Food-to-go was one of the big growth areas in grocery in 2014 with convenience stores being one of the few rays of light for the supermarkets as consumers shopped for less but more frequently. Even WH Smith is desperate to tap into the explosion in sandwiches with the sector being one of the few areas it is investing in rather than cutting back.
And it doesn’t appear food-to-go is going to be any less profitable for the main players in the market in 2015 as more people in employment with more disposable income will continue to mean more potential consumers on the high street looking for somewhere to buy lunch.
Greggs is already on a roll after reporting a strong finish to 2014 and a jump in like-for like sales for the five weeks to 3 January of 8.2% on the back of its refreshed healthy sandwiches and coffee offering.
Irish food group Greencore has this morning followed suit with a robust quarter one trading update standing up to a very strong comparative period a year ago. Like-for-like sales in the 13 weeks to 26 December jumped 4.4% (compared with 9.1% in Q1 2014) with revenue up to £331.9m as the group registered more good growth in the UK food-to-go market and double-digit rises in the growing US business.
CEO Patrick Coveney said in an investor call that growth in food-to-go in the quarter was modestly ahead of the overall market – which was hovering around the 7% mark according to the latest Nielsen data for the 12 weeks to 3 January. He added that the Italian ready meal business was also ahead of the market.
The City took note of the update but a share price rise of just 1.2% to 291.5p suggests a wait-and-see approach for stronger quarters to come – and with the stock being one of the best performing in 2014 it has already enjoyed big jumps in the past 12 months.
Indeed, the first quarter is expected to be the softest of the year for Greencore as a result of the timing of contract ramp-ups and the aforementioned tough comparators.
As the benefit of the M&S contract kicks in from the second quarter – with £30m having being pumped into the Northampton facility to service the agreement – Alex Howson of Jefferies expects to see at least £20m of incremental revenue to eventually be recognised this year. That figure would equate to growth of more than 400 basis points in food-to-go and 200 basis points in UK convenience food.
Jefferies forecasts for the year remain unchanged following the update with FY15 group revenue growth of 7.3% to £1.37bn (it was up 6.4% to £1.27bn in the year ended 26 September 2014), driven by 7.8% like-for-like growth in convenience food.
“Within that, we expect UK food-to-go revenues to grow by 7.7% like for like, with the US +33%. We expect group trading profit (EBITA) to grow 12% year on year to £92.9m (from £82.9m) as margins expand +30bps to 6.8%, with EPS +15% year on year to 18.25p,” Howson says.
The firm has a ‘buy’ rating on a Greencore with a target price for its stock of 320p.
Peel Hunt analyst Charles Hall adds: “Greencore is on track to deliver another good performance. The growth in the convenience food sector should continue, given rising levels of employment, the increase in convenience stores and the reduction in fuel prices.”
Hall also mentions that an improving performance at Tesco should help the sales of ready meals following a relaunch of the supplier’s Italian category, with Greencore hoping to deliver high single-digit growth.
And the booming US business, which has also targeted growth in food-to-go with big contracts with Starbucks and 7-Eleven, should also start to make a good contribution to the bottom line.
Greencore’s turnover in the US increased 34.1% in the first quarter of 2014 – and 19.5% higher on a like-for-like basis – driven principally by the continued rollout of new products with Starbucks.
Hall adds that sales in the US are now at a $325m run-rate, with capacity in the process of increasing to $700m. “This should be a business capable of delivering $50m of EBIT in a few years compared with minimal profits today,” he says.