Gelson’s: The Super Market

Find out how this Los Angeles grocery favorite has been able to protect its turf from the likes of Whole Foods, Sprouts and Trader Joes.

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.

Zach EfronMegan FoxAdrian GrenierEva Mendes

 

 

 

 

 

 

 

 

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.

 

Sources:

Publicly available public filings, CapitalIQ; market data as of 9 December, 2015.

http://www.laweekly.com/best-of/2013/arts-and-entertainment/best-place-to-spot-a-celebrity-2694965

http://www.tmz.com/2014/01/05/tv-actress-ayelet-ben-shahar-shoplifting-police-report-gelsons-house-of-lies/

http://www.bizjournals.com/sanfrancisco/blog/2014/02/tpg-san-francisco-arden-group-gelsons.html

https://www.gelsons.com/store-locations

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9 thoughts on “Gelson’s: The Super Market

  1. Now if they could only find a way to keep the paparazzi out! I wonder if this could be a scalable model to an upper crust neighborhood of NYC, Miami, London etc. The premium cache with celebrity status brand could attract wealthy customers in big markets. Wholefoods seems to have such a stronghold in this segment but this model could even one-up WF. Interesting model. Great Post!

    1. The investors certainly hope you’re right! Footprint expansion was part of the core thesis in the take-private. There is still plenty of white space in southern California (including San Diego), so they will likely want to stay there and leverage the brand strength in Southern California for some time, but I agree that once that market is saturated there should be room for this offering in other large metro areas with relatively affluent populations.

  2. I love Gelsons! (though I only ever shopped at the one in the valley…).

    I think their exclusive partnership with Wolfgang Puck is another great example. They partnered with Wolfgang Puck to offer prepared foods (salads, heat-in-the-oven pizzas, etc.) and in some stores had a small seating area and a Wolfgang Puck sign next to the Gelsons sign. I think this is an example of how a grocery store that does stock a high number of SKUs including every day national brand items is able to distinguoish itself from the competition. By choosing an iconic LA brand with a high-end reputation, Gelsons was able to reenforce their brand equity and reputation for high quality meat and produce.

    1. Exactly right. The company is very thoughtful in selectively seeking out brand accretive partnerships which again help differentiate it from both premium and traditional grocery competitors. Another example is Gelsons’ partnership with Jessica Alba’s Honest Company; they were the first retailer to carry the brand, and maintained an exclusive partnership in many locations for some time.

  3. Thanks for the post – I found it very interesting. Gelson’s in the Century City shopping mall was my mother’s market of choice and I think you did an excellent job of highlighting why. I know this isn’t a class about levered investing, but you mention the Company’s take-private earlier this year by TPG. I can’t help but question if all the factors you highlight for making Gelson’s the premium grocer of choice also make it an extremely risky business to lever up with debt. If we experience another financial slowdown, will Gelson’s customer base trade-down? If they do, the Company will be sitting on more expensive real-estate than its competitors (I don’t know whether the Company owns or leases its land) and also face high interest charges. A regional grocer also won’t have the purchasing power of its national competitors during a downturn to pass most of that pain on to its suppliers. Even Zac Efon might not be able to save the Company in a recession! Thanks again for the post – I think it does a great job of highlighting the key business decisions the Company has made.

    1. Very good point! The business did indeed see a sharp decline in the last recession, forcing them to take a fresh look at their promotional strategy and how they communicate value even as a purposely premium brand. Important as you say not to over-lever a business like this, the investors in this case left significant amounts of leverage on the table (sacrificing returns for reduced leverage during a downturn); also helped by the fact that the company owns three of its most valuable stores and one shopping center, which significantly reduces “true” leverage adjusted for leases.

  4. Love seeing a business model that shows success with a thesis focused on paying employees a higher wage, and realizing a return on that investment. These kinds of models are incredibly important to the broader economy and its sustained growth, as wage rates drive so many variables in the rest of the economy.

  5. This is awesome, Damola. Makes me want to visit one. I think it’s interesting that they see a high ROI on store up-keep, when it seems that so few competitors take this approach. I completely agree that a positive in-store experience increases loyalty and is also appropriate for the upscale market that they are targeting. Even some Whole Foods feel dingy to me. Let’s franchise these in SF, okay?

  6. Interesting piece; but I have to wonder if it’s just another flavor of the week in a very short-sighted West Coast market. Will they be able to take price when need be? They seem to have built a very loyal fan-base, I just wonder how scale-able the model is. Nonetheless I appreciate seeing people on skateboards in the store; very uber trendy.

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