Greencore has suggested it cannot absorb all the additional costs from the UK government’s budget measures, meaning more pricing pain for the consumer.
The food-to-go and convenience foods business reported full year like-for-like sales growth today (3 December) of 3.4% but noted the prevailing “muted consumer confidence” through fiscal 2024.
Looking ahead to the new year, the private-label supplier estimates a £7.5m ($9.4m) impact on the business from the increase in the national living wage and Labour’s hike in employer national insurance contributions.
Finance chief Catherine Gubbins said Greencore “had anticipated the national living wage increase but national insurance was completely unanticipated and unbudgeted”.
She added the £7.5m will impact Greencore in the 2025 financial year from the introduction in April, through September, or an annualised £15m.
“The new government spent a lot of time telling everybody how awful it was and then put a pretty material budget through the system, with increased costs into business, which ultimately are going to end back up being footed by the consumer,” Greencore CEO Dalton Philips told Just Food.
He added: "The national living wage would be £20-plus million through the business. Ladder it all up, and it's a lot of cost going through the supply chain, not just us but an industry that really doesn't have the capacity to absorb it.
“It's a pretty strong ladder, from all the retailers saying what the government had done was going to impact pricing for the consumer.”
Labour headwinds
Greencore generated £1.81bn in revenue in its fiscal 2024. Volumes were up 1.6% with further pricing of 1.8%. The gross margin rose 350 basis points to 33.2%, while profit before tax increased 36% to £61.5m.
However, Greencore pointed to a “significant labour cost headwind” from the budget that would require “further efficiency initiatives”.
“I just wonder, has the government really thought this through?” Philips asked.
“These costs have to go somewhere. In our particular case, first and foremost, before we go and have any conversation with a retailer, we’re going to sit down and look at our own cost base,” he said.
Efforts have already been made under Philips to trim costs by consolidating what had been five business units into a consolidated group structure, and the closing of a UK soups plant.
He said the dynamics entail working from the top of the P&L, looking at costs that can be taken out from engineering, planning, labour and eliminating waste.
“Having said all of that, you can't absorb £15 million. You have to go back to the retailers, and I think they're aware of it,” Philips said.
Asked if “efficiency initiatives” might include job cuts or further factory closures, Gubbins provided some insight.
“Broadly speaking, we have a very comprehensive overall operational excellence model that we've been deploying, which is looking at all of our 16 manufacturing sites and really trying to understand how they operate, standardising them, and running efficiencies through that business.
"And that has really been a significant contributor to our improved profitability over the last two years.”
She explained that Greencore’s new operating model, and the efficiencies that come with it, has helped reduce costs from “indirect labour”, adding “it's about taking that programme to the next level”.
Nevertheless, Philips said “there's not going to be some big bang”.
He continued: “We did that two years ago where we took 15% of our management head count out, but that's not how we work it. We look at automation, when it can come in, and then the food sector business has a high-ish level of staff turnover.”
Greencore, like other global food manufacturers, is in the volume rebuild phase following industry-wide price increases to recover inflationary costs. But Philips suggested volumes going forward will be similar to 2024.
“Overall, the market is low volume. The overall grocery volume last year was negative so we're always going to be in the low single-digit positive volume territory,” he said.
“That's just the reality of the sector we’re in. Volumes are there, but they're always going to be tight volumes relative to some other channels and sectors, which might have a faster growth rate.”
On the potential acquisition front, meanwhile, Greencore indicated in today's results statement that it is open to M&A “opportunities”.
Just Food posed the question of whether there are any areas where Greencore needs to strengthen its business.
“Initially, we would be looking for opportunities in what we would regard as adjacent categories or channels, or potentially, but not immediately, maybe other geographies,” Gubbins said.
