There may be many tasty things in a branch of baker Greggs (LSE: GRG) – but what about the shares? The City has lost its appetite for the company, with the price of Greggs shares dropping by 34% over the past year.
But I see a lot to like here and have no plans to sell my Greggs shares. Here are three reasons why.
1. Proven business model
Any investor worth their salt knows that past performance is not necessarily indicative of what will happen in future.
But that does not mean it is irrelevant. In fact, normally when buying shares one thing I consider is whether an industry and a specific company have a proven business model.
Greggs has honed its business model over decades. It understands what customers want, it knows how to predict demand, produce and distribute the goods, and it knows what sort of pricing allows it to turn a profit while keeping customers coming back for more.
2. Unique position in the market
At first glance, there may seem to be nothing remarkable about Greggs that sets it apart from any other baker. But, as I see it, the company has multiple competitive advantages.
One is economies of scale thanks to its large estate of shops. In an industry that is still highly fragmented, that can offer a financial edge.
Another is Greggs’ track record of developing unique products and creating a marketing buzz around them. That can give it pricing power.
I also like the way Greggs has been getting creative about its role in customers’ eating habits. It has expanded into breakfast and evening meals, beyond the lunchtime rush that was its historic strength. That helps it utilise fixed assets like shops and ovens in a more cost-effective manner.
3. Lots of space to develop
Increasing the number of meal occasions it targets is work in progress. That could offer Greggs lots of space to expand.
But I also see other potential opportunities for the company to grow its business. Within the UK there are lots of areas that it has yet to expand into fully. I reckon the proven business model could easily be exported or franchised in select other markets overseas.
Additionally, Greggs could expand into a wider range of product areas, building on the fact that lots of customers regularly interact with it. One example is the progress it has made in recent years expanding the role of hot drinks like coffee in its sales – and I think there could be more such opportunities left to explore.
A tasty-looking share price
But while I am bullish about the outlook, the shares have tumbled in price.
Weaker consumer spending threatens sales. Growth efforts continue to require expenditure, potentially eating into profits. Another risk to profitability is the impact of higher tax costs and wage bills from this month onwards.
Still, as a long-term investor, Greggs shares look cheap to me. I plan to hang onto mine.
