Grocery Outlet: Christmas cereal in July

Smell the milk before you drink it.

Grocery Outlet: if you’re a grocery store, you probably want to be a specialty retailer

Grocery Outlet is a privately held ‘extreme-value’ grocery chain serving price conscious consumers with 210+ stores across California, Idaho, Nevada, Oregon, Washington and Pennsylvania (Company Website).  By offering its customers the lowest available pricing on non-perishable items through a unique sourcing partnership with CPG suppliers, Grocery Outlet has created a profitable and winning grocery business. With a long track record of strong same-store-sales growth and a unit base that has almost doubled in the past 5 years, Grocery Outlet is a good example of a company with a highly effective union between operating and business models.

Business Model: More like a model business

Grocery Outlet plays a unique role in the grocery supply chain connecting price conscious consumers with overstock, damaged or rapidly aging inventory that consumer packaged goods companies are not able to place (or do not want to place) in their traditional distribution channels.  Grocery Outlet opportunistically buys inventory from over 3,000 suppliers at prices far below wholesale value (https://groceryoutlet.com/news/grocery-outlet-announces-partnership-hellman-friedman).  It then works to move these items off its shelves with rapid stocking into their stores and bargain pricing.

As a result of its unique sourcing capabilities, Grocery Outlet offers the lowest prices on an eclectic mix of dry and packaged goods groceries, a price that can be up to 60% lower than competitors and a selection that covers less than 1/10 of what a traditional store offers (Company Website; http://business.time.com/2010/06/21/big-expansion-for-grocery-outlet-a-favorite-among-frugal-foodies-in-the-west/).  The Company embraces the ever-changing nature of its inventory and markets the ‘treasure hunt’ nature of the shopping experience to a value-conscious consumer base that is willing to sacrifice choice for superior pricing.  By combining extraordinarily low prices with a family atmosphere created by Grocery Outlet’s franchisees, Grocery Outlet has capitalized on the weak economy and increasingly fragmented consumer buying behavior to build lasting loyalty amongst its customers.

Operating Model: Move product, make money

Grocery Outlet’s business model is enabled by opportunistic sourcing capabilities. Grocery Outlet has a large team of expert buyers with established relationships and a deep understanding of CPG production timing.  Buyers proactively reach out to CPG companies to purchase excess/aging product that CPGs are willing to sell at deep discount as an alternative to disposal.  The scale of Grocery Outlet’s store network enables Grocery Outlet to act as the sole buyer of excess product, if necessary, and simplifies the acquisition of product.

A meaningful fraction of the product that Grocery Outlet sources is approaching expiration. Once a batch of product has been contracted for sale, Grocery Outlet is able to move the product to market in highly efficient fashion. Grocery Outlet has centrally located distribution centers to aggregate product that is delivered either by CPG or Grocery Outlet trucks.  From these warehouses, the product is expeditiously pushed out to individual stores which have flexible and no-frills shelving displays to handle various amounts of product and packaging sizes.   The geographic concentration of the store base further allows the Company to get product on the shelf with haste.

To drive in store efficiency, independent franchisees are compensated on store performance and given an extraordinary degree of operational control.  Store operators have control over all aspects of store operations from layout to pricing and are empowered to customize the presentation of product to drive high inventory turnover and maintain margins.  The Company also invests heavily in technologies to improve its supply chain transparency and information sharing between corporate warehouses and individual operators. Grocery Outlet’s information systems provide insight into product availability in the warehouses and allow operators to communicate demand for particularly product categories.

Why you can’t be Grocery Outlet

Grocery Outlet’s low-cost value proposition and ‘treasure hunt’ shopping experience for customers is built around the Company’s ability to buy and move product at deep discount to wholesale pricing.  Grocery Outlet’s ability to source, place and sell a large amount of overstock and expiring product consistently is a differentiating capability.  Grocery Outlet’s team of buyers have deep industry knowledge and the Company’s concentrated and scale store network, carefully picked and incentivized franchisee base and logistics capabilities facilitate the Company’s ability to efficiently move the random, expiring assortment of product from its shelves into the hands of consumers.  The importance of geography and franchisees to GO’s success require the Company to be thoughtful about expansion, making sure to target contiguous states and maintain retail density.

With alignment between operations and business strategy, Grocery Outlet delights both suppliers and customers. Thanks to Grocery Outlet’s role as a credible buyer of scale, CPGs can lower the costs of mismatched supply and demand and moderate the bullwhip effect in the supply chain while young Roberts in Califonia get to eat Santa-branded Frosted Flakes in late spring.  The savings are GREAT!

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2 thoughts on “Grocery Outlet: Christmas cereal in July

  1. Grocery Outlet’s value proposition for customers reminds me of the many dollar stores that we have seen this semester (Dollorama, Family Dollar, Dollar General, Dollar Tree…) in other courses. However, in recent years these dollar stores have done a great job of developing consistent sources of low cost supply, reducing the need for their purchasing teams to constantly search for overstock items from manufacturers and providing certainty for consumers about what will appear on store shelves. It appears as though Grocery Outlet is still heavily dependent upon purchasing overstock lots on an opportunistic basis. How do they evaluate this risk? Do margins vary significantly product-by-product or quarter by quarter based on their ability to find these overstock opportunities? Can they ensure that they will always have certain types of goods in stock?

  2. Very interesting company Rob! Grocery Outlet must be best-in-class in logistics to be able to have significantly lower prices than other stores. I think it covers a great market today, but I wonder how sustainable is their business model in the longer term. This business model relies on other supermarket flaws (i.e., supermarkets stock more food than what they sell, leading to large amounts of perished items). I predict (and hope) that supermarkets will get better analytics/forecasting capabilities to predict sales and reduce their own waste (both with goals of profitability and becoming more sustainable). However, I recognize it may take a few decades till significant improvements in this area are achieved. Thus, I’m sure Grocery Outlet will have figured out a new competitive advantage by the time their current one fades away.
    – Marc

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