British bakery chain Greggs posted some pretty decent sales figures today but the share price is tanking because of one reason —
it wants to go upmarket.
Basically, traders see this as a terrible risk. Greggs is synonymous with cheap pasties, sausage rolls, and greasy convenience foods. They are a hit with the average Briton and are so popular that the chain has 1,700 outlets across the UK.
You can buy pasties for £1.20 and four sausage rolls for £2.40. It’s a cheap, carb-heavy, delicious food-on-the-go option. But it’s not exactly a place you go to for a coffee meeting with a client.
Greggs’ new pledge to add “flat white” coffees and “an improved ‘mocha’ to our coffee menu early in the New Year” is totally different to what the average customer currently gets from Greggs.
The chain has already added things like salads, no-added-sugar drinks, and soups to its menu. While it says that sales are growing in that area, it looks like growth slowed to just 2.3% in the fourth quarter, when the new “healthier items” were being sold everywhere. Overall though, Greggs announced in its Q4 and full-year trading update on Tuesday that sales were up 5.2% in the year and full-year results are expected to be in line with forecasts.
But investors hate this idea so far. This is not to say that Greggs’ new strategy will ultimately fail. It’s just a big risk. Take a look at the share price:
Consumers didn’t find the move that appealing either:
Greggs adding a flat white to its menu is like The Ritz serving Strongbow as part of its afternoon tea.
— Josh Barrie (@joshbythesea) January 12, 2016
Greggs’ posh coffee appears to have fallen flat (white). Slowdown in sales growth didn’t help. Shares down more than 8%.
— Peter Hoskins (@PeterHoskinsTV) January 12, 2016
And why is it a risk? Well, take a look at the following case study.
Greggs already said in July last year that “London’s going strong but we’ve still got a problem in zones 1 and 2 because we simply can’t afford those rents and keep our prices low. I can’t see that changing anytime soon.”
So basically, Greggs is not going to expand in the area where the demographic for “flat whites,” “mocha” coffees, and “healthier options” most likely lives.
The chain usually opens shops in neighbourhoods where wages are lower than London’s. YouGov has a social survey database that claims Greggs’ customers are likely to have less than £125 a week spare, and probably work in a factory or the social services.
To get a real feel for Greggs’ regular customer base, Business Insider spoke to a family that regularly buy food from the bakery chain, outside London.
The Buckleys live in Barrhead, south west of Glasgow in Scotland and have shopped at Greggs for years. One of the family members, Emma, says “sausage rolls were the staple diet at high school” and the food is “cheap and cheerful and normally fills you up for a good while.”
What they usually buy and what Greggs is famed for includes sausage rolls (four for £2.40):
And “bakes,” which are square pastries filled with savoury filling which cost as little as £1.20 each:
Here is a “Mexican Bandit” — Mexican chicken, chilli cheese, red onions and jalapenos — for £3:
Other favourites include scotch pies (thick pie crust with the same kind of meat you’d find in sausage rolls), which are sometimes put inside baps:
All washed down with sugar-filled drinks, such as Irn Bru or Coca-Cola:
And of course, dessert — four doughnuts for £3.
This is classic Greggs fare. It’s a far cry from the image Greggs is trying to portray on its website:
So, as Greggs says “sales growth has been particularly strong in sandwiches and drinks, including our healthier options ‘Balanced Choice’ range including new salads and ‘no added sugar’ drinks,” analysts are still on the fence about whether their push for becoming more upmarket will work out in the long run.
After all, if Greggs is trying to push drinks like “flat whites” across its stores but aren’t expanding in London, it’s hard to see how its core customer base, which thinks a fizzy drink for £1.30 is “ridiculous,” is going to shell out for a niche style of coffee.
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