I'm curious as to how you are thinking about Greggs post the new UK budget. Both the NLW and NI contribution increases are quite substantial regarding their wage bill. But I think they are positioned relatively better vs competitors given they have been less aggressive in pushing prices coupled with their low price point offering. Seems like a good environment for them to grab market share assuming all others raise prices. Share price pullback seems like a good entry point. Keen to hear your thoughts?
Thanks for your comment. The budget is a big challenge for all businesses with lots of UK employees, and also a fascinating real-time experiment in tax incidence.
In theory, economists always believed that any taxes linked to labour should end up being borne mostly by the employees, at least in the longer run, regardless of whether it is the employer or the worker that is originally charged. The crucial theoretical underpinning is that the average worker is thought to need a job much more than the average employer needs a marginal worker.
But in the short term, with employers being charged both NICs and the big minimum wage increases at the same time, that's going to be tested to destruction.
From announcements by Wetherspoons (£60m), Youngs (£11m), Howdens (£18m) and Kitwave (£2m), we can estimate a cost per head of £1,500 on average for businesses with a majority of staff at or fairly close to minimum wage.
Applying this to Greggs, my estimate of the annual pre-mitigation impact on profits is £46m, or c.25% of PBT. (This happens to exactly match the figure issued by Deutsche Bank, although I calculated it independently.)
Greggs choose to pay a 10% profit share to all staff which was £17.6m in 2023. Hypothetically they could cut or axe this to support profits, but I am pretty sure that is not their style.
Instead, they do have some scope to raise prices, as their last price hike (mid single digit) was at the very start of the year.
They may also have some scope to raise wages by less than minimum wage, in cases where they previously chose to pay above the minimum.
The final possible mitigation is that the NLW hike will put more money in the pockets of all low-paid workers, which could be positive for demand.
I'm certainly holding, and may look to add, as I think the c17% recent fall does cover the likely maximum post-mitigation impact. Plus in the longer term, Greggs should continue to gain share, as you say.
Great write-up! What is your view on the rating given the constrained growth outlook and will the market de-rate the company over the next 3 years as it likely transitions from growth to a yield/buyback stock i.e. similar path Dominos UK has gone through
My own base case is explicitly for double-digit growth for the next three years, and implicitly for continued high-single-digit growth in the period to follow. On this path I think the stock would hold its rating if not better.
If you are wondering about a sharper slowdown to c.5% growth plus a reduction in capex and an increase in cash payouts to shareholders, then I think the stock could broadly support the current rating, at a 5-6% yield and with defensive characteristics. I note Domino's UK is currently rated at c.18x forward P/E which is only a turn lower than Greggs.
Of course if the slowdown is to zero growth or worse then all bets are off and we're back to the profit warning scenario I discuss in the post.
Great analysis!
I'm curious as to how you are thinking about Greggs post the new UK budget. Both the NLW and NI contribution increases are quite substantial regarding their wage bill. But I think they are positioned relatively better vs competitors given they have been less aggressive in pushing prices coupled with their low price point offering. Seems like a good environment for them to grab market share assuming all others raise prices. Share price pullback seems like a good entry point. Keen to hear your thoughts?
Thanks for your comment. The budget is a big challenge for all businesses with lots of UK employees, and also a fascinating real-time experiment in tax incidence.
In theory, economists always believed that any taxes linked to labour should end up being borne mostly by the employees, at least in the longer run, regardless of whether it is the employer or the worker that is originally charged. The crucial theoretical underpinning is that the average worker is thought to need a job much more than the average employer needs a marginal worker.
But in the short term, with employers being charged both NICs and the big minimum wage increases at the same time, that's going to be tested to destruction.
From announcements by Wetherspoons (£60m), Youngs (£11m), Howdens (£18m) and Kitwave (£2m), we can estimate a cost per head of £1,500 on average for businesses with a majority of staff at or fairly close to minimum wage.
Applying this to Greggs, my estimate of the annual pre-mitigation impact on profits is £46m, or c.25% of PBT. (This happens to exactly match the figure issued by Deutsche Bank, although I calculated it independently.)
Greggs choose to pay a 10% profit share to all staff which was £17.6m in 2023. Hypothetically they could cut or axe this to support profits, but I am pretty sure that is not their style.
Instead, they do have some scope to raise prices, as their last price hike (mid single digit) was at the very start of the year.
They may also have some scope to raise wages by less than minimum wage, in cases where they previously chose to pay above the minimum.
The final possible mitigation is that the NLW hike will put more money in the pockets of all low-paid workers, which could be positive for demand.
I'm certainly holding, and may look to add, as I think the c17% recent fall does cover the likely maximum post-mitigation impact. Plus in the longer term, Greggs should continue to gain share, as you say.
Great write-up! What is your view on the rating given the constrained growth outlook and will the market de-rate the company over the next 3 years as it likely transitions from growth to a yield/buyback stock i.e. similar path Dominos UK has gone through
Thanks!
My own base case is explicitly for double-digit growth for the next three years, and implicitly for continued high-single-digit growth in the period to follow. On this path I think the stock would hold its rating if not better.
If you are wondering about a sharper slowdown to c.5% growth plus a reduction in capex and an increase in cash payouts to shareholders, then I think the stock could broadly support the current rating, at a 5-6% yield and with defensive characteristics. I note Domino's UK is currently rated at c.18x forward P/E which is only a turn lower than Greggs.
Of course if the slowdown is to zero growth or worse then all bets are off and we're back to the profit warning scenario I discuss in the post.