From Our Print Edition

After netting an all-time high $1 billion in sales last quarter, Grocery Outlet is poised for continued growth.

At Grocery Outlet, frozen endcaps are usually reserved for the very best offers, including WOW! deals like this one: DiGiorno Bacon & Cheese Stuffed Crust Pizza for $4.99 ($7.99 elsewhere) and Crispy Pan Pizza and Fully Stuffed Crust Pizza for $5.99 ($9.99 elsewhere).

Ever wonder what happens to boxes of frozen pizza that offer a chance to win tickets to Super Bowl LVII? — which was played in February. Or the pocket sandwiches in a funky new flavor that just didn’t resonate with consumers? What about the perfectly good gingerbread-flavored ice cream still available after the holidays? Savvy shoppers can find them all at Grocery Outlet for 40% to 70% less than their suggested retail price. And these aren’t brands you’ve never heard of before. In fact, the frozen aisle is a veritable who’s who of the department’s heavy hitters (think Jimmy Dean, Tyson, Eggo, DiGiorno and Birds Eye, to name a few), differentiating Grocery Outlet from private label- heavy deep discounters like Aldi.

‘We are still in the early stages of our growth story.’

Often described as the TJ Maxx of supermarkets, the Emeryville, Calif.-based extreme value retailer utilizes a unique opportunistic buying model that makes everyone happy: Manufacturers are able to move surplus inventory that would otherwise go to waste and consumers get some screamin’ hot deals. During a recent visit to a store in Warminster, Pa., we spotted Green Giant Simply Steam veggies for 99 cents, Newman’s Own pizza for $3.99 and Kashi gluten-free waffles for $1.99. While the assortment varies significantly from week to week, depending on what’s available in the marketplace, Grocery Outlet also carries a wide variety of products “made to order” (MTO). MTOs are best-sellers that are available all the time — at reduced but not crazy prices — so no matter the category, consumers always have a good option. Still, choices are limited. And shoppers do like variety. So how much bigger can this thing really get? If recent results are anything to go by, the sky’s the limit.

POTENTIAL FOR 4,000 STORES

Through Q2, growth has been especially strong in the fresh refrigerated department, prompting the installation of some additional cases.

During the quarter ended July 1, Grocery Outlet’s net sales topped $1 billion for the first time on the strength of a 12.5% gain. “And we are still in the early stages of our growth story,” said president and CEO Robert Sheedy in an Aug. 8 earnings call during which he also noted “the potential to operate over 4,000 stores in the U.S.”

Although the company opened four new stores (and closed one) during Q2, bringing its then-total to 447, the gains came primarily from a 9.2% increase in comp store sales. Those were driven by a 9.1% increase in the number of transactions (average transaction size was flat). In addition, gross margins increased 120 basis points to 32.3%, while gross profit jumped 16.9% to $326.6 million. “More customers are shopping us for the first time, existing customers are spending more with us, and overall customer satisfaction continues to increase,” said Sheedy in his remarks.

And those new customers aren’t just lower-income folks, he added, citing survey data that indicates more middle- and higher-income households are shopping Grocery Outlet than ever before. But will they still shop there once inflation eases? Sheedy thinks so. The company also saw an influx of new customers during the 2008-2009 economic downturn, he recalls. “And then as the economy improved, many of them stuck with us.” Plus, “We’re a better, stronger company than we were back then… [So] we feel really good about future retention and continued growth.”

Grocery Outlet recently opened its 450th store (in Las Vegas), one of eight planned for Q3, but Sheedy said that the company is “going after the tremendous white space that’s available to us.” To complement its organic growth efforts, the chain is developing strategic relationships with large property owners, looking at real estate from retailers that have gone out of business and considering small regional acquisitions, he explains. The company remains committed to 10% annual growth, “but we have lots of different avenues for that.”

Consumers won’t find much private label (yet), but top brands such as Eggo are widely available,
differentiating Grocery Outlet from Aldi and other deep discounters. Seen elsewhere for
$2.59 to $3.99, these SKUs were selling for
$1.99.

‘The strong partnership we have with operators allows us to out-chain the locals and out-local the chains.’

In the near term, however, Grocery Outlet expects to enter a ninth state, Ohio, later this fall, and after expanding into New Jersey and Maryland during the past two years, it will also continue to grow its presence in the mid-Atlantic. The company is still opening stores in its native California, too. But the key to its success in every market is its independent operators. Though they’re supported by the company, “Operators enjoy the autonomy of running their own stores, selecting localized products, making merchandising decisions and providing outstanding service to their customers every day,” said Sheedy during the Q2 earnings call. He add- ed, “The strong partnership we have with operators allows us to out-chain the locals and out-local the chains.” Sheedy also noted that although interest in becoming an operator is at an all-time high, fewer than 1% of interested candidates are selected to join the Grocery Outlet family. For those that are, average net income for “mature operators” exceeded $250,000 last year.

Spot boxes at the entrance to the store allow independent operators to feature refrigerated items popular in their communities. This one
included 10-ounce grass-fed, free-range New York strip steaks for $4.99.

GROWING FROZEN & REFRIGERATED

While the number of Grocery Outlet stores continues to grow, within stores, frozen and refrigerated sections are growing, too. “Frozen and refrigerated product demand has increased, and space requirements in both new and older stores have grown to meet that demand,” confirms senior director of frozen foods Mike Kirby.

Through Q2, however, growth has been especially healthy in the fresh refrigerated department, reports Vivian Son, senior director of refrigerated foods. “So in recent years, we’ve added cheese islands to better showcase specialty cheeses and home meal replacement cases to display our grab-and-go category. We have also [installed] egg cases to ensure our stores remain in stock, salad cases to increase the amount of fresh produce and bagged salad we can offer, and spot boxes that give our independent operators the flexibility to stock more refrigerated items that are popular with their community.”

‘We get [better-for-you] brands into the hands of customers at a discounted price. It gives them a chance to fall in love with the item and look for it again at a local health food store once the deal is sold through in our stores.’

Although most stores are equipped with 40 frozen doors with endcaps, 10 dairy doors, 36-foot deli sections, 16-foot meat cases and three spot boxes, “We have found success utilizing self-contained units as they are easily available and straightforward to install,” adds Kirby.

WOW! deals can also be spotted inline: check out the price on Tyson boneless, skinless chicken thighs.

In both refrigerated and frozen, NOSH products (natural, organic, specialty and healthy) that shoppers on a budget can’t always afford at conventional supermarkets are seeing some of the biggest gains — and creating excitement in the aisles, says Kirby. “We can provide extreme value on brands that are top of mind for our health-conscious customers,” which makes those dedicated sets a true destination. But manufacturers of NOSH products benefit, too, because they’re able to reach a much wider audience. “We get their brands into the hands of customers at a discounted price,” he explains. “It gives them a chance to fall in love with the item and look for it again at a local health food store once the deal is sold through in our stores.”

NOSH items (natural, organic, specialty and healthy) that hoppers on a budget can’t always afford at conventional outlets are seeing some of the biggest gains.

A PLACE FOR NOSH…AND PRIVATE LABEL?

In the store we visited, a standalone refrigerated case, a frozen endcap plus four doors in the frozen aisle were all reserved for NOSH products — though additional plant-based, organic and other specialty items were merchandised through- out the store. Three other frozen endcaps were reserved for WOW items — “the most exciting deals that we have in each store,” according to Kirby. On the day we visited, for example, there were three types of DiGiorno pizza for $4.99 and $5.99 in one bunker and Franks’ Red Hot Bites for $3.99 and One Bite Pizza Bagels for $1.49 in another.

We also spotted a fair number of locally made products, such as Pellman frozen desserts and Philly Gourmet sliced steaks, highlighting the ability of operators to customize their assortments with local brands. “For our independent operators, understanding their local shopper, being responsive to customer preferences and serving the com- munity is an important part of what they do,” explains Son.

A free-standing refrigerated unit features a variety of NOSH beverages from popular brands such as So Delicious, Planet Oat, Almond Breeze, Lactaid, Naked and Bolthouse Farms.

‘When you think about the business from a shop- per needs perspective, you can’t help but consider a private label program.’

One thing Grocery Outlet customers don’t see much of is store brands. However, says Kirby, “As our model evolves and our shoppers continue to look to us to complete their full shop, we see the benefit in expanding our high-quality consistent offering at a great value.” Does that mean the chain might consider an own brand?

“When you look at the data, it shows that, traditionally, loyal private shoppers enjoy bargain hunting for great quality and low prices. It just feels like a natural fit with our existing opportunistic treasure hunt experience,” says Kirby. “So, when you think about the business from a shopper needs perspective, you can’t help but consider a private label program.” What might the brand look like? When would it debut? What might it be called? “You will just have to wait and see for yourself when it hits the shelf at a local Grocery Outlet,” answers Kirby.

TECHNOLOGICAL ADVANCES

While opportunistic buys offer some of the biggest savings, “made-to-order” items available all the time allow consumers to do a complete shop — and still save money.

With such an eclectic, ever-changing assortment, how do operators successfully manage merchandising? “We leave a certain amount of flexibility by working off of a flow versus a schematic or planogram,” answers Kirby, who suggests it’s equal parts art and science. That said, Grocery Outlet just rolled out a new portal that’s expected to help with the science side.

“[The] new platform will provide operators with better analytics and easier access to information to make smarter business decisions,” said Sheedy in his Q2 earnings call. In addition to facilitating faster, better decision-making around everything from inventory to ordering to managing the mix, the portal will boost opera- tor efficiency, and time that used to be spent analyzing spreadsheets can be put to better use.

While Grocery Outlet doesn’t have a loyalty card per se, it does have a mobile app that delivers exclusive offers and coupons, displays the most up-to-date deals, creates shopping lists, saves digital receipts and automatically enters users into a “Win What You Save” sweepstakes. However, the chain is testing a more personalized app that will track specific customer trans- actions and allow more targeted communications. The company also maintains an e-mail database for delivery of WOW alerts and other news. “And thousands of shoppers follow our local store Facebook pages to keep up with new items hitting local shelves and the activities of independent operators in their community,” says Son.

Often praised by Grocery Outlet shoppers, the cheese section is a standout and includes a wide variety of specialty and plant-based options.

Although the in-store treasure hunt is a big part of Grocery Out- let’s appeal, 95% of stores offer on- line ordering via delivery partners Instacart, DoorDash and Uber Eats, including all stores in New Jersey, Maryland and Pennsylvania. “We continue to be delivery only, which is just a percentage of the total channel, and we’ll look to enhance that in the future,” said Sheedy. He declined to disclose exact e-commerce penetration, “but it’s a small percent of sales.”

A WORD TO POTENTIAL PARTNERS

The frozen section at Grocery Outlet is a veritable who’s who of top brands, including pizza category luminaries Red Baron, Freschetta, Tombstone and more.

Kirby and Son say they and the rest of the Grocery Outlet buying team are at almost every CPG trade show, looking for new partners to help grow its brand selection. What do they want them to know? “We work with major manufacturers as well as upstart brands to purchase opportunistic products — short-coded, package changes and other special inventory situations,” says Kirby. “Our world-class purchasing team is com- mitted to being an easy business partner, working quickly to negotiate deals with no slotting or placement fees. Anything that we purchase opportunistically is sold through our stores directly to customers.”

‘Our world-class purchasing team is committed to being an easy business partner, working quickly to negotiate deals with no slotting or placement fees.’

Adds Son, “There is never a quantity too large or too small for us to buy, and we are always quick to respond to any offers.”