Greggs: A Discounter's Dilemma – Strong Brand vs. Weak Share Performance

The paradox of Greggs is stark: a brand synonymous with affordable, reliable food in the UK faces a stock price that has plummeted 42% year-to-date despite 7% revenue growth and a 4.22% dividend yield [3]. This misalignment between consumer appeal and market valuation reflects a broader "discounter's dilemma" in 2025, where structural challenges in the UK retail sector and strategic execution risks overshadow the company’s operational strengths.

The Fundamentals: A Company Built for Resilience

Greggs’ financials remain robust. Its trailing P/E ratio of 11.60 and forward P/E of 12.33 [1] suggest a valuation that appears attractive relative to earnings, particularly for a company with a 7% year-on-year revenue growth rate [3]. The dividend yield, one of the highest in the FTSE 250, underscores its appeal to income-focused investors [3]. Yet these metrics mask a deeper issue: profit margins under pressure. Operating profits in the first half of 2025 fell 7.1% to £70.4 million, despite total sales of £1.03 billion [1]. This disconnect highlights the cost of scaling in a high-inflation environment, where labor and food input costs are rising faster than revenue [4].

The "Discounter's Dilemma": Structural Headwinds in the UK Retail Sector

Greggs’ struggles are emblematic of a sector-wide crisis. The UK’s economic backdrop—slowing growth, sticky inflation, and government policies driving up operational costs—has eroded consumer spending power [4]. Discounters like Greggs, which thrive on price-sensitive demand, now face a paradox: their value proposition is both their strength and their vulnerability. As one analyst notes, “The UK consumer is trading down, but even the cheapest basket is getting heavier” [1].

The recent profit warning, which cited “modestly below” 2024 operating profits, sent shares tumbling 15.5% to a five-year low [1]. While the company blamed a heatwave for reduced footfall, skeptics argue that structural issues—such as cannibalization from overexpansion and weak traction in strategic initiatives like delivery—are equally culpable [1]. For instance, despite expanding delivery to 1,556 sites, delivery sales account for just 6.7% of company-managed shop sales [1], a figure that lags behind competitors like Pret A Manger.

Strategic Initiatives: Progress, But at What Cost?

Greggs’ 2025 strategy hinges on three pillars: store expansion, evening trade, and digital innovation. The company plans to open 140–150 new stores, with a focus on non-traditional locations like transport hubs and drive-throughs [2]. While this diversification could mitigate reliance on high-street footfall, it also raises concerns about cannibalization and capital intensity.

Evening trade, which now represents 9.3% of sales [1], is a brighter spot. Extended hours and menu innovations (e.g., BBQ Chicken & Bacon Pizza) have driven growth, but the segment’s potential is capped by competition from late-night dining options and delivery platforms. Meanwhile, the Greggs App, used in 25.7% of transactions [1], has boosted customer engagement but has yet to translate into significant profit uplifts.

Analyst Perspectives: Undervalued or Overlooked?

The debate among analysts is split. Some argue Greggs is a “once-in-a-decade bargain,” trading at 12 times next year’s earnings with a 4.3% yield [1]. Others caution that the company’s reliance on low-margin growth and macroeconomic headwinds could delay a re-rating. A report by Edisongroup notes that while Greggs’ 12% revenue CAGR from FY23–FY25 is impressive, profit growth may lag due to cost pressures [4].

The key question is whether strategic initiatives will unlock value. For example, the new frozen manufacturing site in Derby and automated distribution center in Kettering [1] could improve efficiency, but these investments will take years to bear fruit. Similarly, the expansion of evening trade and delivery hinges on consumer behavior shifts that are not guaranteed.

Investment Implications and Catalysts for Re-Rating

For long-term investors, Greggs offers a compelling risk-rebalance. Its strong cash generation—evidenced by maintaining dividends despite a 17% drop in pre-tax profit [1]—provides downside protection. However, the stock’s re-rating depends on three catalysts:
1. Successful Execution of Store Expansion: Opening 150 new stores in 2025 without cannibalizing existing locations.
2. Acceleration in Digital Adoption: Scaling delivery and app usage to 10%+ of sales.
3. Margin Stabilization: Controlling labor and food costs amid inflation.

If these milestones are met, Greggs could recapture its FY24 momentum, when sales hit £2.23 billion [3]. Conversely, failure to address structural challenges—such as the “price-marked packs” debate [4]—could deepen the discounters’ dilemma.

Conclusion: A Stock for the Patient

Greggs’ story is one of resilience in a turbulent sector. While its share price languishes, the company’s fundamentals—strong revenue growth, a defensible brand, and a high-yield profile—suggest it is not a value trap. However, investors must weigh the patience required to see strategic initiatives bear fruit against the risks of macroeconomic deterioration. For those willing to bet on the long-term appeal of a “£1.20 bacon roll,” Greggs remains a compelling case study in the discounter’s dilemma.

Source:
[1] Greggs PLC - Interim Results [https://www.research-tree.com/newsfeed/article/greggs-plc-interim-results-2937263]
[2] Greggs Q1 2025 Preview: Growth Slowdown Tests Bakery ... [https://www.ig.com/en/news-and-trade-ideas/greggs-q1-2025-earnings-preview--can-the-bakery-chain-overcome-e-250519]
[3] Greggs PLC Stock Price Today | LON: GRG Live [https://www.investing.com/equities/greggs]
[4] Greggs — Profits on the go [https://www.edisongroup.com/research/profits-on-the-go/32145/]