The price of Greggs shares has dropped 29% in a year. Part of the blame can be laid at the door of the changes to employers national insurance contributions announced in the autumn budget at the end of October 2024, and their impact on the bakers profitability. In this article we aim to explore this impact in more detail.
National Insurance changes
Employers paid 13.8% on a workers earnings above £9,100. From April 2025 onward they will pay 15% above £5,000. Greggs will get little relief from the employers allowance—which is the amount of total salary an employer pays out before they become liable for national insurance payments—increasing from £5,000 to £10,500 given the size of the company’s wage bill.
| Old | New | |
| Rate | 13.8% | 15.0% |
| Threshold | £9,100 | £5,000 |
| Allowance | £5,000 | £10,500 |
In 2023 Gregg’s employed 30,085 people (2022: 26,928), and reported a wage bill of £439.1m (2022: £519.6m), for an average wage of £17,271 (2022: £16,304) which of course is subject to skew. It paid £38.2m (2022: £33.8m) of social security contributions (which in the UK is synonymous with employers national insurance payments) in relation to that wage bill, plus £30.3m (2022: £26.5m) of payments to employees defined contribution pension plans and £5m (2022: £3.3m) of equity-settled transactions inclusive of NI for a total reported employee costs of £593.1m (2022: £502.7m)
| 2022 | 2023 | |
| Wages and salaries (£m) | 439.1 | 519.6 |
| Compulsory social security contributions (£m) | 34.2 | 38.8 |
| Pension costs – defined contribution plans (£m) | 26.5 | 30.3 |
| Pension costs – defined benefit plans (£m) | 0.0 | 0.0 |
| Equity-settled transactions (£m) | 2.9 | 4.4 |
| Total (£) | 502.7 | 593.1 |
In the 2022 and 2023 financial years Greggs could pay each employee £9,100 before they start paying National Insurance at a rate of 13.8% on every pound paid over that threshold. So, if we take the number of employees for each year, multiply that number by £9,100, and add the £5,000 employees allowance, we get a total which we will call the below threshold salary. The calculations are set out in the table below, but for 2022 and 2023 we get £245.0m and £273.8m respectively.
| 2022 | 2023 | |
| (A) Total employees | 26,928 | 30,085 |
| (B) NI threshold (£) | 9,100 | 9,100 |
| (C) Employers allowance (£) | 5,000 | 5,000 |
| (A x B + C) Below threshold salary (£m) | 245.0 | 273.8 |
Now, if we take the total wages, salaries and benefits in-kind paid each year, subtract the below threshold salary, and divide the NI paid into that figure we should arrive at 13.8%. But, we don’t.
| 2022 | 2023 | |
| (A) Total wages, salaries, benefits in kind (£m) | 442.0 | 524.0 |
| (B) Total NI paid (£m) | 34.2 | 38.8 |
| (C) Below threshold salary (£m) | 245.0 | 273.8 |
| (A – C = D) Above threshold salary (£m) | 197.0 | 250.2 |
| (B / D) Calculated NI rate | 17.4% | 15.5% |
We end up with calculated NI rates of 17.4% and 15.5%. The reason is that we have assumed that every employee contributes the full threshold amount of £9,100 to the below threshold salary total. But, if an employee earns say £8,000 per year (maybe they only work a few short shifts a week, maybe they are a board member that should renegotiate) no employers NI will be payable, yet we are adding a full £9,100 to the NI shielded wages and salaries amount, which shrinks the liable portion of wages and salaries, and we end up with an inflated calculated NI rate.
For know, lets move on with the analysis and later, much later, get to a discussion of how this issue might be tackled.
How the NI changes affect Greggs profitability
So what we are going to redo the numbers for 2022 and 2023 using an individual threshold of £5,000, an NI rate of 15.0% and an employers allowance of £10,500. The salary numbers don’t change. But what you end up with is a new below threshold salary amount of £134.7m and £150.4m for 2022 and 2023 respectively, calculated by multiplying the number of employees by £5,000 adding the new employers allowance. The amount of wages and salary above the threshold is now
| 2022 | 2023 | |
| (A) Total wages, salaries, benefits in kind (£m) | 442.0 | 524.0 |
| (B) New Below threshold salary (£m) | 134.7 | 150.4 |
| (A – B = C) New above threshold salary (£m) | 307.3 | 373.6 |
| (C x 0.15 = D) New NI expense (£m) | 46.10 | 56.01 |
The results are that NI paid increases by £11.5m in 2022 and £16.6m in 2023. These might look like small numbers when compared to the hundreds of million in total employee expenses, yet it is an increase of 35.1% and 45.0% for 2022 and 2023 respectively.
The new NI scheme increases employee expenses by 2.3% and 2.8%, and total operating expenses by 0.84% and 1.01% for 2022 and 2023 respectively. That sounds like less of a big deal, but before we start to celebrate, let’s also a look at how operating profit and margin, and return-on-invested-capital (ROCE)1 change with this increase in NI paid.
Operating profit drops from £154.4 to £142.9m in 2022 and falls from £172.3m to £155.4m in 2023. That is a decline of 7.4% in 2022 and 9.6% in 2023. That is something that will get any investors attention. Operating margins drop from 10.2% to 9.4% in 2022, breaching the psychologically important 10% level, and decline to 8.6% from 9.5% for 2023.
| 2022 | 2023 | |
| Operating profit (£): | ||
| before | 154.4 | 172.0 |
| after | 142.9 | 155.4 |
| percentage change | (7.4%) | (9.6%) |
| Operating margin (%): | ||
| before | 10.2% | 9.5% |
| after | 9.4% | 8.6% |
| ROCE (%): | ||
| before | 21.1% | 20.1% |
| after | 19.6% | 18.1% |
And finally, to a number that actually matters. I jest, of course, but here at the storied investor we do pay extra attention to ROCE and the closely aligned return-on-invested-capital. Those NI changes produce a drop from 21.1% to 19.6% in 2022 and 20.1% to 18.1% in 2023. Since a quality screen will likely incorporate an ROCE over 20% check, this is significant. If Greggs stock does not make it through a screen, then it won’t get bought, and if its not in demand, its price should drop.
Conclusion
Based on this analysis the impact of the NI changes will be material, but not apocalyptic. Not great, not terrible. Management confirmed that these NI changes will be a headwind in their end of the 2024 financial year results announcement. They also spoke of a poor start to 2025. The share price fell around the day of the announcement, it also dropped in early January when 4th quarter results were announced and back in November 2024 when Deutsch Bank analysts opined on the magnitude of the impact themselves, although only slightly. These three drops helped the Greggs share price on its way to that 29% drop in a year, as for the first part of it, price movement was flat.
Notes
- To calculate ROCE I started with finding capital employed, using a simplified approach of subtracting current liabilities from total assets for each year. For 2022 this was £974.4m – £244.1m = £730.3m and £1,129.7m – £272.5m = £857.2m for 2023.
DISCLAIMER: James J. McCombie owns shares in Greggs. The Storied Investor has no beneficial ownership position in any of the stocks or securities mentioned. No comment in this article should be construed as a recommendation of, or opinion regarding the future performance of, any stock or security or collection of them mentioned herein. Opinions expressed are the author’s and do not represent the views of The Storied Investor.
The Storied Investor 