Gelson’s Market is a premium grocery chain operating eighteen stores in Southern California. The company has managed to distinguish itself in a commoditized Los Angeles grocery space as the preferred high end shopping destination and as a celebrity favorite, finding its way into iconic Hollywood media staples like LA Weekly, TMZ, and HBO’s Entorouge. This brand cache combined with a focused and complementary operating strategy has translated directly into financial results. The company has been able to price at a premium without sacrificing volume, allowing for per store metrics that compare favorably to best-in-class peers; the value at which Gelson’s was taken private in early 2015 is equivalent to $25 million per store, compared to current public market enterprise values for renowned best-in-class peers Whole Foods and Sprouts which translate to $23 million and $21 million per store respectively.
Gelson’s value proposition to customers essentially boils down to: 1) top quality meat, produce, and deli offerings, 2) an experiential customer draw with aesthetic, clean stores and abundant, friendly staff, and 3) one stop shop offering complete with national brands. This combination sets the chain apart from other premium grocers who may offer quality meat and produce and an experiential draw but are not one stop shops, and also from traditional grocers like Kroger, Safeway and Albertsons who offer a full shop but typically not a quality or differentiated experience nor premium meat and produce offerings. Gelson’s has in effect bridged this gap and created it’s own lane to great success and customer affinity.
Gelson’s success in its approach has been enabled by a number of key operating decisions which serve to support its business model, highlighted below. These decisions contribute to a higher operating cost structure; but with overall profit margins near industry highs, it is evident that the investment is generating worthwhile returns by driving premium pricing ability and sustained high customer traffic.
Key operating model decisions:
- Location, location, location. Gelson’s value proposition is highly valued specifically by affluent customers. As such, the company has been very thoughtful about where to locate stores, and has been willing to pay higher per-square-foot rents to be in premium locations with stores in areas like the Pacific Palisades, Century City, Newport Beach, Santa Barbara, Calabassas, and Hollywood. The company owns three of its stores, and has signed very long term leases in the remaining, effectively protecting its positioning and accumulated brand equity within these areas.
- Employees as an asset. Gelson’s pays its workforce at above average per hour rates, and tends to overstaff its stores in order to always have helpful, smiling faces ready to offer personalized customer service. The first thing customer sees upon walking into their stores is a help-desk staffed by a customer associate the following mission statement prominently featured: “To make shopping anywhere else unacceptable for consumers who value quality products, cleanliness, convenience, and personal service”. This focus on customer experience helps drive loyalty and sustained volume despite premium pricing.
- Look good, feel good. Gelson’s invests heavily into the appearance and feel of its stores via higher initial store build costs and more expensive (and more frequent) store remodels than competitors. This helps drive a consistent positive customer experience with clean, well kept stores and updated facades. The company elects to matain wider isles (cutting down a bit on selling space), brighter lighting (increasing utility costs), and elegant displays (higher material costs), correctly assessing that the incremental investment would yield a worthwhile financial return.
- We’ve got everything you need. Gelson’s has also made the conscious decision to stock a high number of SKUs within its stores. The result is that the format appeals to a wider breadth of shoppers – those who specifically come for premium organic, produce and deli items, as well as those who want to do all of their shopping at one place but are willing to pay for a premium experience. This also allows Gelson’s to defend against competitive entries from premium grocery peers with more selective offerings. Say, for example, a Trader Joes opened across the street from a Gelson’s, even the most loyal TJ shopper would still have unfulfilled needs and would potentially remain a Gelson’s shopper for certain items.
Publicly available public filings, CapitalIQ; market data as of 9 December, 2015.