Photo: iStock
Will Grocery Outlet Find Room for 4,000 Stores?
Through a special arrangement, presented here for discussion is a summary of a current article from October’s Frozen & Refrigerated Buyer magazine.
Grocery Outlet recently opened its 450th store (in Las Vegas) while reaffirming its belief that as many as 4,000 can open in the U.S. CEO RJ Sheedy said on Grocery Outlet’s second quarter earnings call, “We are still in the early stages of our growth story.”
Often described as the T.J.Maxx of supermarkets, Grocery Outlet 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.
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.
In the quarter that ended July 1, sales topped $1 billion in a quarter for the first time on the strength of a 12.5% gain. “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 at Grocery Outlet than ever before.
A key to its success in every market, however, is its independent operators, who have the autonomy to run their own stores, including selecting localized products. Sheedy added, “The strong partnership we have with operators allows us, as we say, to out-chain the locals and out-local the chains.”
Grocery Outlet also credits its flexibility to work with major brands and upstarts on opportunistic buys, whether short-coded, package changes, or other special inventory situations. Vivian Son, senior director of refrigerated foods, tells RFBuyer, “There is never a quantity too large or too small for us to buy.”
Discussion Questions
What threats may Grocery Outlet face in reaching its expansion vision? Do you see similar market dynamics supporting off-price grocers as those favoring off-price apparel chains?
Poll
Loading …BrainTrust
Mark Price
Adjunct Professor of AI and Analytics, University of St. Thomas
John Karolefski
Editor-in-Chief, CPGmatters
Grocery Outlet is profitable and is delivering strong sales results, so the business model clearly works and is ripe for expansion. That said, the 4,000 store number is based on a view of where Grocery Outlet could expand, not necessarily where it will expand. It’s more of a long-term aspiration to show potential than a definite roadmap. The point is that Grocery Outlet can be bigger. Expansion will continue but is somewhat constrained by the fact it takes around 4 years for new stores to mature and payback the investment.
I think this it’s perfect storm time for Grocery Outlet. Trading down, from fashion to food, is becoming the norm. Food deserts are in way too many places. And the real estate available for expansion is also probably within reach. If they started this business in 1946 and are only now ramping up at this pace, their growth line could definitely look like a hockey stick!
That being said, the dollar stores have been doing their own version of this for many years, but without saying it. I believe Grocery Outlet can even grow beyond 4,000 stores, but they need to watch out for the dollar store juggernaut.
As for locations, locations, locations, the vast majority of Grocery Outlet’s existing stores are in California and the West, with another cluster in the Mid-Atlantic region. Their business model clearly gives them the confidence to plan for massive growth in every potentially profitable region in the country. To succeed, they’ll need to have a solid IT strategy and the HQ management infrastructure to maintain their culture and processes—especially their buying function.
Given that inflation has hit grocery prices hard, the timing could not be better for Grocery Outlet to expand. The opportunistic buys give consumers a sense of adventure, and the discounts represent a hedge against inflation. I imagine this concept will continue to appeal to middle class and higher-income consumers since the dramatic growth and grocery prices have hit everyone.
I have a new favorite expression for regionalizing and localizing:
“…allows us, as we say, to out-chain the locals and out-local the chains.”
That alone is a business model foundation worth aspiring to.
The Grocery Outlet has a runway to grow and expand into new metro areas. The size of the stores can be 15k to 25k square feet. The smaller-sized Grocery Outlet may be close to the size of the larger drug stores that are being closed across the country by the major chains. From a density perspective, I have seen two grocery stores within 4 miles of each other in a moderate to low-income suburban area so they can have multiple stores within a small metro area.
This is the time to expand as inflation has taken a hit on many households. I wouldn’t be surprised if you see them double over time. However, these stores can look worn out and in disarray at times. The key is to be able to keep a standard for cleanliness and organization in these stores for customer retention.
Scale is actually a challenge with an opportune buy business model. Finding enough deals to fill 4,000 stores is different than finding for 450. Only a few Retailers have managed that model, and they do it with a lot of buyers in the market all the time. I presume that part of the independent owned and operated model includes the ability of “head office” to still manage the majority of the inventory. Those challenges aside, with the uncertainty of Albertsons/Kroger and the sameness of grocery stores currently in the market, there sure seems to be room for a good operator to expand in between the traditional grocers.
What an exciting concept. The combination of an opportunistic buying model and the local franchise model enabling the owners to provide locally sourced products may be the operating model that will help Grocery Shop expand significantly in the disrupted grocery industry.
There are cautionary tales in the retail and grocery industries where such ambitious store expansion strategies have backfired. Although we are experiencing relentless inflation and a customer base seeking value-centric quality grocery products, the growth potential is substantial. However, Grocery Shop should take a calculated and strategic approach to growth. A test, learn, and experimental model will help guide their expansion plans.
Grocery Outlet has found the holy grail of today’s market dynamics and consumer needs: providing a retail platform for manufacturers to move surplus inventory and in turn, offering prices that shoppers find compelling. The result will certainly be continued and accelerated growth for Grocery Outlet, though growing ten fold will come with its own set of challenges for the brand.
Given the trade-offs shoppers are willing to make when food shopping in this inflationary environment, Grocery Outlet is in a good position to capitalize on these trade-offs. Given their current store footprint, they definitely have room to expand. With a compelling value proposition and the flexibility their model offers its independent operators, they could be a force to deal with in new market areas.
What’s missing from this discussion is that I’m seeing Grocery Outlet stores in many small towns that have few food options beyond Dollar General. Just based on their expansion into rural communities, they should hit that expansion targets.
Am I the only one who thinks we’re starting to get a bit over-stored on the grocery front? There are certainly “food deserts” they could do well in, if that is their plan. Good to have brands rather than private label alone…that really did turn me off about Aldi (and Kroger delivery)…but it just seems to me that it’s going out of control.
There’s obviously a lot of moving parts between the formats. Per Forbes, there are about 1,500 drug stores that are expected to close in the next few years that carry some of the same center store grocery, alcohol, and HBC items as a Grocery Outlet. That could free up some real estate for Grocery Outlet and also open up some customer demand. I know that they are not like-for-like comparisons. But, at the same time, we are seeing a large increase in store count for dollar stores that carry groceries, so I can see your concern.
There are a number of problems:
1) The model – i.e. selling overstocks, blemished items, etc – limits selection, and thus, ultimately, the shopper base.
2) The franchise model leads to a lack of consistency (in image, certainly, but perhaps operations as well).
3) There are plenty of well-funded and experiened operators who have similar expansion goals, but frequently without the limitation(s) of #’s 1 and 2.
The similarity(ies) between off-price food and apparel is an interesting question – which I’ll concede I haven’t much thought about – but my initial reaction is the former carries a cetain stigma that the latter doesn’t (OTOH, the second-hand apparel market I think has a lot of comonality…at least until it became trendy).
Sure, Grocery Outlet could expand. And they should. Shoppers are tired and angry over high grocery prices for favorite brands in traditional supermarkets. Plus, there is “shrinkflation” — prices are stable but there is less product in packages. That is a hidden form of food inflation.
Grocery Outlet should press the gas pedal on this expansion. What they do works, and the current economy calls for it.
Grocery Outlet has earned a greater level of respect as they’ve grown, the story, the promise being clear and compelling, and their ability to own control over local products gives them an edge over chains. Where never-shoppers might have teased in the past about GO’s quality and food safety, they have won over many new shoppers with a friendly, authentic vibe, and have made the case for their good deals.
4,000 stores… That’s almost as many as Walmart (approx. 4,700 stores). This potentially puts Grocery Outlet in a logistically convenient position. Approximately 90% of the US population is within ten miles of a Walmart. That’s convenient! Can Grocery Outlet be the same?
The consumer trend towards off-price retail is a tailwind for Grocery Outlet. We also are in the right econimic conditions for this major brands at rock-bottom-prices retailers.
The challenge ahead for Grocery Outlet may be experience and the rising tide of Grocery channels private label.
First, since Grocery Outlet is primarily selling closeout products, consistency may be a challenge. It may be hard for consumers to hold on to favorites as store inventory constantly turns to serve up the latest close outs. Some consumers will be OK with this but others who seek familiar favorites on every trip may pull back.
Second, today’s grocery channel private label can rival many national brands. Consumers who have already found both value and quality in private label may not be so easily swayed by Grocery Outlet’s value proposition.
Still, the retailer remains a good option for bargain hunters, making the right market/location key. This just has to be enough to sustain 4,000 stores.