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May 14, 2024
Should Grocery Outlet Join the Private Label Bandwagon?
Grocery Outlet, the closeout grocer, plans to introduce its first private label program in the third quarter of 2024, with a goal of increasing basket sizes and margins.
On the company’s first-quarter analyst call, RJ Sheedy, president and CEO, said about 100 private-label SKUs will be introduced by the end of the year. The first items to hit the stores will be in the beverage and grocery categories, followed by additional items in both of these categories as well as within the dairy, household, and baking categories.
Sheedy said he expects that private-label assortments will “become another key differentiator, providing even more value and excitement for our customers” while supporting “inventory consistency.” Many items will be priced cheaper than those they’re replacing.
Sheedy also said private-label offerings “will all be unique to us,” also supporting differentiation. He added, “Many of them will be more unique items, whether in the NOSH (natural, organic, specialty, healthy) space, different formulations, new adds to the shop that create another reason for customers to shop our stores beyond just the value that they provide.”
Finally, he said private labels will offer a “better margin” for the grocer and its independent store operators.
When initially revealing the plan during its fourth-quarter analyst call last year, Sheedy noted that the private brand will initially focus on “everyday value commodity categories” that help customers complete full shops. He added, “These items will help us capture larger baskets and create a stickier customer relationship.”
Examples of the offerings included water, baking items, pasta, and cheese.
Often described as the T.J.Maxx of supermarkets, Grocery Outlet, with nearly 500 stores, utilizes an opportunistic buying model that the chain’s pricing research from October 2023 showed offered savings of 40% compared to conventional grocer competitors. In comparison to discount retailers such as Walmart, Grocery Outlet is priced about 20% lower on average.
Grocery Outlet reported in a recent investor deck it’s a “preferred CPG partner for a non-disruptive, brand-protected sales channel” that helps liquidate excess inventory. Long-standing suppliers cited included General Mills, Kellogg’s, Campbell’s, and P&G, while emerging suppliers cited included Chobani and Newman’s Own.
A major part of Grocery Outlet’s appeal is offering a treasure hunt experience, where shoppers score deals on items being phased out. With one analyst expressing concerns about the private label’s impact, Sheedy in the Q&A session said the private label will feature a “treasure hunt component” through different methods.
“Seasonal products certainly lend themselves to that being in and out of those items as the seasons come and go,” he explained. “And then just on a regular everyday basis, we look forward to having the treasure hunt element be a part of the assortment there as well, where we are pulsing in and out of items and creating that newness and excitement within private label, the same that it exists within the branded side from an opportunistic standpoint.”
Grocery Outlet’s private label debut comes as private label sales in U.S. grocery reached an all-time high penetration of 20.7% in 2023, according to the Private Label Manufacturer’s Association. Walmart, Target, and Kroger are among those making aggressive private label expansion efforts as consumers seek out savings amid inflationary pressures, while private label-heavy ALDI recently announced a stepped-up expansion plan.
Discussion Questions
What potential benefits do you see from Grocery Outlet adding private label to its offerings?
Do you see private label detracting from Grocery Outlet’s treasure hunt experience or creating other complications?
Poll
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This is a big change of strategy for Grocery Outlet which, traditionally, has relied on selling branded products (acquired from close-outs and other sources) at deeply discounted prices. Having those brands available will remain a critical part of Grocery Outlet’s appeal, not least because its customers love the treasure-hunt dimension of the shopping experience. However, there is no harm in having some private label lines alongside brands – and let’s be clear the private label offer will be a fraction of the total SKU count. Operationally, as Grocery Outlet opens more stores and expands it is probably sensible to have some of its own labels to ensure a degree of consistency and reliability on staple items.
It makes sense for Grocery Outlet to introduce private label lines alongside branded products. It adds consistency and reliability while preserving the thrill of treasure-hunting for customers. Smart move!
In our national research shoppers give private label high marks in quality and price relative to national brands. So here, since there are deeply discounted prices for branded products, it will be interesting to see if Grocery Outlet can still gain the price image that conventional retailers have in that regard. It will also be interesting to see how they do with quality relative to more established private label brands.
So, I don’t necessarily agree with reports that Grocery Outlets will “differentiate” itself with private label, except perhaps to a degree, in the specific type of “outlet” category it competes in. Otherwise, differentiation would have been true in 1964, rather than 2024.
I think of Trader Joes in 1967, or Loblaws in 1984, when I think about “differentiation,”
In years to come, other retail chains followed suit, introducing their own private label products under their own brand names and treating their programs similarly, but some, much better than others.
Grocery Outlet should be in that market since 21% of grocery items are private label, so long as it does not try to replace the close-out national brand business. Creating private label products has never been easier. Grocery Outlet does not need to invest in manufacturing or production facilities. Few retailers do.
Almost all of their process can be outsourced, just like everyone else’s. Besides operating, distributing, and selecting products, Grocery Outlet can also focus on marketing.
Most Grocery Outlet stores are independent, often owned by married couples, which means that the company needs to “sell” the program to them. Similar to Whole Foods, Grocery Outlets allows its local stores to be flexible with their product offerings to meet local tastes.
The approach won’t be ground breaking in so much as it will be imitation, but there is nothing wrong about that! Private label programs and independent stores have had varying degrees of success. President’s Choice, Supervalu’s programs, Topco, Wetterau, and many other companies have been successful in the past.
While Grocery Outlet stores are independently owned, they are all part of the Grocery Outlet brand, and the business model is strictly closeouts and in-and-out deals – – and now private label!
Grocery Outlets is a good company and I wish them much success. – Db
The drawback of pursuing the treasure hunt for consumers is that the reliability of most items is very unstable. In fact, it is quite common that entire subcategories can be out of stock which can be a source of frustration. Several months back, Grocery Outlet was out of Cottage Cheese and Oatmeal as a category, causing customers to make another trip. However, establishing a consistent source of inventory of the top essential items in value driving categories can help reduce that customer frustration.
A focused relatively small assortment of 100 or so items across the store does not detract from their overall treasure hunt strategy as it will be likely less than 1% of their total sku count across the store. If priced competitively and at the right level of quality, this may create more loyalty for customers as they know that these items will most likely be in stock and will be worth another trip
By introducing private label products, Grocery Outlet aims to boost basket sizes and margins while enhancing customer loyalty. Offering unique items at cheaper prices creates value and excitement for shoppers. The “treasure hunt” aspect adds to the appeal, mimicking its signature experience. This strategy aligns with industry trends as private label sales surge, allowing Grocery Outlet to compete effectively amid growing consumer demand for savings.
While there may be concerns about private label affecting Grocery Outlet’s treasure hunt experience, the company plans to integrate it seamlessly. Grocery Outlet aims to maintain the excitement by pulsing in and out of items, offering seasonal products, and ensuring uniqueness in its private label assortment. Balancing this while preserving its core appeal is key to avoiding complications and sustaining customer interest.
I’m really unclear on how this will work; not the process, but the numbers: GO’s entire M.O. is to take advantage of inefficiencies in other retailers…I’m skeptical they can secure an advantage competing with other private lables on an equal footing. Also, based on my personal experience, I question how central the Treasure Hunt Experience is for their shoppers: unlike soft goods, where purchases of identical goods are infrequent, and there is little expectation of repeat purchases, that’s the main idea with groceries; sure it’s great to get a familiar brand for practically nothing, but it’s even more disappointing when you come back the next week and find it’s gone…for me, anyway.
The reasoning is solid, I just don’t know if it makes sense to do a full spread as you go to them for great pricing on national brand items. It may make sense in non-foods or general merchandise but unless your private label equivalent is as good as or better than national comparable, (and you can back it up), it will be hard sell. One other thing- it would mean that those item would be permanent- so would you lose customers because you don’t have the national brand the week you happen to go shopping in that store and they don’t feel good about the private label? This will be interesting to see how it plays out.
Launching private labels will improve Grocery Outlet’s margins with new revenue drivers. Expanding the assortment with exclusive and ephemeral items will also boost foot traffic and differentiate Grocery Outlet, which can deepen loyalty.
Consumers will gain more choice during their treasure hunts and even better value for money on everyday essentials. Limited-time and seasonal private label products will inspire consumers to visit more often to see what’s new in store.
It is a smart strategy for Grocery Outlet to offer private label products. Relying on branded products that are close-outs or seasonal makes shopping unpredictable. While many of Grocery Outlet’s customer enjoy the thrill of the treasure hunt, it is nice to know that you can depend on getting some of your staple items on a regular basis.
I wouldn’t call private brands a differentiator. Not having private brands is the exception rather than the rule at this point. Even so, Grocery Outlet’s private brand foray will plump up margins and enable product consistency that its opportunistic buying model doesn’t support. Private brands will serve as an anchor to Grocery Outlet’s otherwise scattered assortments.
My first thought as I read the article was about the similarities to TJX, but then the next immediate thought was about the big difference between Grocery Outlet and TJX. That would be the treasure hunt aspect of the shopping experience. And then I see that Craig Sundstrom addressed that issue perfectly. Private label…??? Absolutely. GO has to inject some predictability into the inventory and customer expectations. Food shopping has to have a whole different level of predictability than treasure hunt apparel shopping. Any kind of consistent out-of-stocks are going to be a deal breaker for long term customer satisfaction. It’s not a discount if it’s not there to buy.
This is not a significant shift in its marketing strategy. The treasure hunt still remains. This latest initiative takes advantage of the continued demand for private label merchandise. I see two significant advantages: 1. Using selective private label offerings to create a differential advantage. 2. Taking advantage of the supply chain consistency offered by the range of private label products.
Adding private label at Grocery Outlet is a good move because none of its savings and value platform need to change. Going forward, it’s the same treasure hunt of value message, now with the added promise of consistency.
The embedded base of customers already coming for a treasure hunt of savings in brands they know may not always find the exact same thing on the shelf. By having even a small private label offering, it builds customer confidence in that they can count on finding, buying a constant in-stock baseline of value product. Both sales and bottom line will increase for Grocery Outlet with this move.
As long as Grocery Outlet doesn’t forget their core customer and business, it makes sense to evolve a bit and try new things. Today’s Retail environment with the many layoffs and bankruptcy filings we’re seeing is telling us that evolution is necessary