UK Quick-Service Saturation And Rising Regulation Will Undermine Viability

Key Takeaways

• Evolving consumer preferences and regulatory demands threaten revenue growth and profitability by increasing compliance costs and challenging Greggs' traditional product offerings.
  
• Market saturation, fierce competition, and rising input costs are capping expansion potential, compressing margins, and limiting earnings growth opportunities.
  
• Expansion into new locations, supply chain automation, product innovation, value focus, and digital adoption position Greggs for resilient growth amid evolving consumer and market trends.

Catalysts

Operates as a food-on-the-go retailer in the United Kingdom.

• The ongoing rise in health consciousness and anti-processed food sentiment presents a long-term threat to Greggs, as its core menu is predominantly high in fat and carbohydrates. This could erode same-store sales growth over time as consumers increasingly avoid traditional bakery offerings, directly impacting revenue.
  
• Regulatory pressures on environmental sustainability, such as the extended producer responsibility levy on packaging and likely future requirements around carbon footprint, are expected to drive material increases in compliance costs and required investments for Greggs. This ongoing capex and inflation of operational expenses will structurally cap net margin improvement and reduce bottom-line earnings growth.
  
• The UK quick-service market is approaching saturation; with Greggs already operating over 2,600 locations and targeting more than 3,000, the company faces diminishing returns from store expansion and limited ability to increase total revenue over the medium to long term. Saturation risk is compounded by low international presence and limited diversification.
  
• Intensifying competition from both supermarkets ramping up their own grab-and-go offerings and digital delivery platforms places Greggs under persistent pricing pressure, undermining its value advantage and threatening to compress gross margins as the business is forced either to increase promotions or surrender share.
  
• Rising labor costs and inflation in key input materials such as wheat, dairy, and energy continue to outpace Greggs' modest like-for-like sales growth. With limited leverage to raise prices further without losing transaction volumes, this will fuel operating profit stagnation or decline and limit growth in earnings per share for the foreseeable future.

Greggs Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Greggs compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Greggs's revenue will grow by 7.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 7.0% today to 5.0% in 3 years time.
• The bearish analysts expect earnings to reach £127.1 million (and earnings per share of £1.24) by about August 2028, down from £144.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, up from 11.4x today. This future PE is lower than the current PE for the GB Hospitality industry at 19.9x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.46%, as per the Simply Wall St company report.

Greggs Future Earnings Per Share Growth

Risks

• Greggs continues to successfully expand its store footprint, particularly targeting under-penetrated areas such as retail parks, roadside locations, supermarkets, and regions with lower existing density, which provides substantial headroom for revenue growth through new shop openings.
  
• The company is investing heavily in supply chain automation, including state-of-the-art facilities at Derby and Kettering, with these investments set to lower labor intensity and drive cost efficiencies, thus supporting future improvement in net margins and overall profitability.
  
• Greggs is consistently innovating its product offering, introducing healthier and on-trend items (such as protein-led foods, plant-based options, over-ice drinks, and flexible new formats like bitesize) that appeal to evolving consumer tastes, helping to defend and grow sales as eating habits shift.
  
• The brand's strong value reputation, combined with demonstrable market share gains relative to food-to-go and fast food peers, indicates resilience during periods of consumer pressure and reinforces its ability to sustain revenue and earnings even in tougher macroeconomic environments.
  
• Adoption of digital channels, including a rapidly growing app user base, third-party delivery, and in-store kiosk deployments, is expanding customer engagement and purchase frequency, which will enhance transaction volumes and can support both revenue growth and operational efficiency in the long term.

Valuation

• The assumed bearish price target for Greggs is £13.3, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Greggs's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £30.6, and the most bearish reporting a price target of just £13.3.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be £2.6 billion, earnings will come to £127.1 million, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of £16.3, the bearish analyst price target of £13.3 is 22.6% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.