The company, which trades under the Greggs and Bakers Oven banners, said that an 8.1 per cent increase in sales to £457 million in 2003 had come despite the hot summer weather, while improved operating efficiencies helped the group lift operating profit by 11 per cent to £39.2 million despite higher insurance costs and a steep rise in raw material charges, especially for flour, meat and dairy products.
Savouries and sandwiches were the biggest contributors to the company's good performance, but the company said that increased competition in the sandwich sector in particular meant that trading in 2004 would be tougher than expected.
A number of new products launched in 2003, such as the Lifestyle Choice of healthier sandwiches, reflected Greggs' shift of focus into the added value segment of the market, the company said, adding that traditional bakery staples such as bread and rolls were playing an increasingly minor role in the company's business.
Greggs also embarked upon the conquest of Europe in 2003, with its first two Continental stores opening in Belgium early in the year. The performance of the two stores is in line with expectations, the company said, adding that the local management had experimented with a variety of store formats and product ranges to gauge local tastes.
The European business is seen as a long-term investment for Greggs, however, and the domestic market will continue to be its core focus over the next few years. The group is aiming for 1,700 shops by 2010, but is still some way short of its target with just 1,231 stores currently in operation and a slowdown in new store development as it focused on upgrading its existing Greggs outlets, largely to the detriment of the more upmarket Bakers Oven format.
Greggs is an increasingly rare example of a speciality food retailer in the UK, and has survived and prospered because of its ability to adapt to the prevailing market conditions, providing more added value, convenience products and moving away from traditional bakery staples.
But with the major multiples taking an ever increasing share of food sales - and moving into the High Street convenience market with a vengeance - Greggs is likely to face tough competition over the next few years, and this in fact is likely to lay a more important role than the slowdown in sandwich market growth.
The sandwich market in the UK was worth around £1 billion in 1990, but with growth rates of 25-30 per cent a year over the last decade, it is now worth around £3.5 billion, Jim Winship of the British Sandwich Association told FoodandDrinkEurope.com.
"Growth was inevitably going to slow after so many years of rapid expansion, but even so it is likely to remain at between 5-8 per cent over the coming years," Winship said.
"What we are seeing now is increasing competition from the likes of Tesco moving into the High Street convenience market, and this is likely to be a bigger challenge for Greggs.
"Research suggests that customers will not queue for more than two minutes for a sandwich, so convenience stores such as Tesco Metro have a major advantage over more traditional sandwich outlets. The sandwich market is very fickle - new outlets can easily steal regular customers from sandwich bars by offering a different range or lower prices."
Sandwich retailers need to find the right product mix if it is to continue to grow in the face of such opposition. "There is some market for products such as gourmet sandwiches, and chains such as Pret A Manger do very well at this high end, but copying this trading style is not a long-term option. Greggs has the brand and the money to carve its own niche in the sandwich market, but many other smaller players are likely to fall by the wayside."
Plenty of variation
There is already a wide variation in the postioning adopted by the various sandwich retailers in the UK, according to market analysts Mintel. Premium operators such as O'Briens sell their sandwiches at over £3, and the UK average is just under this £3 level, reflecting a shift towards more exotic and unusual flavours. At the same time, the basic sandwich remains at a relatively low price point, with Pret A Manger, for example, selling its egg mayo sandwich for £1.15 and Asda charging 98p for a pre-packed wedge sandwich.
Of particular interest to Greggs, which offers both eat-in (Bakers Oven) and takeaway (Greggs) formats, is the fact that most consuemrs prefer to take their sandwiches away with them, according to Mintel's data.
Takeaway sales account for the lion's share of the market - some £3.3 billion - and while the growth in specialist sandwich shops with eat-in facilities and in coffee shops selling sandwiches helped lift eat-in sales above the £200 million mark for the first time in 2003, this is still just 6 per cent of the total sandwich market.
Mintel also confirmed Greggs' suspicions that growth was likely to slow, although its reasons were somewhat different. "The sandwich does not compete in this market in isolation but is a rival in the snack market where new products are continually being introduced. Portable healthy and easy-to-eat snacks are increasing in number and enjoying sales previously taken up by sandwiches," the analysts said.
But while Mintel suggested that there was still plenty of opportunity for specialist retailers, it stressed that the threat from multiple grocers was also a very real one.
"Benjy's refinancing deal should ensure a fairly rapid expansion of this value-for-money retailer. Greggs has ambitious expansion plans, as do O'Briens and Pret A Manger. This rise in the number of outlets will in itself cause the market to expand further.
"But perhaps the area that has yet to fully exploit the opportunity for sandwich sales is the convenience sector. The development of this sector through the entry of the leading grocery multiples will ensure that sandwiches are a fully featured range. The snack, and by definition the sandwich, market relies heavily on being at the right place at the right time, when the inclination to purchase occurs. The appeal of the sandwich as an any time snack will be extended through better availability in the convenience store sector."