Baker Greggs (LSE: GRG) has lately hit the headlines for an instore innovation that, at face value, seems small. However, it may turn out to have bigger implications for the value of Greggs shares than some people think.
Back to the future
That innovation is getting people to pay a member of staff for their purchases.
Wait, you may think, isn’t that how retail has worked for as long as we can remember?
Yes, but in recent years many retailers including Greggs have moved to a model where some customers use self-service machines.
Initially that tends to be touted as good for the business, as it reduces costs. I am not convinced that is always the case, especially in markets where customers appreciate a human touch.
However, like many rivals, until now Greggs has been fairly gung ho about trying to reduce the number of staff needed to serve customers by introducing innovations like an app and self-service checkouts.
Why the change?
The FTSE 250 company is now testing measures in a limited number of shops that include getting rid of self-service machines and putting more products behind protective screens.
Shoplifting has become a sizeable problem for the company. It hopes these moves can help combat that.
I find that a sad reflection on our society. But wearing my hat as a Greggs shareholder I find recent developments interesting for several reasons.
The first is the simple reason of reducing lost revenue.
Sausage rolls may not seem like obvious items for a would-be shoplifter to target. But each one that is taken out the store without being properly paid for eats directly into Greggs’ revenue.
That might result from shoplifting but it could simply be because someone has made a mistake using a self-service checkout.
Making sure that fewer items leave Greggs’ shop doors without having been properly paid for could actually add up to quite a revenue boost at a national level, I reckon.
Management is getting a grip on problems
The second reason I welcome this innovation is a less tangible one.
I think Greggs has the makings of a great business and its shares ought to reflect that. It has a strong brand, proven business model, and huge economies of scale. Indeed, the fact that thieves want to steal its pastries and sandwiches is a perverse sign of the chain’s popularity.
But Greggs shares have been struggling in part because of some management missteps.
The Greggs share price is 10% lower than a year ago, following a shock profit warning last summer. That reflected a mismatch between warm weather and the company’s product offering. I see that as a straightforward failure of demand planning.
Is management upping its game?
Lately, Greggs has been focused on cost control. It delivered structural cost savings of £13m last year .
Currently the firm has a “key focus” of restoring return on capital employed to around 20% from around 16% (on an underlying basis) last year.
Tackling what retailers call shrinkage (theft and other loss of product without it being paid for) demonstrates to me that Greggs is very serious about managing costs.
Combined with ongoing like-for-like sales growth and shop opening plans, I think it means Greggs shares continue to look undervalued.
