Grocery Outlet officials this week confirmed that the extreme value retailer will open three to five new stores on the East Coast next year, confirming an expansion first reported by WGB.
The emerging growth front promises to bring a new complexion to the competitive landscape in the greater Philadelphia area, where Grocery Outlet has quietly run a handful of stores for more than a decade, but has spent the last year revamping the format to better resemble its fast-growing sisters on the West Coast, recruiting and training a roster of potential operators to run stores, and focusing investment in new real estate closer to major population centers, said Eric Lindberg, CEO of Emeryville, Calif.-based Grocery Outlet, in a conference call reviewing the chain’s third-quarter results this week. Grocery Outlet expects to open 35 new stores next year overall.
Greater Philadelphia is already absorbing an influx of price-focused competition from hard discounters such as Lidl and Aldi, but Grocery Outlet brings a different twist to the model: Its assortment focuses not on private label but on branded goods it acquires at steep discounts leading to a description as a “TJ Maxx of groceries.” Grocery Outlet’s operating model is also unique, using independent store operators who sell on consignment and focus on local service.
As reported previously, Grocery Outlet has been identified as a tenant in a forthcoming mixed-use project in North Philadelphia and has been seeking store operator candidates in several cities around Philadelphia in recent months.
“We're very encouraged by both the quality of the real estate sites we're seeing and the operator talent we’re finding,” Lindberg said this week, according to a Sentieo transcript of the earnings call Nov. 10. “While we’re energized about the growth potential of the East, we will manage this expansion with the same disciplined growth we have taken in the West.”
Lindberg said he visited the East Coast last month, checking in on the 19 existing stores that over the last year have adopted the “Bargain Bliss” format of its West Coast sisters; met with about a “half-dozen” prospective store owners now training at those sites; and toured potential new locations with the chain’s real estate executives and Heather Mayo, the former Sam’s Club and Boxed executive named to lead the chain’s East Coast division a year ago.
“I was really happy with what I saw,” Lindberg related, citing “really high engagement with the IOs,” or independent operators. “They’re leading in that market. When we walk stores, I mentioned that they never look better—merchandising, freshness upfront, item selection on the power wall and the endcaps, adjacencies in the market. We’ve invested in marketing, so every store back there has the Bargain Bliss package. That label rolled out last year and it’s looking great.”
On the real estate front, he added, “I think we're going to see some nice opportunities in the broader Pennsylvania and New Jersey market.”
Sales, Comps and Profits Up in Q3, but Moderation Concerns Market
Rapid growth of new stores out West, in the meantime, contributed to a sales increase of 17% in the fiscal third quarter that ended Sept. 26, officials related. Comparable store growth of 9.1% in the quarter was above expectations but represented a sequential decrease from the reported 16.7% comps in the second quarter. A forecast for “mid-single-digit” comps in the current fourth quarter evidently met with investor consternation as Grocery Outlet stock was trading down by more than 7% early Thursday.
Scott Mushkin, an analyst for R5 Capital, in a note to clients said the sales guidance was a “real challenge.”
“Management indicated that comps were running in the mid-single digits, which is well below where our research suggests traditional grocery is trending. Indeed, Grocery Outlet has experienced a sharp comp sales slowdown, resulting in the company seeing some of the best industry comparable sales performances in the first half of the year and now some of slowest,” Mushkin wrote.
Lindberg said, however, officials were “thrilled” with the quarter. “I think every point we measure, 2020 as a year and the quarter, it’s going to be a better year. Overall comp consistency, it’s strong across departments, regions, vintages. We’ve stabilized [comps] in the mid-single digits. We are seeing increased baskets.”
Sales totaled $764.1 million, helped along by a net increase of 35 stores since the same period last year, and net income climbed by 225.2% to $40.5 million. Trends toward larger baskets and fewer trips, consistent with performance since the onset of then pandemic in March, continued, with gross margin climbing by 40 basis points to 31.2% of sales on reduced markdowns and throwaway coming with the larger volumes.
The “mid-single digit” comps, however, put Grocery Outlet at about the same rate as it was growing prior to the pandemic, evidently leading some investors to conclude wild growth of the pandemic’s early months have since passed. Grocery Outlet’s comps are also trailing some conventional competitors reporting over a similar period, though Lindberg was quick to bat back comparisons, citing Grocery Outlet’s unique characteristics.
“I don’t have a great sense for when or how this will start to unwind and return to normal [or] what normal [will] look like,” Lindberg said in response to an analyst question. “We know that food-at-home has helped anyone that’s in the food business, the grocery business, the discount business. I mean, we’ve all sort of benefited.
“How this starts to return, how long, how sustaining it is? I think it's just too tough to call, but we just remain super focused on value, very focused on the IOs, very focused on delivering what our customers expect us to deliver to them, which is incredible value,” he continued. “It's really tough to compare us to all the other conventionals out there. We’re this treasure hunt, limited SKUs. We’re hard-hitting values. … We don’t have a lot of the other things that other retailers use for their strategy.”
Karen Short, an analyst with Barclays, in a note to clients said Grocery Outlet was missing out on e-commerce growth enjoyed by many of its conventional peers. A general lack of price sensitivity among shoppers and trip consolidation trends are also likely to be working against Grocery Outlet.
R.J. Sheedy, president of Grocery Outlet, related that the company was continuing to see a lot of opportunity to buy goods to provide strong values for shoppers, counting its buying expertise as a unique competitive advantage.
During the quarter, for example, the company secured 50,000 cases of discontinued coffee K-Cups from a top branded supplier whose client discontinued carrying them, offering 50% saving to shoppers on that item in stores. A branded manufacturer that discontinued a coconut water line to focus on core brands—a common practice among CPGs in the pandemic—resulted in a 60,000-case purchase and a $1.99 price point per item in stores, what Grocery Outlet said was a 67% discount. Grocery Outlet also scored another deal, buying 30,000 cases of 1-gallon containers of salsa. These are priced in stores at $4.99, or about 60% off retail.
“Our opportunistic and everyday inventory is healthy, and the pipeline remains strong,” Sheedy said. “Our buying team continues to identify and source products that deliver the 'wow' shopping experience for our customers. We are seeing the benefit of long-standing supplier relationships as well as those that have been established in recent months.”