Greencore is experiencing labour inflation

Sandwich giant Greencore has warned that input inflation has reached double digits and its only option is to recover these costs through price increases.

After a torrid 18 months the FTSE 250 convenience player announced a return to profitability this week in its year to 24 September, on the recovery of the UK food to go market.

But after experiencing relatively benign raw material and packaging inflation of just 1% , and direct labour inflation of approximately 5%, both components had seen a “marked” increase since the start of its fourth quarter, with CFO Emma Hynes telling The Grocer the current wave of input inflation was running at “low teens in aggregate”.

She said this level of inflation meant price increases were inevitable, given labour constraints mean the extra costs cannot be mitigated by adding incremental volumes in a market where there is still “unmet demand”.

“We are doing everything we can to manage this inflation alongside customers and the last thing we want to do is see prices going up for consumers,” she said.

“But ultimately inflation is at a level where it has to be recovered through price and we are having those conversations with customers.”

She added that Greencore had mechanisms where some costs were recovered automatically, but typically the surging price of energy and labour would not be included in such mechanisms.

Jefferies analyst Martin Deboo said Greencore’s guidance implied a £100m cost recovery challenge, relative to group-wide profits of less than that number.

He suggested mitigating the “biggest inflation challenge we can remember in seven years of covering the stock” would imply raising customer prices by about 6%.

Greencore’s stark reflections on the inflationary picture, mirror that of drinks supplier Britvic, which last week suggested it was facing cost inflation of “high teens”.

The cost hikes threaten Greencore’s strong recovery in its financial year to 24 September as it bounced back to pre-tax profits of £27.8m compared to a loss before tax of £10.8m in 2020.

Greencore’s revenues increased by 4.8% to £1.3bn, with sales up 6.2% on an organic basis as food to go revenues rose by 9% to £842.1m driven by a recovery in underlying demand.

Organic growth in food to go was 59% in the second half and only 5% below the equivalent pre-Covid level of 2019 as a recovery in the category was boosted by new business wins to exit the year at around 98% of pre-Covid levels.

Despite pressure on cost, Greencore expects to meet market expectations for its 2022 financial year, assuming mobility restrictions and lockdowns do not return.

Mounting concerns about the Omicron variant – and the announcement of the departure of CEO Patrick Coveney – saw the stock drop by almost 11% last Friday.