The bakery chain Greggs has warned prices are likely to increase due to a surge in the costs of ingredients, energy and fuel after Russia’s invasion of Ukraine.
Greggs, best known for its sausage rolls and pasties, predicted profits would fail to increase in the year ahead as it tried to offset cost inflation of up to 7%, up from 5% at the start of 2022, with the uncertain outlook.
The company added 5p to 10p to the price of products at the start of 2022 and said “further changes are expected to be necessary” as the prices of all ingredients were increasing.
Fears of shortages of cereals and sunflower oil from Ukraine as well as petrochemicals from Russia have added to existing inflation caused by energy and fuel price rises and a bounce-back in demand since pandemic restrictions eased in many parts of the world.
Shares in the company slid 6%, making it the biggest faller on the FTSE 250, as Roger Whiteside, the outgoing chief executive, said: “Cost pressures are currently more significant than our initial expectations and, as ever, we will work to mitigate the impact of this on customers, however given this dynamic we do not currently expect material profit progression in the year ahead.”
Whiteside said any new price changes in Greggs stores would partly be governed by rivals’ actions. “We won’t move prices unless the market moves and that is about the response to consumer behaviour once disposable income comes under pressure,” he said.
The share price hit came despite Greggs swinging back to a pre-tax profit of nearly £146m in the year to 1 January, from its first-ever loss, of £13.7m, in 2020. The profit is higher than its pre-pandemic profit of £108m in 2019. Total sales rose 5.3% to £1.2bn compared with 2019 levels, while like-for-like sales, stripping out new shops, were down 3.3%.
In the first nine weeks of 2022, trading improved, with like-for-like sales up 3.7% compared with pre-pandemic levels in 2020.
The company will pay a special dividend of 40p a share to investors, and resume its profit-sharing programme for staff, suspended last year when it made a loss. It has vowed to share 10% of its profits among staff every year and will distribute £16.6m this time. A Greggs worker who has been at the company for more than six years on a 20-hour contract will get £800.
The staff payout comes as Whiteside said recruiting enough staff remained a challenge. A pay rise was brought forward by five months, adding £4.5m to costs last year, and Greggs expects wage inflation to be 4.3% this year.
Despite rising cost pressures, Greggs plans to open 150 new shops every year, targeting outlets in supermarkets and other retailers as well as drive-throughs and railway stations, eventually taking the total from 2,181 to 3,000 in the UK. It will also extend late opening to 500 shops this year to draw in more customers who are on their way home and extend home delivery to 300 more outlets, taking the total to 1,300.
Whiteside, who is to be replaced by Roisin Currie, the group’s retail and property director, in May said he was leaving the business on a firm footing despite “short term pressures”.
He said the business could now take market share by selling more evening meals and reaching more customers through home delivery. “The prospects for the business are more exciting for the next five years than they have been in the previous five years, notwithstanding our success,” he said.
Food, packaging and energy prices went up last year as Greggs renewed contracts with suppliers, and it expects cost inflation in those areas to increase further this year. On top of this, the full rate of VAT on hot food and drink will be restored at the start of April.
John Moore, senior investment manager at Brewin Dolphin, said: “Greggs has benefited from the return of increased footfall as the UK returned to a more ‘normal’ way of life.
“The question is how the business reacts to cost inflation being ahead of its expectations. Greggs has a tricky balancing act to perform on that front, at least in the short to medium term. But the company is well known for its long-term thinking, which has worked well for it in the past.”