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Grocery Outlet Soars on IPO

Strong investor interest results in a more lucrative IPO than expected
Grocery Outlet
Photograph: Shutterstock

Grocery Outlet’s unique twist on the discount food shopping model—combining strong values and a fun shopping experience enabled by independent store operators selling on consignment—proved to be a considerably more attractive investment opportunity than the company first envisioned, President R.J. Sheedy told WGB in an interview.

The Emeryville, Calif.-based chain, which only a few weeks ago contemplated a price of $15 to $17 for its initial public offering of stock, raised its price twice this week in response to strong investor interest, eventually pricing it at $22 per share. It began regular trading on the Nasdaq exchange Thursday afternoon near $30 per share.

The sale of 17.2 million shares in the IPO would generate some $378 million—about $128 million more than initially expected—which the company said it would use to pare down debt. It was trading near $29 market closing price on its first day of trading, indicating the market views the company worth $2.8 billion.

RJ Sheedy

Photograph courtesy of Grocery Outlet

“As we did our roadshows, we saw a lot of positive interest around our business,” Sheedy said in relation to the rising IPO price. “That was nice to see. I think people are excited by deep discount.”

Sheedy said investors responded strongly both to Grocery Outlet’s positioning within the overarching value trend, but were further enticed by the company’s operating model, which uses independent store owners—frequently family groups like husband and wife teams—to  provide locally tailored assortments and marketing to the merchandise centrally procured by the company.

The buying organization at Grocery Outlet, Sheedy explained, utilizes longstanding relationships with suppliers to obtain discounted brand-name merchandise and fresh foods, including a wide selection of what it calls NOSH (natural, organic, specialty and healthy) products. In turn, Grocery Outlet provides value in a way that differs from hard-discount rivals sucg as Aldi, which achieve savings through tightly controlled private brands and efficient stores utilizing a lean labor model.

Grocery Outlet stores typically stock about 5,000 items at a time but from an available selection of some 80,000 items, providing a “treasure hunt” atmosphere at stores that also have strong customer appeal, Sheedy said.  “You never know what you’re going to find."

He said interest in the discount trend began to broaden following the recession and shows no signs of letting up.

“Our customers are bargain-minded, but that’s a very broad demographic,” he said.

In a stock prospectus, Grocery Outlet indicated it sees the potential to more than double its current 316-store base in states in which it currently operates, and could quadruple its store base to 1,600 locations by expanding to surrounding states. Over the long term, it said the market potential exists to establish 4,800 locations nationally.

“We want to grow but in a disciplined way,” Sheedy said. “That said, we do a have a lot of runway for growth.”

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