With it being a slow period with a holiday this week and ahead of earnings season in a couple of weeks, we wanted to present an idea that we think may have been overlooked and not getting a lot of attention: Grocery Outlet (GO).
It's an extreme value grocery chain with stores that are much smaller than a typical grocery store, equating to lower rent fees and operating costs. GO says that its prices are approximately 40% lower than those of conventional grocers and 20% lower than the leading discounters. Its stores require neither membership fees nor bulk purchases for customers to save money.
Another interesting aspect is that its stores are run by independent operators (IOs), with the goal being to create a neighborhood feel through personalized customer service. IOs participate in their communities. This also allows for a localized product offering. In fact, GO notes that its IOs select approximately 75% of merchandise based on local preferences. Of note, the vast majority of its IOs operate a single store, so the stores tend to have a small business feel to them.
The company has some pretty bold goals for store growth. Since 2006, its store base has grown from 128 to 323 stores across the West Coast and Pennsylvania. These efforts have more than tripled sales from $640 mln in 2006 to $2.3 bln in 2018. So, it's a pretty sizeable chain at this point. In 2018, GO opened 26 new stores, and it expects to open 32 new stores in 2019. Its goal is to expand its store base by approximately 10% annually. Looking ahead, GO believes it could build 400+ additional locations just within those states in which it currently operates. Over the long term, GO believes the market potential exists for 4,800 locations nationally.
How is it able to offer such low prices? GO says it sources product opportunistically at significant discounts, which are generated from order cancellations, manufacturer overruns, packaging changes, and approaching "sell-by" dates. Then, GO supplements its "WOW!" deals with everyday staples in order to provide a convenient shopping experience.
In sum, Grocery Outlet just made its IPO debut in June 2019, so we don't think it's on a lot of radar screens. We like the combination of highly discounted prices, the IO structure (sort of like a franchise model, with IOs putting up much of the cap-ex, but with the benefit of the large buying scale of whole chain) and store growth opportunity. Also, GO says its stores have performed well across all economic cycles, as demonstrated by its 15 consecutive years of positive comps.
As a side note, the author of this profile visited a store for the first time when he was in Portland last week and was quite impressed with the prices, wide aisles, clean stores, helpful service, etc. The company reminds us of Aldi, another deep discount, no-frills grocer that is very popular and very successful (see CNN.com article). We also agree with GO's view that value-buying is becoming the new normal for consumers. Aldi is not public in the US, but we view GO as a similar model that looks compelling.