enjoyed remarkable success for decades. I pick those examples because their business/market records are there for the public to see. The same criticisms could’ve been made about Greggs at any point in the last 20 years – they can’t suddenly be used as an excuse when they have a bad year 🙂

I may be wrong, but I’d rather invest in a profitable successful business that the average person enjoys, rather than invest in an unprofitable fancy restaurant that I’d eat at every evening myself.

Could Greggs buy out, or start up “Le Fancy Sandwich Shop”? And apply its productive power and scale while offering a more up-market fancy offering, to meet one’s lofty sandwich standards? Maybe, maybe not. It will not have a bearing on my long-term valuation of the business 🙂

Seriously though, give me a McDonalds or a blue-collar pasty shop over the countless loss-making pretentious eateries out there, any day of the week 😉

Only in the ludicrous world of the stock market could the Bakery business be “doomed” after a bad year. And in Britain, Greggs effectively is the bakery business, with around 11 times more stores than their nearest rival.

In short, I don’t think it’s a huge bet to say they’ll be fine. They’re remarkably well embedded, are by far the lowest cost producer, and I think the bakery business will look largely the same as today in 7-10 years.  I wouldn’t get too hung up about looking 40 years.

Please note that my personal belief for Greggs’ business is objective, based on its economic characteristics and record.

If I felt the business had fundamentally changed, I’d say so without hesitation. Of course things change. Some companies are better equipped than others to deal with that though, and I don’t see the bakery business changing any time soon. Sandwiches and sausage rolls aren’t complex – they’ve been around for a long time, and they’ll outlive me too.  But in my view, what has really changed is the market price, and the crowd’s sentiment. Neither of those things give me any worries – if anything, the opposite.

Those factors – commentators seeing it lower, the consensus opinions about the high street, commodity cost rises, the chart. None of those things affect my long-term view of Greggs as an operating business. Especially the technicals/bearish sentiment.

After all, if I owned a successful chain of stores that were by far the dominant leaders in their market, with a fantastic 20+ year record of cash generation and growth…

I wouldn’t rush to sell the company for half its worth, because of one bad year. I may be wrong, but I’d view that as the irrational thing to do.

I understand why the market is currently upset – but its fears are rooted in short-term concerns, and arguments that were just as valid when the company was producing blockbuster results. It doesn’t surprise me to see commentators rushing to criticise the company after a bad year – this is the nature of the stock market 🙂

I’m not in the business of predicting the end of the world though, or the death of long-standing institutions based on short-term concerns. My job is to invest in very desirable businesses, at prices that make sense. Selling my stake every time the market became hysterical would be a huge mistake 🙂

Worth adding though, that this really is a long-term business investment for me, rather than anything attractive in the short-term. Greggs is one of the most admirable businesses in the UK in my eyes, and it must be stressed that this is one for at least 7-10 years out.