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Grocery Outlet Execs Share ‘Secret Sauce’ Ingredients

Grocery Outlet’s co-keynote speakers at the FISMC luncheon were Paul Miller, VP-grocery, and Weldon Weatherly, VP-fresh meat, frozen & refrigerated foods.
Grocery Outlet’s co-keynote speakers at the FISMC luncheon were Paul Miller, VP-grocery, and Weldon Weatherly, VP-fresh meat, frozen & refrigerated foods.

Last updated on August 15th, 2016 at 04:06 pm

Grocery Outlet opened a new location in Costa Mesa in December, adding to its 250-plus store count and venturing for the first time into Southern California. Executives from the company offered a peek behind the curtain into the operations of the chain during a recent Food Industries Sales Managers’ Club (FISMC) event honoring Grocery Outlet.

The company’s stores offer shoppers discounts of 40 to 50 percent on groceries vs. conventional competitors’ prices, and a “treasure hunt” experience to boot.

The majority of its stores are in five states—California, Idaho, Oregon, Nevada and Washington—but it also operates 20 stores in Pennsylvania.

People think of Grocery Outlet as a small-store operator offering a limited assortment, and that is true. Its stores range from 10,000 to 25,000 s.f. and its daily assortment consists of about 5,000 SKUs.

What sets Grocery Outlet apart is the way it buys and sells.

Sixty percent of what shoppers find in stores is “opportunistically” purchased, said Weldon Weatherly, VP of fresh meat for the San Francisco-based chain. The other 40 percent is made to order (MTO). As for selling the products, most often a husband-and-wife team deeply embedded in the local community independently operates its stores.

The accidental but genius idea

Paul Miller, VP of grocery, said the way Grocery Outlet operates today is the result of a 70-year-old mistake with a fix that turned out to be genius.

Founder Jim Read had one store in San Francisco, and he had so much surplus product that he ended up shipping truckloads of it north to Redmond, Oregon. He told the recipients to sell it all and when they were done to split the profits with him.

“That is to really oversimplify the independent agreement that’s alive and well today,” Miller said.

Fast-forward a decade and a half, and in 1971, the first supplier agreement was signed with Del Monte Foods. In 1972, the first independent operator agreement was officially signed with the Downs family in Redmond.

Before long, shoppers began wanting reasons to come back to Grocery Outlet more consistently. If only it sold meat or fresh produce or milk or “fill in the blank,” Miller said, they would frequent the stores more often. As Grocery Outlet added meat, produce and dairy departments, customers responded by shopping its stores more often.

In 2009, Eric Lindberg and MacGregor Read, the third generation of the founding Read family, took the positions of co-CEOs. Shortly after, the company took on a private equity partner, Berkshire Partners, to get the second-generation capital out of the business. Since then, it’s been a “rocket ride,” Miller said. The company has nearly doubled in size the past seven years.

“Same people in place, same management, third generation running the business—but they (Berkshire) really told us to do two things,” he said. One was “open stores faster, so we spent a lot of time building the infrastructure for people to do that. The second thing was to tell people what you do.”

Berkshire Partners left the business about two years ago, and in its place is a new private equity partner, San Francisco-based Hellman & Friedman.

“Same culture, same people, accelerated growth plans, and I would say probably the two most important things in this next chapter of Grocery Outlet will be developing new markets—and L.A. is huge,” Miller said.

Equally important in the next year or two will be a buildup in the Mid-Atlantic market as the company adds more locations in Pennsylvania and surrounding states, perhaps New Jersey and Maryland.

This year, Grocery Outlet will open a record 30 locations, followed by 35 new stores next year and 40 in 2018. Stores won’t be opening in northern California or Washington because the company is reaching a saturation point in those markets.

Today, Grocery Outlet’s priorities boil down accelerated growth and doubling down on “wows” and deep values in product assortment. Grocery Outlet tracks its “wows,” which Weatherly described as products that sell three times faster than the department average and have savings vs. conventional retailers of greater than 40 percent. It also has “scores,” which sell seven times faster and offer savings of more than 50 percent. Data shared at the FISMC event showed that all of these items were national brand products.

Most notable among its priorities perhaps is a new focus on NOSH—natural, organic, specialty and healthy products—categories that have seen 30 percent annual growth increases.

“It’ll be a $200 million business at the end of the year across the store—frozen, deli … and hugely important for us to reach a new customer,” Miller said.

That new customer group, he said, is Millennials who don’t really shop Grocery Outlet today.

Why attracting the 54 and older crowd is a good thing

To continue to drive traffic and sales, Grocery Outlet listens to shoppers. It has evolved with them.

“We understand who our customers are,” Weatherly said. “We do a lot of exit interviews. We want to get an understanding of why they shop us or what they do or they don’t like about us. We want to understand what they do and don’t like about our competitors.”

The No. 1 goal its shoppers have is to save money. Maybe some felt like they had to shop at Grocery Outlet in 2008, when the recession pummeled their finances, even though it is not a dollar store. Its customers have kept coming back even after their incomes recovered because Grocery Outlet offers a different experience than dollar formats.

“Our No. 1 everyday bacon item—you would probably say something that sells for $1.99, but it’s not—it’s a 3-lb. bacon that’s priced competitive every day at $9.99, and we sell a heck of a lot of it,” Weatherly said.

Grocery Outlet is extremely popular with customers ages 54 and older; not so much with shoppers 34 years old and younger.

“So you want my sales spiel on why that’s a really good thing?” Miller said. “Here’s how we think about it: The number of people that will be over 54 or 55 between now and the middle part of this century is the fastest-growing population of shoppers out there, and we view the younger consumers as more of an opportunity. There’s not a lot of Millennials coming into Grocery Outlet today.”

The company expects that the 30 percent growth in NOSH product sales will help push Grocery Outlet over the top with younger consumers, Miller said.

“One thing is for sure—we’ll never be everything to everybody,” Weatherly said. “We know that we can’t be all things to all people, and I think that’s part of our success. We don’t offer full-service departments, so there are no butchers, no bakers. But we continue to look for items that complement the current mix that we have to keep some customers coming back.”

The opportunistic model

Shoppers don’t know what an MTO is and don’t understand opportunistic buying, but they understand value, Weatherly said. He explained how the opportunistic sourcing model works.

“Opportunistic comes to us in a number of ways. It includes code date, production overruns, packaging changes, right-sizing—as suppliers like to say—or downsizing, but we see it week in, week out,” he said. “Most of the opportunistic is purchased at a 50 percent discount at least to wholesale, or the best possible price. And we take those savings that we procure and pass those on to our customers.”

The MTO side of the business is a “little trickier,” Weatherly said. These are the items that are convenient and keep shoppers coming back.

“If we can’t find an item, a like item, whether it’s the same brand or the same type or the same size, we have to source it through MTO. We work really thin on margin in those items,” he said.

Grocery Outlet works hard behind the scenes to keep the ratio of opportunistic to MTO at about 60/40. MTOs improve its terms and help build basket size right along with customer traffic, but opportunistic buys boost margins for Grocery Outlet and its operators. It is a difficult balance, 60/40, and it may change, but “we’re really comfortable with that number,” Weatherly said. “We know that opportunistic sourcing has been, is today and will continue to be our core business.”

Grocery Outlet surveys the prices of its top five or six competitors every week in each market. It strives to be at 40 to 70 percent of the price charged by conventional competitors and 15 to 25 percent under WinCo or Walmart on a basket of about 300 items, including highly visible MTO items.

Lest anyone thinks having prices that much cheaper than the “big Ws” is “BS,” Weatherly said, “You think about it, 60 percent opportunistic/40 percent MTO. MTO has to be priced to meet or beat a WinCo or Walmart or in this case a Food 4 Less or an Aldi. You could definitely hit those type savings.”

Grocery Outlet’s strong relationships with suppliers go back in some cases 40 years or more.

“Our suppliers know that when we make a deal, we’re never going to divert it,” he said. “We’re never going to sell it to a secondary market. We’re, in fact, going to take ownership of it and run it through our stores that we own. You’ve got to have personal relationships along with business relationships, and it’s a joy to do business with all of our major suppliers.”

There are five major sources for opportunistic purchases: “close coded,” excess inventory (seasonal or event-driven items), packaging changes, new item introductions and discontinued products.

“Why do people need to move this product? Simply stated, they need to free up their inventory. They need to turn their dollars,” Weatherly said. “We’re a safe haven to get that accomplished for a supplier.”

Suppliers who need that safe haven can pick up the phone and call. Someone will get back with them within an hour or two.

“After we negotiate the price and we agree upon that, there are no forms to fill out. There is no slotting. If we were to put your item on ‘feature’ or an ad, there are no ad fees. It’s simply send us a UPC or a picture of the item,” he said.

Weatherly said once a purchase order is cut, the retailer expects to have the product within two to three weeks.

Grocery Outlet’s buyers have full autonomy when it comes to not only purchasing product, but also where to send it.

What’s perhaps most surprising about the company’s business model is that while the stores carry 4,000 to 5,000 unique SKUs within their walls, by the end of the year, each store will have scanned 120,000 unique SKUs.

“You come in, you see it, you like it, you should buy it, because if it’s not an MTO item it’s an opportunistic item and it’s probably not going to be there the next time you’re in,” Weatherly said.

In 2015, more than 145 unique SKUs went through deli, and of those 85 percent were bought opportunistically. All the 1,300 unique yogurt SKUs were bought opportunistically. In less than a decade, Grocery Outlet has gone from shipping approximately 11,000 cases of yogurt each week to between 55,000 and 60,000 cases per week now. Yogurt has helped make the retailer a destination for shoppers. Conventional yogurt products go for three for $1 or two for $1, and Chobani can be had for 59 cents.

Out-chain the locals, out-local the chains

Grocery Outlet finds a location, signs a lease, fixtures the store and fills it with inventory. Then, just as Jim Read did with Leonard Downs in 1972, it signs a business agreement with operators to be “consigned salespeople to sell inventory that’s owned by us,” Miller said. “The reason it is so powerful is because that really gives us the ability to out-chain the locals and out-local the chains.”

Grocery Outlet has $2 billion in buying power, its own distribution network and IT, and it can market in such a way as to afford even television commercials.

“But when the product is sold by families—a husband and wife, maybe grown children involved with the business—that are living in and very involved in the community, that’s a powerful thing,” Miller said.

Many of them come from retail careers with Safeway, Albertsons, Target, Costco, Winco, Trader Joe’s and Aldi.

“They’ve got 20 or 25 years with whatever retailer and you see this twinkle in their eye,” Miller said. “They remember when retailing was fun, when they actually could put items that they thought were good for that particular area on an endcap or support a local community.”

They are entrepreneurial families. Being an independent operator for Grocery Outlet is a level up from managing a store, and they can run a business the way they used to with their family in the community where they live.

“It’s just really, really powerful stuff,” Miller said. “If we could bottle it, we would, but we can’t. We work really hard to find the right people to take over the stores.”

He said Grocery Outlet knows that this model works because its customers have put it in the company of Trader Joe’s and Costco for a positive shopping experience and whether they would recommend the store to a friend.

“It doesn’t matter if it’s yelp, Facebook, Twitter…it’s all about how they love the new merchandise that comes into the store. They love to find the very best deals that arrive on a weekly basis,” Miller said. “They don’t shop us for their complete shop. They shop us first knowing that we don’t have everything they’re going to want on their shopping list.”

Its formula is working. For five years, Grocery Outlet has experienced about 14 percent compounded annual growth, Weatherly said. It had $1.5 billion in sales in 2014. This year it will finish close to $2 billion this year, and its estimated sales for 2018 will be right at the $3 billion mark, he said.

New stores will help push those sales. Grocery Outlet has identified 800 new store opportunities in the West alone. Its current plan for its overall store count breakdown includes its 250 core stores in the West, 200 in the greater Los Angeles market, 250 in the East and about 100 in Idaho, Nevada and Arizona.

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