The bakery chain Greggs has warned of spiralling cost pressures as commodity prices surge following Russia’s invasion of Ukraine, adding it will have to raise prices further.
Greggs, best known for its sausage rolls and pasties, is expecting overall cost inflation of 6% to 7% this year, and cautioned that the outlook for many commodity costs remains uncertain. This prompted it to put up some prices at the start of this year, and “further changes are expected to be necessary”.
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.”
A spokesperson added that Greggs had raised its prices by a “few pennies”, adding 5p to the price of some products, but wanted to remain competitive.
Shares in the company fell nearly 9% on Tuesday morning, making Greggs the biggest faller on the FTSE 250.
The escalating conflict in Ukraine has sent the price of oil, gas, wheat and many other commodities soaring.
The comments came as Greggs swung to a pre-tax profit of nearly £146m in the year to 1 January, from a loss of £13.7m in 2020, its first-ever loss. 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.
Despite rising cost pressures, Greggs plans to open 150 new shops every year, 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.
Cost pressures also come from rising wages. 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.
Food, packaging and energy prices went up last year as Greggs renewed contracts with suppliers, and 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 benefitted 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.”