Five years into its strategy, there is plenty for Greggs to do. Its shops, which all now look and work like value food-on-the-go outlets, must spread out from their high street origins. Its manufacturing bases are being transformed, at substantial projected returns. But most importantly, its wide-ranging food offer will take time to be known by non-customers, we believe. Their gradual buy-in should provide a tailwind to Greggs’ mission to gain share.
Where next for Greggs’ strategy, now that the entire estate has been repurposed on the food-on-the-go operating model? The full answer to this references the fourfold strategy as a whole: not only the shops, but also the food offer, the supply chain project, and the enabling of service through support systems. It is through these enhancements that the brand is aiming to become the customer’s favourite for food-on-the-go, with the share gains that implies. The estate is still developing with non-retail locations such as transport hubs; the food offer is pushing boundaries with, for instance hot food, creating the possibility of evening opening, and the supply chain project is entering its heaviest investment phase, with substantial returns to come according to the company’s projections.
Greggs’ brand is founded on convenience and value, and the rationalisation of its manufacturing bases into product specialisation centres should enhance both by providing a reliable supply of quality products at lower economic cost. Management expects the five-year project to provide annualised returns on investment of 23%. It is just entering its third year with a peak investment of £37m.
Greggs is a well-loved national brand, but unlike other brand transformation stories, does not advertise its new identity above the line. As a result, we believe noncustomers will be relatively slow to understand the transformation of the brand. In one sense this is an advantage since it implies investment in the brand will have a relatively long and sustained return.
Our valuation approach adds peer comparison to the DCF metric: comparisons are not exact but, like consumers, investors have a choice in the space. Our DCF values the shares at 1,536p, our peer comparison at 1,335p. Our blended valuation is therefore 1,436p (previously 1,226p), implying a FY18e P/E multiple of 21.6x and EV/EBITDA of 8.6x, undemanding given Greggs’ stable growth and yield prospects.