The boss of sandwich maker Greencore has warned of potential further price hikes, as the supermarket supplier faces another wave of rising costs following last week’s autumn statement.
It comes as CEO Dalton Philips, who took over from Patrick Coveney at the London-listed group in September 2022, praised progress at Greencore as the business boosted annual revenues, volumes and profits.
However, an almost 10% rise in the national living wage (NLW), set to come into effect next April, is expected by analysts to add another £30m to Greencore’s wage bill.
Philips said the group, which makes sandwiches, salads, sushi and other convenience ranges for the major mults, would look to mitigate the additional costs internally as much as possible before talking to retail customers.
“Talks with partners have finally been able to get back to growth and innovation but now we’ve got to figure how to manage the NLW,” he said. “We are hugely supportive of real incomes rising, as that is good for our business by putting money in people’s pockets, but the truth is it has to be mitigated. We need to figure out how we do that and will look internally first before speaking to the retailers.
“Difficult conservations will have to be had and we’re not excited by that as we’re trying to move on with the growth agenda.”
Philips said further automation would help offset some of the costs as “way too many processes” were still done manually.
“We still wrap all our rolls by hand,” the CEO added. “We’re looking towards automation and clearly the payback on automation has improved materially as the cost of labour has increased.”
Analysts at Peel Hunt reckoned added labour costs would lead to further price increases next year at Greencore, while house broker Shore Capital said government policy was inflationary to the food system.
It follows the British Retail Consortium warning this morning that “government-imposed” measures hitting retailers, such as business rates, the NLW and red tape, could “stall or even reverse progress made thus far on bringing down inflation, particularly in food”.
Greencore worked to offset £200m of inflation in the year to 29 September, passing on some costs to supermarket partners and also reducing costs internally through operational efficiencies, SKU optimisation and restructuring the workforce.
Philips expected input cost inflation to ease significantly in the new financial year, falling from low double-digit levels to about 2% or 3% as prices come down for a range of commodities, including chicken and a variety of oils. Although costs for packaging and other items are still going up.
Work done by Philips to stabilise Greencore as the group attempted to recover from the pandemic paid off in the past year, with revenues up 10% to £1.9bn as workers returned to the office in greater numbers, boosting sandwich volumes.
“Mobility is really important,” Philips said. “There are more people working five days a week in the office than there is hybrid now. That really drives our business.
“The growth in second jobs, which is a factor of the cost of living crisis, means there are also more people on the move going from one job to another and that is driving footfall into shops as they have to eat on the run.”
He added that consumers were also buying premium meal deals in much bigger numbers as cash-strapped workers sought affordable lunches.
“The whole premiumisation of the meal deal will continue to run and run. Consumers are feeling stretched but if you can get a decent meal for £5, it is materially cheaper than anything else on the high street in the fast food market.”
Food-to-go sales at Greencore – which make up 65% of the total business – increased 7.9% to £1.3bn in the year. Other convenience categories, including chilled ready meals, soups, sauces and quiches, increased sales by 14.3% to £661.1m.
Group adjusted EBITDA rose 4.6% to £132.8m, while adjusted operating profits increased 5.7% to £76.3m – although margins fell by 20 basis points to 4% because of the inflation hit.
Philips is now focused on rebuilding profitability to pre-pandemic levels of £105m, which he expects will take three years.
After that, the new boss will look at expanding into new categories and channels, including breakfast, brand partnerships and ultra-fresh, which it has already started with one-day shelf life sandwiches in M&S.
Shares in Greencore fell 4.8% to 96.7p today despite the positive results as investors focused on squeezed margins and the 2.8% fall in adjusted pre-tax profits following £8.9m of reorganisation costs.