Grocery Outlet Gathers Momentum
Retailers are a creative lot, and there are many unique approaches to serving shoppers evident throughout the industry. However, there aren’t many companies as unique as Emeryville, Calif.-based Grocery Outlet, or that have as bold a vision for growth.
As the name implies, Grocery Outlet is an off-price retailer of food and consumables focused on delivering value to shoppers. It operates small-format stores where shoppers can find a limited assortment of predominantly branded merchandise, about half of which has been purchased opportunistically, offered at prices that the company refers to as “shocking values.” Elements of the company’s strategy are evident in the operations of retailers such as Big Lots, 99 Cents Only, Save-A-Lot, Trader Joe’s and Costco. But no one does it quite the way that Grocery Outlet does, as evidenced by the company’s approach to ownership, entrepreneurship, operations and accountability, which in turn drives the company’s financial performance and supports the long-term view that the United States could support nearly 5,000 Grocery Outlet stores. The likelihood of that happening revolves around the fact that the company doesn’t have store managers; instead, it has independent owner-operators.
“The best way for anyone to understand what we do is just walk into a store and ask for the operator and talk to them,” says Eric Lindberg, CEO of Grocery Outlet. “It is the difference between managing a store and owning a business. We think we are providing the American dream in the form of running a business, with the best of two models coming together.”
Grocery Outlet does things that the independent owner-operators, known as IOs, can’t do, such sourcing merchandise, managing the supply chain and maintaining robust technology systems, Lindberg explains.
“The IOs provide for us the things that we can’t do centrally, which is hire and manage locally, give back to the community in a way that is unique and authentic, live in the community, and make decisions at the point of intercept with the customers,” he notes.
That’s what Grocery Outlet refers to as “small business at scale,” and it has proved to be an effective combination with accelerating momentum. The company ended last year with 380 stores after adding 35 new locations. The combination of new stores and a full-year same-store sales increase of 12.7% — the company’s 17th consecutive annual increase — enabled the company to grow overall sales by 22.5% to $3.13 billion.
This year, plans call for between 35 and 38 new stores spread between Grocery Outlet’s core West Coast markets and its newer northeastern market. It’s part of a strategy to expand by 10% annually in existing and contiguous markets, while also entering new areas. Grocery Outlet went public in June 2019, and since then has maintained the view that it can open 1,900 stores in existing and contiguous states. Over the long term, the company believes that the market potential exists to establish 4,800 locations nationwide.
Expansion Eastward and Beyond
Grocery Outlet is largely a West Coast phenomenon, but going forward, it expects considerable growth to occur in the Northeast, a market it entered via a small acquisition a decade ago. There are currently 19 Grocery Outlet stores in Pennsylvania, but over time Lindberg foresees 150 to 200 stores in that state, as well as in nearby New Jersey, southern New York, Maryland, Delaware, West Virginia and Virginia.
“Then we have an opportunity to go north into New England, and we can go into the southeast,” Lindberg says. “We think the Southeast would be a fabulous market for us to penetrate, and we’ve already done some work going west into the Pittsburgh and the Ohio Valley area.”
As the company penetrates eastward, it relies on what Lindberg calls a very robust supply chain, consisting of nine facilities: five dry facilities, and four other facilities operated by Atlanta-based Americold. To make it all run and take the company to the next level, in January Grocery Outlet named former Sobeys executive Tim Scott its chief supply chain officer.
“As we grow and expand, we think Tim is our guy for the next 15 plus years as we look at our supply chain supporting the East, continued growth in the West and probably a new geography yet to be identified,” Lindberg notes.
Wherever the company grows, it looks to lease space for stores in the 15,000-square-foot to 20,000-square-foot range. Often, finding a good location will trump size, and the company will make the space work, which has led to some variability in sizes.
“We take a lot of second- and third-generation boxes, but we like the 15,000-square-foot store because it requires discipline, in particular with the SKU count,” Lindberg observes.
Store Count by State
California: 221
Washington: 67
Oregon: 56
Pennsylvania: 19
Nevada: 9
Idaho: 8
Total: 380
Source: Company Reports, as of Jan. 2, 2021
Not For Everyone
A familiar narrative in the grocery industry has long centered on three key areas; it’s an intensely competitive industry with low margins, where scale is essential. The industry is challenging enough that it’s hard for multibillion-dollar retailers to compete with one another. Why, then, would someone want to become an owner-operator of a food retailing concept with the word “outlet” as part of its brand identity, and how many people would find that opportunity appealing?
Plenty, is the short answer. Grocery Outlet shares with investors that it fields 20,000 inquiries annually from people interested in becoming an IO. According to Lindberg, the number is actually higher than that, because during the pandemic, the company began fielding more inquiries from outside of the grocery industry. However, the big number at the top of the funnel number gets whittled down quickly as people go through a self-assessment to determine whether they have the right mindset to be successful in the grocery business and as part of the Grocery Outlet system.
“It takes two things to be successful in Grocery Outlet,” Lindberg explains. “One is the mindset of being an entrepreneur, waking up every day and chasing a dream, working hard, with no one really telling you what to do. The other is the skillset. We can teach the skillset, but we cannot teach the mindset. I would take mindset 10 to one over the skillset.”
To make that determination, aspiring IOs go through a 40- to 60-hour assessment. They spend time in stores, where they’re encouraged to grill other independent operators about the pros and cons of the company and its approach. The process is designed to make sure that aspiring owners are entering into a potentially lifelong commitment with their eyes wide open.
“We want people who are willing to put in the sweat equity and live and work the model,” Lindberg says. “We don’t want to have a partner in the system that is wrong. We have a big responsibility to make sure people know what they are getting into. We are only looking for 15 or 20 people a month, so there are more than enough out there [for us to] be very, very selective."
Once selected, the process becomes more rigorous. Applicants enter an Aspiring Operator in Training program, where they’re stationed in a store to work and learn what it’s like to run a Grocery Outlet location. They become part of a cohort that goes through a four- to six-month training program that also includes classroom work. Upon completion of the training program, applicants submit business plans to apply for new stores as they become available. Based on the strength of the business plan, which includes a competitive analysis of the local market, operational strategy, marketing actions and projected financial performance, IOs are selected for new stores.
A Hands-Off Approach
By the time that a potential IO has completed the rigorous screening process and gone through the extensive training, Grocery Outlet has sufficient confidence in the individual that it doesn’t engage in heavy-handed oversight. This approach is also somewhat unique in retail, where most conventional retailers have a familiar hierarchy of store, district and regional managers. Also, depending on the size of the organization, there may be additional layers of SVP and EVP roles all running retail operations with a tight fist to ensure compliance with centrally designed strategies. Grocery Outlet, meanwhile, doesn’t even have planograms.
“There is a bright line between what we manage and what the independent operator manages,” Lindberg notes. “What we agree on is the brand standard, and that is something we determine.”
The brand standard relates to a base-level set of expectations that shoppers will find Grocery Outlet stores clean, bright, well merchandised, fully stocked and well signed. The independent owners have the ability to control all of the variables related to store experience, because they control the labor budget. IOs order merchandise and manage inventory, market locally, and hire and train employees.
“We have spans of control that are much larger,” Lindberg says, referring to the company’s field reporting structure. “Our district managers are DSMs, and the S is for sales. Instead of overseeing 10 stores, they have more like 35 to 40 stores. We are selling ideas, coaching, asking questions, and taking the best of what we are seeing and sharing, and we have robust systems to do that. It is very different than regular retail. We are really letting the independent owners do what they think is best for their customer and their community. They are using the tools that we give them, and we all agree what the brand standard is."
‘Shocking Values’
With connection to the community a key aspect of the Grocery Outlet value proposition, IOs make store-level merchandising and assortment decisions, but they benefit from centralized buying. Heather Mayo, EVP, chief sales and merchandising officer for Grocery Outlet’s East region, calls the model “buy centrally and deploy locally.”
Mayo, a former Sam’s Club executive, occupies a hybrid role at Grocery Outlet, essentially functioning as an overall manager of her designated region, with a large span of control and passion for store operations and merchandising.
“We have a great buying team that has just come together on the perishables side,” Mayo says. “We hired three people across produce and meat that combined have more than 100 years’ experience.”
That experience paid off recently, when merchants were able to procure vacuum-sealed beef loins and offer them at $5.99 a pound, for a price point above $25.
“We wanted to test a higher price point and really drive excitement for the customers,” Mayo recounts. “We started out with that item to test it. We didn’t know if it would work or not — we thought it might, but it did so much better than we ever expected, we have made it an everyday item.”
The role of merchants at Grocery Outlet is to discover value and present a curated assortment, a point Mayo and Lindberg both emphasize, especially since stores typically carry 5,000 items. That means the best merchants have to be hunters, according to Mayo.
“They are looking for great deals and new items,” she notes. “They understand what’s hot in the marketplace and what’s on trend. They are attending trade shows so they know what the latest products are coming onto the market, and they are looking at innovation.”
That can mean visiting competitors’ stores to identify interesting products, but it’s also about developing relationships so when branded suppliers have inventory, they call Grocery Outlet first. This approach works well enough that Grocery Outlet is able to secure branded goods at such attractive prices that the company has very limited exposure to private brands.
“We have been able to find branded product we can purchase opportunistically that we put on the shelf at prices below what we can find and control ourselves with private label,” Lindberg says. “Private brand will probably not be a 30% penetration rate for us, but it could be 10%.”
- An Aversion to E-Commerce
Most grocers saw explosive growth of e-commerce during the past year, but not Emeryville, Calif.-based Grocery Outlet.
“It is still not part of our strategy,” says Eric Lindberg, the company’s CEO. “We watch it. We stay close to it. We spend time talking to some of the partners out there. Could we turn it on? Yes.”
The prospect of doing so isn’t appealing to Grocery Outlet, however, because of the added cost. Digital grocery is currently heavily subsidized, and larger retailers are able to look the other way on profits, according to Lindberg, who maintains that the magic of off-price retail and the treasurehunt sense of discovery is in the brick-and-mortar store.
“Right now, our customers today are not telling us they are willing to substitute the value they get for the delivery of the product,” he notes. “We think we’ve got a lot of growth without having to go to the complexity of the e-commerce world.”
