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Shares of Greggs fell as much as 8 per cent on Friday morning after Deutsche Bank predicted the UK bakery chain faces an extra £97mn in costs over the next two years as a result of the recent Budget measures.
The analysts downgraded the Newcastle-based group from hold to sell, predicting the changes would cost it £45.8mn in 2025 and £51.2mn in 2026, as well as suffering a 23 per cent fall in pre-tax profit in each of those years.
In 2023 Greggs posted a £188.3mn pre-tax profit.
Employers’ national insurance contributions will rise 1.2 percentage points to 15 per cent from April, while the earnings threshold at which the tax kicks in will fall from £9,100 to £5,000, chancellor Rachel Reeves said last week. Minimum hourly pay for adults will increase 6.7 per cent to £12.21, with larger increases for younger staff.
“Greggs has material exposure [to the Budget measures] via its 30,000 employees, coupled with a low — less than 10 per cent — operating margin,” Deutsche Bank said. “We see this as upside risk rather than our base case,” they added.
Greggs did not immediately respond to a request for comment.
The estimate from Deutsche is the latest example showing how many UK companies are bracing for higher business costs after Reeves unveiled the UK’s biggest tax-raising Budget in a generation. Groups including Marks and Spencer, JD Wetherspoon and BT revealed this week they have to fork out over half a billion pounds in total in extra costs as a result.
Deutsche Bank said price increases would be the most obvious measure to offset the costs for Greggs, known for its affordable offerings.
However “it is difficult to be confident [its rivals] will price-up,” especially in an environment when the recent consumer prices index suggests inflation is slowing, they added.
Greggs has been expanding as it capitalises on its popularity among consumers who traded down during the cost of living crisis. However the chain reported slowing sales growth in its latest quarter, which it blamed on violent riots and poor weather in the period.
Given its 32,000 employees, Greggs is “going to be facing quite a significant labour cost headwind”, said Patrick Higgins, an analyst at Goodbody. He expects “another inflationary year” to come because of employers’ cost burden with the Budget measures.
“You’ll probably see prices have to drift up to a degree next year. The question is how much can some of the higher-priced competitors take price versus Greggs, which is coming from a more value-focused base,” he said.