Greencore's share price growth: it's all about sandwiches

Greencore caused quite a stir yesterday, hitting the front page of the Mail after admitting it was looking to Hungary to staff its new sandwich factory in Northampton. The story – intended to raise the twin issues of immigration and the welfare state – led to the Irish food producer trending on Twitter, with users sharing images of their failed attempts to make sandwiches with the obligatory hashtag of #sandwichgate.

Time’s US website even picked up on the tale under the headline ‘Here’s Why Britain Is Freaking Out About Sandwiches’.

The Anglo-Irish ready meals player says it has found it difficult to fill the 300 positions for the new £35m facility, set to open by spring 2016, from the local workforce.

But behind the headlines lie one of the answers to Greencore’s growth in 2014 and the 35 per cent rise in its share price from about 180p 12 months ago to highs of 301p in March. Even at its current price of 260p at the close of play yesterday it’s one of the best performing grocery plc stocks.

The answer is sarnies. Greencore announced a major cash investment in its food-to-go business in May, allowing it to open a second facility at the site, after posting an 8.2% rise in first-half sales to £619.8m, representing 9.3% growth on a like-for-like basis.

The sandwich production facility supplies M&S, which the group has strengthened its relationship with this year with bigger contracts won at the expense of a competitor.

With ready meals struggling for growth in the wake of Horsegate, Greencore’s focus on food to go has been the key driver of the group’s performance.

Greencore makes in excess of 350 million sandwiches, baguettes and wraps each year, as well as salads and sushi, for the likes of Sainsbury’s, Tesco, Morrisons, Asda, Marks & Spencer and Waitrose.

And despite a sluggish UK grocery market, there have been a couple of hot trends within the industry, including food-to-go and convenience, which Greencore has taken full advantage of with its revenue up by 8.4% in the division during the first half and the sandwich category growing by 12% within that arm.

Most of the grocers have pulled back in terms of new space opening, with the convenience side being the one exception, leading to an explosion of M+S Simply Food, Tesco Express, Sainsbury’s Local, Morrisons M Local and Little Waitrose store openings across the country.

Jefferies equity analyst Alex Howson says Greencore have been in a “bit of sweet spot positioning wise” to benefit from the convenience store boom.

“While the retailers have been struggling with the big box supermarket formats, they have been channelling their capital deployment and their growth into spending on more convenience outlets,” he says.

“The City is expecting strong revenue growth in Greencore’s food-to-go business in the UK in the upcoming preliminary results [due to be posted by the end of the month] driven by small store format expansion by retailers.”

Greencore’s focus on that food-to-go market has helped the group consistently deliver double-digit growth through the first three quarters of the year, materially outperforming its peers, according to Darren Shirley of ShoreCap. “We’d expect the Q4 performance to have slowed because the comparatives do toughen but we’ll still be looking at mid-single digit and continued outperformance,” he says.

However, riding the wave of convenience store expansion in the UK isn’t the only trick up the business’ sleeve as considerable progress has been made in its US business, which is also largely focused on food-to-go products.

After initially betting on ready meals being the way to fuel US growth, Greencore changed tack to focus on demand for sandwiches in coffee chain Starbucks as well as convenience stores such as 7-Eleven. Constant currency sales in the US grew by 16.9% on last year in the third quarter – including the contribution from frozen foods specialist Lettieri’s, acquired in February just a week before its highest share price recorded so far in 2014.

Darren Shirley says other investments in the country have also been taken well by the City, with the consolidation of its Boston facilities into a single hub in Rhode Island giving access to New York and the addition of chiller capacity in Florida automatically filled with existing customers such as Starbucks.

“What they have also got is an emerging US business,” says Shirley. “They initially went in there with Kroger in what was a bit of a scattergun approach doing hot meals, ready meals, sandwiches etc. But what they have done more recently is focused on the convenience channel, again in that food-to-go area, with Starbucks and 7-Eleven by far and away their biggest customers.”

A Greencore spokesman adds: “During the last year the group has announced significant new factory investments into both the UK and the US, a further acquisition in the US, and several material new customer contracts. This momentum and cumulative investment has enabled Greencore to grow its share in key markets and positions the business for future growth.