Latest / The Dutch Investors / #22 | How Greggs took over Britain | One sausage roll at a time

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#22 | How Greggs took over Britain | One sausage roll at a time · The Dutch Investors

• 0:00
  SPEAKER_00: Today, we're talking about a British cultural icon, Gregs.
• 0:05
  SPEAKER_00: Yes, the land of tea, the royal family, and football hooligans also has one of the most beloved bakery chains in the world.
• 0:15
  SPEAKER_00: Let's break it down.
• 0:16
  SPEAKER_00: Let's talk about Gregs.
• 0:29
  SPEAKER_00: Our story begins in 1951 in the small town of Gosforth Newcastle.
• 0:36
  SPEAKER_00: The founder, Mr.
• 0:37
  SPEAKER_00: Gregs, started delivering, by pushbike, fresh eggs and yeast to the families of a small town.
• 0:45
  SPEAKER_00: Ten years later, he chained up his bike and opened Gregs of Gosforth in the high street, baking and selling bread and treats.
• 0:55
  SPEAKER_00: There is still a Grex there today.
• 0:57
  SPEAKER_00: He wasn't looking to build an empire of bakery chains or disrupt any industry.
• 1:02
  SPEAKER_00: He just wanted to bake amazing bread and doing what he loved to do.
• 1:07
  SPEAKER_00: As the years passed, his son Ian took over the business and saw something bigger.
• 1:13
  SPEAKER_00: He expanded Grex from a humble bakery into a chain of shops that fed people on the go.
• 1:20
  SPEAKER_00: By the 1980s there were 250 Grex stores.
• 1:25
  SPEAKER_00: By the 1990s, after acquiring Baker's Oven, that number had grown to over 500 stores.
• 1:32
  SPEAKER_00: Today, Grex has over 2500 locations, like I said earlier, more than McDonald's and Starbucks combined in the UK.
• 1:43
  SPEAKER_00: In London alone, there are over 40 different Grex locations.
• 1:47
  SPEAKER_00: And when I went to London a few weeks ago and I looked at Google Maps, I saw over 14 different Grex locations within a 2km radius.
• 1:57
  SPEAKER_00: Not bad for a bakery chain that started in a small town.
• 2:01
  SPEAKER_00: But how did they go from selling loaves of bread to becoming a staple of British fast food?
• 2:08
  SPEAKER_00: Grex figured out something fundamental early on.
• 2:12
  SPEAKER_00: People don't just want food, they want 1.
• 2:20
  SPEAKER_00: good tasting food.
• 2:22
  SPEAKER_00: So they pivoted from just selling bread to offering a grab and go menu that worked for everyone.
• 2:29
  SPEAKER_00: Sausage rolls, pasties, sandwiches, coffee, quick, cheap, and delicious, totally focused on what the average hardworking people of England wanted.
• 2:41
  SPEAKER_00: And it was a total hit.
• 2:43
  SPEAKER_00: Here's a fun fact: Greg sells more coffee in the UK than Starbucks.
• 2:49
  SPEAKER_00: Let that sink in for a second.
• 2:51
  SPEAKER_00: In 2023 they sold over 2.6 billion units of sandwiches and sweet treats.
• 3:00
  SPEAKER_00: The best-selling item of all time is their so-called sausage roll, which I had to try when I went to London, of course.
• 3:07
  SPEAKER_00: Grex sells close to 2 million sausage rolls a week and serves more than 6 million customers a week.
• 3:15
  SPEAKER_00: Their secret sauce lies in their locations.
• 3:19
  SPEAKER_00: They don't hide away in food courts or rely on drive-throughs.
• 3:23
  SPEAKER_00: You'll find Grex on every busy high street, near train stations, and in shopping centers, wherever people need a quick bite.
• 3:32
  SPEAKER_00: And they have just kept going, longer opening hours, home delivery via Uber Eats and Just Eat, and even new menu items like pizza and fried chicken.
• 3:44
  SPEAKER_00: They have made sure that they stay relevant and try new things.
• 3:49
  SPEAKER_00: So what makes Greg's stand out from its competition?
• 3:53
  SPEAKER_00: We believe it comes down to two things that make Greg's very hard to beat.
• 3:58
  SPEAKER_00: One, they're cheap.
• 4:00
  SPEAKER_00: Like, very cheap.
• 4:02
  SPEAKER_00: Grex is one of the most affordable fast food chains in the UK.
• 4:07
  SPEAKER_00: When times are tough, people still need to eat, and they'll choose the most budget-friendly option.
• 4:14
  SPEAKER_00: That's why Grex does well in both good and bad economies.
• 4:19
  SPEAKER_00: 2.
• 4:20
  SPEAKER_00: They understand British culture.
• 4:22
  SPEAKER_00: Grex isn't just any fast food chain like McDonald's or Starbucks.
• 4:26
  SPEAKER_00: To many, they're a national symbol.
• 4:29
  SPEAKER_00: And their marketing taps into this brilliantly.
• 4:33
  SPEAKER_00: And this is reflected in their brand loyalty.
• 4:36
  SPEAKER_00: According to a Statista survey, Greg's is the UK's favorite fast food chain with a close to 80% approval rating.
• 4:45
  SPEAKER_00: For comparison, McDonald's has only close to 60%.
• 4:49
  SPEAKER_00: Now let's talk about the numbers.
• 4:51
  SPEAKER_00: How well is Greg's actually doing financially?
• 4:54
  SPEAKER_00: Because all of this doesn't matter if they don't make money.
• 4:57
  SPEAKER_00: Revenue has been growing at about 9% per year for the past decade.
• 5:02
  SPEAKER_00: Gross profit margins are around 60%.
• 5:06
  SPEAKER_00: Net profit margins are around 8%, which is very healthy for this industry.
• 5:11
  SPEAKER_00: Return on invested capital is a very impressive 21%.
• 5:15
  SPEAKER_00: And the best thing of all, Greg's has no debt.
• 5:19
  SPEAKER_00: Of course, this can change after the recording this episode, but management appears to be, well, not the biggest fan of taking on debt to fund growth, and right now Grex is trading at a lower PE ratio than usual.
• 5:32
  SPEAKER_00: Around 15 at the time of this recording, which does appear reasonably cheap.
• 5:37
  SPEAKER_00: EV to EBIT is as well trading at just 12.5.
• 5:41
  SPEAKER_00: But even the best companies have risks, and Grex isn't bulletproof either.
• 5:46
  SPEAKER_00: One of the main risks we see is that they're running out of room to grow.
• 5:50
  SPEAKER_00: With over 2500 stores, they're nearing saturation in the UK.
• 5:55
  SPEAKER_00: They're aiming for 3000, but after that, what's next?
• 6:00
  SPEAKER_00: Perhaps international expansion?
• 6:03
  SPEAKER_00: That hasn't worked out too well for them in the past.
• 6:06
  SPEAKER_00: Especially since they're so focused on British culture.
• 6:10
  SPEAKER_00: Another risk are changing health trends.
• 6:13
  SPEAKER_00: Let's be real, Grex isn't exactly a healthy food chain.
• 6:17
  SPEAKER_00: The vegan sausage roll was a huge win, but can they keep adapting to shifting diets and preferences?
• 6:25
  SPEAKER_00: So far, they have been able to do so, but who knows?
• 6:28
  SPEAKER_00: So, what are our thoughts on Grex?
• 6:31
  SPEAKER_00: First, let's discuss our red flags or things we don't like about it, and then we'll switch over to the green flags.
• 6:38
  SPEAKER_00: The first red flag is this.
• 6:40
  SPEAKER_00: Grex appears to be running into a growth ceiling, like I just mentioned, which raises the question: if you can't grow internationally or domestically, how are you going to increase revenue and profits?
• 6:53
  SPEAKER_00: If you're going to raise prices too much, you'll lose part of what makes Grex so attractive.
• 6:59
  SPEAKER_00: Number 2.
• 7:00
  SPEAKER_00: The dependence on food traffic.
• 7:03
  SPEAKER_00: More people are shopping online, and this will only grow, which means fewer visits to the high streets, impacting sales.
• 7:11
  SPEAKER_00: Future work from home trends could further impact locations reliant on office workers and commuters.
• 7:17
  SPEAKER_00: And I don't know if Grex is the perfect company for delivering food at home, but that's just personal preferences, I guess, and anecdotal evidence.
• 7:26
  SPEAKER_00: Lastly, competitive pressure from the likes of McDonald's, Starbucks and other chains, but also supermarkets.
• 7:33
  SPEAKER_00: Supermarkets like Tesco and Sainsbury are improving their ready-to-eat meal selections, and they also offer alternative, cheap, convenient options.
• 7:44
  SPEAKER_00: Then are green flags.
• 7:46
  SPEAKER_00: Grex has a very strong brand in the UK.
• 7:49
  SPEAKER_00: They are cost leaders in this market, being the cheapest chain in the UK, and this makes them pretty resilient to innovation and economic downturns.
• 7:58
  SPEAKER_00: They also have a very efficient business model.
• 8:01
  SPEAKER_00: The majority of food is pre-made in factories, reducing labor and operational costs.
• 8:06
  SPEAKER_00: Stores require only 2-3 employees per shift, and this keeps costs pretty low.
• 8:12
  SPEAKER_00: They are debt-free and have very good margins for this industry.
• 8:16
  SPEAKER_00: It's a simple business and easy to understand.
• 8:19
  SPEAKER_00: And the CEO has close to 35 times her base salary in stock, so enough skin in the game as well.
• 8:27
  SPEAKER_00: So there is a lot to like about Greg's.
• 8:29
  SPEAKER_00: If you want our thoughts, the entire fundamental analysis with all the ins and outs of Gregs, head on over to thedutchinvestors.com.
• 8:38
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• 8:48
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• 8:53
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• 8:58
  SPEAKER_00: That's it for today's quick company breakdown.
• 9:01
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• 9:07
  SPEAKER_00: That really helps us out.
• 9:08
  SPEAKER_00: Until next time, stay curious, keep learning, and happy investing!