Market Analysis: Greggs, Tesco & Mondi

This week, Ross Hindle, analyst at Third Bridge comments on Greggs' results and Tesco:

“Greggs two-year LFL Q3 sales were up 3.5% despite labour and supply chain challenges. The overall UK food-to-go market remains depressed by around 15%-20% as the UK's new found appetite for working at home keeps commuter volumes in check. Greggs has been able to punch above its weight in this climate because of its low pricing, wide-appeal marketing, and shops outside city centres.

“Greggs has turned up the heat on the food-to-go sector with its launch of new vegan products and its punchy plan for additional store openings. The Group has opened 68 stores year-to-date (net of store closures) with management continuing to expect the Group to open 100 stores by year end.

“Supply chain issues and labour shortages remain a key risk for Greggs with no end in sight. Temporary interruptions for some ingredients could result in the Group reducing its range and would hamper current momentum.

“From a pricing point of view, Greggs chose to pass on the Chancellor's VAT discount to their customers. They now face the tricky challenge of putting their prices back up when VAT increases to 12.5% at the end of September, and 20% in 2022. This may mean short-term margin pressure for the Group especially in the face of rising inflation.”

Turning to Tesco, Ross Hindle says:

“Tesco’s Group sales (ex-fuel/ex-VAT) were up 2.6% y/y, a beat on consensus.

“Now the Morrisons auction is complete, the supermarket industry is rife with rumours that Tesco or Sainsbury’s is next in line for a takeover bid. Industry insiders say Tesco is less attractive than Sainsbury’s because it lacks an extensive property portfolio, however it does offer exciting digital expansion plans, with its online infrastructure superior to its big 4 competitors.

“Tesco has capitalised on the acquisition distraction at Morrisons, grabbing 20 basis points of market share.

“With cost inflation pressures mushrooming, Tesco finds itself increasingly squeezed towards a price reaction. So far Tesco has largely absorbed rising costs, but as these pressures mount the supermarket can be expected to raise prices to defend margins. For now, Tesco is holding on to its Aldi price-match strategy; however, our experts question how sustainable this will be given the UK’s inflationary headwinds and point to a resurgence from the discounters.

“The current supply shortage plaguing the UK is expected to force retailers to cut back on ranges, especially as we move towards the festive period. One would like to see Tesco deploy its enormous buying power to push even harder on suppliers and navigate shortages.

“Now that average basket sizes and shopping frequencies are retreating towards pre-pandemic levels, Tesco is looking to stimulate LFL growth by encouraging consumers to buy multipacks and increase shopping frequency at its convenience stores. As office workers slowly return to the office, Tesco’s many city-centre convenience stores should provide a tailwind for growth, however this return has proven slower than expected.”

Meanwhile, Ben Nutall, Senior Analyst at Third Bridge reports on Mondi:

“Major challenge of the quarter has been passing on input costs mainly energy, resins, transport and chemical costs. 3Q21 EBITDA was up 27% compared to 3Q20, only 1% above 3Q19. The group expects to be impacted in Q4 by elevated input cost and planned maintenance and project related shutdowns.

"Mondi primarily operates in secondary packaging markets across commercial and industrial supply chains, rather than in direct to customer packaging. Unfortunately industrial supply chain customers are less environmentally conscious than retail customers. Mondi is now seeing some rapid e-commerce growth as we use more cardboard packaging, but it’s from a smaller base.

"Mondi had the best paper assets in the industry which has led them to follow a long paper strategy, meaning they sell more paper than they use to make boxes. Mondi is significantly exposed to any volatility in the paper market. Mondi's main competitors, DS Smith and Smurfit Kappa are short and balanced on paper.

"Our experts expect to see defensive consolidation in the European packaging market over the next few years as key players prepare for a potential transatlantic merger further down the line."

Third Bridge is a global primary research firm that interviews more than 6,000 internationally recognised industry experts and business leaders a year to compile 360-degree market intelligence for institutional investors. www.thirdbridge.com