Why I added one of the UK’s most loved brands to my watchlist
Greggs is a British cultural icon. It also seems to tick a lot of my investing boxes.
Returning to the UK for my brother’s wedding has reintroduced me to some old favourites. Dairy Milk chocolate without the wax added to manage the heat in Australia. Percy Pig sweets (sorry, lollies) from Marks & Spencer. And, of course, Greggs.
For the uninitiated, Greggs is the undisputed king of British bakery chains. It has over 2600 blue and yellow branded locations across country. All selling sausage rolls, steak bakes, donuts, coffees and other inexpensive food and drink items.
To give you a better idea, here is the selection that awaited me around the corner from Glasgow’s Queen Street Station on Saturday July 5 at roughly 10am:
And here is the haul of sausage rolls that my brother and I snagged from a Greggs drive-thru near his house at roughly 5:30pm the same day:
You probably get the picture by now.
Greggs is a British institution, right up there with Wimbledon and not lifting international football trophies. It’s also a public company that has been a huge winner for long-term shareholders.
Figure 3: Greggs long-term share chart. Source: Morningstar
But could Greggs PLC also be a suitable investment for my retirement portfolio one day?
This article uses the sausage roll king as an example of what you might consider when looking for investments aligned with your goals and strategy.
First things first
The first step, of course, is being clear on what the goal and strategy is. So before taking a closer look at Greggs, let me share a quick overview of how I try to go about investing for my retirement and what I’m trying to achieve.
Most of my retirement savings are in a portfolio of individual shares. The goal here is simple – provide for a comfortable retirement 35 years from now. The number I’ve attached to that will require an annual return of 9-10% assuming flat contributions.
I plan to do this by buying shares in competitively advantaged companies at prices where that 9-10% annual return looks extremely doable when you consider the sources of equity returns. More on this later.
The edge I am trying to exploit in order to get the above average returns I need to achieve my goals is a structural one. Said differently, I want to avoid the short-term mindset that career risk instils in many professional investors.
This might involve buying companies with decent long-term prospects at times when others have become depressed about what comes next. Unless the share becomes insanely overvalued during my holding period, I then hope to do nothing.
This goal and strategy dictate my investing criteria. Not only in terms of which kind of companies might be able to deliver the returns I need, but in terms of qualities that make me comfortable holding rather than overtrading and killing my potential edge.
The main qualities that give me comfort in this regard are a competitive edge that I understand, a decent long-term growth outlook for the business, and a strong financial position. Let’s see how Greggs measures up on these criteria.
Criteria 1: Does Greggs have a moat?
As I write this, Morningstar doesn’t cover Greggs. But let’s look at where moats in the quick service food business usually come from and how they might apply to Greggs.
The first thing to note is that food businesses normally aren’t very moaty. “The space is highly competitive” says our analyst Johannes Faul in his research note on Guzman, “switching costs are non-existent for patrons, barriers to entry are low, and consumer preferences can evolve quickly.”
In saying that, some of the best performing shares of all time have been those of successful food chains. And many of these companies are thought to have Wide Moats by our analysts - McDonalds, Yum Brands and Chipotle to name three.
What makes a moat in the food business, then?
Johannes says it typically comes from intangible brand assets and cost advantages through scale. Given the highly competitive nature of the business, though, proving that these sustainable advantages actually exist can take a long time.
The clearest evidence of this is a long track record of high returns on capital employed within the business. Greggs certainly displays that. Over the past twenty years, Pitchbook data shows that returns on capital have consistently hovered around 20%.
High ROICs can also stem from capital light business models more than a sustainable competitive advantage. But, again, I wouldn’t say that this flatters Greggs. It operates the vast majority of its locations as opposed to franchising them out.
This hints that Greggs’ continually high returns on capital could be due to some kind of competitive advantage. And I would say that Greggs has clear potential to satisfy two of the most common moat sources in the quick service business.
Let’s start with brand. You might associate the word ‘burger’ with Maccas or the word ‘burrito’ with Guzman. In the UK, Greggs has that level of mindshare for pretty much any baked good – especially for the sacred words “sausage roll”, and even with vegans.
That might sound like a trivial point. But I’d argue there is a lot of value in being the clear default option in the niche that Greggs plays in – providing good value food and drink for people that need to grab a quick something on their way somewhere else.
When it comes to grabbing something quickly, you often aren’t thinking about getting the best possible food. You just want to avoid disaster and get decent food without thinking about it. McDonalds has long benefited from something similar.
A competitor could copy the convenient store locations and a similar product range quite easily. But they’d find it very hard to match the brand power or mindshare that Greggs has built over many decades.
The other potential source of moat in quick food service is a scale-based cost advantage. This can apply on the production side and in regard to the costs of marketing or selling it.
On the marketing and selling side, Greggs isn’t a massive TV advertiser. But every pound that is invested in mass media advertising is spread across a bigger base of stores and revenue than most of its competition.
As we’ve seen, Greggs has over 2600 locations and made over GBP 2 billion in revenue last year. The only other two chains with over 2000 locations in the country are Costa Coffee and Subway. McDonalds has around 1500 (albeit much larger) locations.
I’d need a deeper understanding of Greggs’ unit costs to understand the extent of its cost advantage. But let’s put it this way: I think it’s unlikely that Greggs operates at a major cost disadvantage.
Greggs’ seeming ability to consistently increase prices while remaining inexpensive versus competitors could also be testament to that.
It’s not my place to say whether Greggs has a moat or not. The evidence, however, points to a business of above average quality. Thanks to its scale and brand, it also fits the mould of other moated companies in the quick service food industry.
Criteria 2: Is the long-term outlook fairly good?
In my article how to find companies that can grow forever, I laid out qualities that can underpin revenue growth that seems endless. Or at least goes on for a lot longer than you might think realistic given a company’s size or market saturation already.
These included thinking about markets rather than getting bogged down in individual products, showing innovation to serve and expand those markets, and rolling out your offering to different geographies.
Greggs hasn’t expanded abroad. But it does – in my opinion, anyway – exhibit a masterclass in focusing on markets (people needing food on the go) rather than a static product range, and in innovating to broaden the markets being served.
I say this because Greggs has repeatedly found new ways to serve the need for quick food and drink beyond previous product ranges (adding pizzas, coffee, sandwiches, et cetera to the traditional baked goods). It has also responded well to new trends.
This included building a formidable position in vegetarian items and forging new ways to find those in need of quick food. By adding drive through locations to its traditional high street stores, and opening stores within supermarkets and hospitals, for example.
Nobody has a crystal ball, but would it be outlandish to think that people will keep needing quick and inexpensive food of a dependable quality? And that Greggs might be able to keep leveraging its brand and hefty resources into more growth channels?
It might not be the sexiest story. But when you combine those things with Greggs’ formidable brand and scale, I wouldn’t be surprised if the company is still thriving (and growing) twenty years from now.
Criteria 3: Is the company in a strong financial position?
Pitchbook shows net debt of December 2024 was roughly 290 million sterling according to Pitchbook. Add in lease obligations and you get around 415 million.
Pre-tax profits in 2024 were around 195 million, in a business where demand seems unlikely to fall off a cliff year to year. The company’s pre-tax profit last year was around 15 times higher than the company’s latest annual interest expense.
Whatever way you look at it, the debt load looks sustainable and – if desired – could be paid down very quickly with cash generated by the business. I am not concerned about Greggs’ financial position and think it looks rather strong.
From watchlist to portfolio
Greggs appears to meet many of the criteria I have set for the kinds of business I would like to be a shareholder in. It is a company that, in the right circumstances, I would be happy to own as part of the approach I take towards investing for retirement.
For that reason, I have placed it on the watchlist I keep in my brokerage account. But while I may well own the shares one day, I don’t own them yet.
Making that final step would require me to build more confidence that Greggs can satisfy the last and most important of my investing criteria: the ability to deliver the return I need to meet my goals with a margin of safety.
The total return I require for my portfolio is around 9-10% per annum for the next thirty years until my retirement date. So before buying shares in a company I would want a high level of confidence that the three main levers of return could combine to deliver it.
These levers or components of return can be simplified as: growth or decline in the company’s earnings or free cash flow, returns to shareholders through dividends or share buybacks, and changes in valuation multiple afforded to the shares.
So if a company was to grow free cash flow per shares at 6% per year over the holding period, deliver an annual dividend yield on cost of 4%, and trade at a similar multiple to when you bought the shares, your annual return should be roughly 10%.
I would build confidence here by seeking what Benjamin Graham called a margin of safety. Or in other words, a purchase price where even middling performance in the underlying business versus my expectations could deliver a higher return than I need.
In practice, that would require predicting what earnings and dividends could look like at Greggs over the long-term, while making sure that I wasn’t paying a multiple of earnings that is vulnerable to contraction.
I haven’t done enough work on those fronts to assess how close Greggs might be to graduating from my watchlist yet. But it’s certainly on my to-do list.
For a step-by-step guide to devising your own investing strategy, take a look at this article by my colleague Mark LaMonica.
