Greggs' warning over the high cost of wheat

Greggs, which sells sandwiches and pastries through a 1,400-strong chain of high street shops, said soaring wheat prices are set to push up costs over the coming months

It warned that the increase in costs and continued pressure on consumers' incomes would make trading conditions tougher in the second half.

The group's warning follows a rise in pre-tax profits for the first half of the year, up 12 per cent to 18.5m.

Greggs has performed well during the downturn as it focuses on affordable products and deals aimed at consumers with less disposable income.

In the first half of the year, the company sold more than two million 1.80 meal deals. Around 4.5 million breakfast rolls have been sold since Greggs launched the range in February.

US wheat futures rose to a two-year high last week after key grain producer Russia banned exports as a drought threatened to decimate its harvest.

Greggs' chief executive Ken McMeikan said the wheat shortage might result in "a very small increase" in its prices, stressing that the impact would be limited because the company bought part of its wheat requirements for the rest of the year before the Russian export ban. "We'll be very cautious about how much we buy at this sort of price," he said.

"We believe the price at the moment is overinflated, and we'd expect it to come down as the situation settles."

Mr McMeikan said the company would normally expect wheat prices to be around 120 a tonne, but it is currently trading between 158 and 170 per tonne.

"Our view is that there has been an over-reaction, and we would hope prices would come back down," he said.

"If the prices stay around 158 to 170 per tonne, there could be a small price increase in the products in our stores."

Greggs buys around 90 per cent of its wheat from the UK.

Mr McMeikan said the pressure on the trading environment looks likely to increase in the second half and the group will remain focused on managing costs tightly.

Sales for the 26 weeks to July 3 showed a 2.9 per cent increase to 321m, with like-for-like sales up by 0.7 per cent.

Mr McMeikan said the group's expansion plans are on track. It opened 26 new shops in the first half of the year, taking its estate to 1,437 outlets.

It intends to add between 50 and 60 shops to its estate this year, followed by at least 70 a year from 2011 onwards.

At the end of last year Greggs unveiled plans to open 60 new stores in Yorkshire.

The group is to open at least 600 stores across the country, creating 6,000 jobs, over the coming years.

Of these around 600 staff will be based in Yorkshire in an estimated 8m investment in the region.

Mr McMeikan said there are many parts of the country where Greggs is under-represented.

"Currently more than 50 per cent of the UK population do not have a Greggs nearby. It remains our belief that a further 600 plus shops can be opened in the medium term with little cannibalisation of sales from existing shops, " he said.

The expansion plans will introduce shops to locations where customers work and travel, such as transport hubs and industrial and retail parks.

Brewin Dolphin analysts cut their 2010 profit forecasts in response to the higher wheat prices, and warned that more expensive grain would weigh more heavily next year due to a knock-on effect on chicken and pork prices.

"Rising wheat prices are likely to place greater pressure on 2011 earnings as there will be a full 12 months of higher wheat prices and the prospect of protein price inflation through higher animal feed prices," they wrote in a note.

Headache for food groups

Escalating wheat prices are set to become a major cost for food groups over the coming months.

Last week the UK's biggest food producer, Premier Foods, warned shoppers that bread prices will have to increase following the sharp rise in the cost of wheat.

The group, which makes Hovis bread, said it will have to pass rising wheat inflation on to retailers, which could lead to a 10p increase in the price of a loaf of bread. Wheat costs have rocketed by around 50 per cent since late June.

Harsh droughts and wildfires in Russia, one of the world's largest exporters, are thought to have killed around a fifth of its wheat crops.

There are also worries for food groups about escalating costs of other raw materials such as cocoa, dairy, paper and plastic packaging prices.