GREGGS PLC., THE HOME OF FRESH BAKERY is all about the distribution of fresh bakery products, healthy and environment friendly, it is about the commitment to bring quality and freshness into a blend of cakes, sandwiches, bread rolls etc., it is an endeavour to contribute to a better society, a higher value of living and a breakfast at delight.
GREGGS PLC is the leading bakery retailer in the UK. Over the past 70 years Greggs has served a million customers in over 1,400 shops around the UK. With over 90 in-store bakeries, Greggs has grown to be one of the best preferred bakers in UK. Greggs employs nearly 19,000 people and has ambitious plans for the near future in terms of growth, expansion and revenue.
Despite the economical crunch, Gregg seems to have achieved what they have planned. How did they do it? How does the future look for Gregg plc? Will they be able to improve over their competitors? What would be the measure of Gregg's performance attributable to its high shareholder value?
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In this paper we discuss how Greggs plc has evolved and the contribution reflected in its profitability owing to its Corporate Social Reporting endeavours. In such evaluation, we need to know why Greggs or per say, companies report about their activities to the public? Is it legally required? Or is it to boost a company's image for being open and honest?
Gone are those days when companies had only one objective to achieve - profit maximization. Companies are answerable to shareholders for every action they take or implement. As a result any business is responsible for their impact on environment, community, employees, consumers, stakeholders. To meet this responsibility and to build a better public image, corporate social responsibility was initiated. So what is CSR or Corporate Social Responsibility?
What is CSR?
"...finding a responsible balance between the concern for economic prosperity ("profit"), environmental quality ("planet"), and human well-being ("people"), while at the same time communicating openly about these matters with stakeholders..."(Cramer 2003)
"...a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis." (European Commission)
CSR entrusts the organization with the responsibility of Corporate social reporting, which is a medium to communicate socially responsible behaviour of the organization to their stakeholders. This encompasses adherence to follow the law, business ethics and standards or norms. The essential point is that compliance is voluntary rather than mandatory and this voluntary approach to Corporate Social Reporting expresses the reality of enterprises in taking responsibility for their true social impact and recognises the existence of a larger pressure exercised by various stakeholders. (Guler Aras 2008)
So how does a company disclose this information's?
- (CSR Trends 2010)
As per the Table 1, the reporting is predominantly communicated though the annual report and on organization's websites. One third of respondents disclose their social performance in publicity material, publication of social or CSR report or produce a sustainability report.
How does all this add value to a firm?
High Goodwill: Disclosure of information helps the suppliers and creditors gain more credibility for the company. Henceforth the company can avail longer credit days, lower effective interest rates and better terms and conditions.
Shareholders Value: CSR builds in confidence to the investors and the market, thereby increasing the demand of the shares. This in turn increases the share value contributing a higher market capitalization.
Higher profitability: Profitability is attributed to operational profits and capital gains for a shareholder. CSR helps to increase the market capitalization of the company which in turn brings capital gain to individual shareholder.
Better Brand Image: A higher disclosure builds a better reliance and credibility of the company to all the stakeholders. This leads to a higher depth and breadth of image building among the masses. Hence contributing a stronger brand image.
Easy operations in the market: Owing to a higher credibility the inter relation between the company and the suppliers, creditors, banks, financial institutions and shareholders gets strengthened. Thereby, streamlining the operations.
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Human Resource - Good choice of employees: A company with a better image and goodwill is always the most sought after destination for the employees. CSR in itself acts as an indicator of a better work environment and culture within the company.
Risk management: CSR foresees forecasting of revenue, HR requirements, market sustainability and other major operational and financial factors. This helps in better risk management and higher efficiency.
But why do companies disclose this vital information to the public?
Even though there are no legal requirements for the companies to disclose this information, the advantages are so high that companies disclose this information voluntarily to public.
In the case of Greggs plc, the annual reports clearly suggest the company's accountability towards its various stakeholders has been a highlight for their Greggs success over the years.
In concern the outlined information disclosed, (Annual Report 2009, Greggs Plc)
To its Customers: -
Company removed all added trans fats, hydrogenated fats and oils from all the products concerning the health of customers.
A nutritional information chart to be made available on all Gregg's products - national bread rolls and confectionery ranges, savoury, sandwiches and drinks.
Greggs will continue to assess the recipes for all products, working towards the Food Standards Agency's recommended salt and fat targets for each type of food.
To its employees: -
Increased access to free, 100% private medical treatment for any accidents at workplace. Company is committed in continuing its Employee Assistance Programme for assisting all levels of employees.
Greggs aims to maintain 25 bakery apprenticeships to create more jobs with opening of new 50-60 stores in 2010 by creating criteria for 500-600 new jobs along with new training methods.
To the Environment: -
Company aims to divert more of its waste away from landfill, forecasts to reduce its total energy consumption and increase the amount of packaging that is made from sustainable sources.
Educating the customers to dispose their packaging waste responsibly by informing the customers with additional signage and talking to staff and customers.
Continue to recycle as much as cardboard, paper and plastic that we recycle from our shops, bakeries and offices.
For the community: -
Implemented a number of Breakfast Clubs to at least 150, providing a free, nutritious breakfast to more than 7,000 pupils each school day.
Sponsored Expochef Healthy Food events in 60 Breakfast Club schools in order to promote better understanding of healthy diets amongst pupils and their families.
For 5 years Gregg's have engaged the staff and customers in a major national fundraising campaign to support the BBC Children in need appeal.
Corporate social reporting has been heralded as ushering in a new phase in corporate social accountability. CSR demonstrates the self-regulating capacity of companies; it offers a mechanism to improve the social and environmental performance of companies and represents the instrument par excellence for managing stakeholder relations (Elkington 2001; Kaptein and Wempe 1998; Zadek 2001). However, with the upsurge in corporate social reporting, criticism of the quality and effectiveness of social reporting has also increased. Social reports have been criticised for being anecdotal in character (van Tulder and van der Zwart 2005), self-laudatory (Hooghiemstra 2000), threatening to become arbitrary and low in credibility.
Criticism of CSR Reporting?
Argued that it is a window dressing and does not really represent a fair and balanced view of the activities of the particular company.
Possibility of the reports being used as marketing tools and nothing more. Hence CSR is nothing but inclusion of fair factors eliminating the dark side of the argument, thereby giving a manipulated and partial presentation of information. (ref:)
Essentially, a CSR report is a dialogue between a company and its stakeholders. To be effective, the report should explain how often, with whom and through what activities the company engages with those stakeholders. Equally important, the report should explain how their feedback is being incorporated into CSR policies and initiatives.
In today's world, investors are demanding greater access to transparent, accountable, robust, reliable, and comparable data from companies about their "nonfinancial" performance. This is when bigger companies started to concentrate on Sustainability reporting and termed CSR with a different outlook but with better insights into reporting using various guidelines and frameworks.
What do you mean by Sustainability Reporting?
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By definition from the Global Reporting Initiative (GRI), sustainability reporting is,
"...the practice of measuring, disclosing and being accountable for organizational performance while working towards the goal of sustainable development."
CSR Reporting is also sometimes called Sustainability Reporting. Sustainability reporting is a new shift of paradigm where it is not merely seen as about disclosure, but also an integral element of communication process between companies and their stakeholders. It provides an opportunity for the stakeholders to identify whether their concerns have been taken into account (Aras and Crowther, 2007). The rising trend of sustainability reporting globally has been prominently visible through numerous reports by multinational corporations.
How CSR developed into Sustainability Reporting?
A sustainability report makes value addition to CSR report in three ways.
First, taking CSR to the second level, effective sustainability reporting quantifies, measures, and tracks environmental and social performance in the same form as it tracks financial performance with metrics analyzed over time.
Second, where CSR reports provide qualitative information on company programs, sustainability reporting goes one step further by asking a business to explain why it performs its CSR initiatives, why those issues and initiatives are important to stakeholders.
Finally, this tracked performance measurement approach implies that companies report in a balanced and continuous manner, rather than merely disclosing positive performance and current initiatives without any reference to past or future. (Eric Ricaurte 2010)
Corporate Sustainability & Reporting, the new CSR (CSR 2.0, for twentieth century)
The CSR 2.0 can be conceived as spiralling, interconnected, non-hierarchical levels, representing economic, human, social and environmental systems, each with a twinned sustainability/responsibility manifestation: economic sustainability and financial responsibility; human sustainability and labour responsibility; social sustainability and community responsibility; and environmental sustainability and moral responsibility. (Wayne Visser 2008)
Companies have now widely recognized the importance of sustainability report, in order to give themselves a long term future. Some of the frameworks used by corporations are AccountAbility's AA1000 standard, Connected Reporting Framework, GoodCorporation's Standard, Green Globe Certification, SA8000 standard, ISO 14000 and Global Reporting Initiative's Sustainability Reporting Guidelines.
The most widely used all-encompassing reporting framework is the GRI, a global non-governmental organization which develops its framework and guidelines through stakeholder collaboration. Sustainability reports produced using the GRI's latest G3 guidelines follow a series of policy disclosures, management disclosures, and performance indicators that cover the following aspects: economic, environmental, labour, human rights, society, and product responsibility.
In short, reporting standards and guidelines have developed in various forms in recent years. The problem has been seeing the responsibility from a narrow view than from a broader perspective or from a stakeholder's point of view. Perhaps the final comment should rest with Blyth, who has suggested that 'There is no one definition of what it takes to be a responsible corporate. The key is to have a rigorous process for identifying those responsibilities and fulfilling them (Blyth 2005, p. 30)
Key Information about the company:
In 2009, Sales increased by 1.5% in first half i.e. 26 weeks, but remained flat in the 2nd half with an overall sales increase by 0.8% for the year. Input costs stabilized after major increase in the cost of ingredients and energy prices during 2008.
Operating margin improved to 7.4% in comparison to 7.1% (2008). The CAPEX was reduced to GBP 30.3 million in comparison to GBP 40.8 million (2008) and almost touched the all time minimum of GBP 30 million (2006). The operating profit as acclaimed by the company was GBP 48.4 million making it to the maximum since 2005. This reflected the beneficial effects of centralization, reduction in waste and sensible control of labor costs.
On the corporate social reporting front, the company has complied with combined code on corporate governance by FRC with the only exception that Sir Michael Darrington (former MD) retained on board as NED until May, 2009 to assist the transition of the new CEO. The company also donated GBP 739, 000 for BBC children in need fund, while it raised GBP 1.3 million through Greggs Foundation.
In 2009, a new accounting system was introduced with some responsibility for financial management being passed to a shared service center. Financial control will be centralized further in 2010. On 13th May, 2009, AGM passed the authorization on a resolution for 10, 350,000 shares buyback, following which GBP 4.5 million shares were bought back in August, 2010. Later, 120, 000 and 360, 004 shares were purchased at a price of GBP 4.62 - 4.6155 per share on 20th Oct and 25th Oct, 2010. While recently 225, 000 shares were bought back at a price of GBP 4.3 per share on 12th Nov, 2010. This brought down the total number of shares to 101,444,601 (RNS, London Stock Exchange). This move is expected to increase the profitability of the shareholders for the year 2009-10.
A Quick review of the Financial Ratios for GREGGS PLC 2009
Analysis and Interpretations:
The company has increased its profitability in comparison to last year, but there are certain things to be taken into consideration. First, the ROSF and ROCE both have decreased signalling a decrease in the PAT. Second, GPM, OPM and PAT margin has increased indicating a higher operating profitability, owing to company's centralization and new Supply Chain policies. But this seems to be contradictory, as a decrease in PAT signals an excessive expense on other concerns. The company is yet to rise from the batter of the economic crisis, as it is yet to touch and grow ahead of its achieved mark of 2007.
Looking through the ratios and gauging the efficiency of the company, we find that although the company has announced a higher efficiency due to centralization and supply chain management, yet there has been no considerate effect on the sales or fast turnover of the production, as the Stock turnover days have increased continuously year on year. Besides, there has been an increase in the Creditor days, which shows that company is retaining the cash for a longer period. This might be a problem later spoiling the goodwill of the suppliers. Besides, in a retail business, there should be some positive repercussions of the cash retention. Also, since bakery is a retail industry hence the goods are sold on cash payment or payments in immediate effect. Hence virtually the overall business is run on the creditors cost. In consideration to the productivity of the workforce there has been a positive impact as the S/E rate has been increasing, showing a rise in the sales contribution per employee.
The liquidity ratios are a reflection of the liquidity of the company and are very important for the suppliers to evaluate the repayment credibility of the company. While 2:1 is a sound ratio for Current ratio, a 1:1 is expected to be a good one for Acid test ratio. In consideration, both the ratios are quite less, almost half of the expected in case of Greggs. But this is not an indication of a liquidity crunch at Greggs, as Greggs is into retail business of bakery products, hence, it will hold only fast moving inventories of finished goods and all of its sales are made in cash. It is therefore expected to have a low Current and Acid Test Ratio.
Gearing ratios are an insight into the financing of the company. Besides, it gives an understanding of the capital structure of the firm. As from the Greggs ratios, it is evident that the company is meagrely reliant on the debt, and the, major contribution is all through the equity. This leaves for a thought that inclusion of debt, with a return higher than the cost of debt, will add to the profitability to the shareholders. On the analytical part, it is well understood that Greggs being a retail bakery business is cash in business with its capital expenses covered mostly by the suppliers in terms of Credit period. Hence a low gearing is evident and expected.
As evident from the calculations, Greggs is faring well for its shareholders as not only the EPS has increased to its best in last four years, but the dividend is also 17 pence, which stands to be the highest since 2006. Dividend yield, which is measure of the cash return for the shareholder investment, has also improved to its best since 2006. On the contrary P/E ratio, which is a measurement to estimate the market confidence in the future earnings of the company has detoriated. This is something to be thoughtful about. It indicates that although the company is making a great return value to its shareholders, yet the market is not confident of this continued earning in future. It is hoped that the company may come out with some reasonable announcements in near future to establish a higher confidence among the investors for its future earnings.
Improvements and Suggestions
Having deeply introspected each of the ratios in individual and group analysis, following points have been inferred as the key improvement areas that Greggs should look into in the following:
The company needs to work on the increased sales of its products, besides; it must seek ways to improve the operational efficiency. The centralization and improved supply chain management seems to be a great start and it is expected to bring a future benefit in a long run.
The company has been retaining cash for a longer period than committed in its annual report, which might not be a great sign, as too much of cash pressure can bust a supplier or harm the goodwill of the company. It might be possible that company is doing so, in order to finance its new operational policies, but in such case, it must ensure that they remain consistent with their goodwill.
The capital structure of the company has been mostly equity based. This leave the company to be vulnerable for a takeover, hence it is always advised to have an optimal mix of debt and equity. Besides, a debt with a higher rate of return in comparison to the cost of debt will improve the return on the shareholder's funds.
Lastly, the company needs to rethink why despite a good return in investment; the company has lost confidence among the investors on its future earning capabilities. It has made a good move by the series of buybacks in August, October and November, which has increased the return for shareholder and strengthened the control of the owners on the company. But the market awaits better innovation on this issue.
The combination of slower growth in the sandwich take-away market and increased competition from supermarkets and other businesses expanding into the market, will undoubtedly make it difficult for Greggs. But looking ahead, on a brighter end with a with a more customer focused approach, more investment in innovative promotions of product ranges should enable Greggs to perform better among its peer competitors.