GROCERY OUTLET EXTENDS REACH TO TEXAS WITH YES!LESS BUY

Mark Hamstra

BERKELEY, Calif. -- Grocery Outlet here is taking its discount food concept east to Texas, where last week it received bankruptcy court approval to acquire 16 Yes!Less stores from Fleming Cos., Dallas.

The terms of the transaction were not disclosed. Grocery Outlet also acquired a 17th Yes!Less store through a separate negotiation with the landlord. Fleming had closed all of the locations last month as part of its bankruptcy reorganization.

The acquisition marks a nearly 1,000-mile jump across the country for Grocery Outlet, which has 118 stores in eight Western states offering primarily closeout groceries at deep discounts. The company, which executives said has annual sales of about $500 million, is privately owned by brothers Peter and Steven Read, sons of company founder, Jim Read.

Grocery Outlet had been working behind the scenes for several weeks in anticipation of the acquisition, James Patitucci, president and chief executive officer, told SN in an interview last week. Patitucci left his post as senior vice president of sales and marketing at Ralphs three years ago to take the helm at Grocery Outlet.

"We've been working in the marketplace for a while trying to get these things squared away," he said, noting that Fleming had approached Grocery Outlet with an offer to sell the stores.

Before the bankruptcy court in Dallas approved the transfer of the store leases last week, Grocery Outlet had already begun training the former Yes!Less store managers at its facilities in California. Patitucci said Grocery Outlet hired a total of 25 store managers and support personnel from the Yes!Less division to remain with the company.

Most of the acquired stores are within 100 miles of the Dallas-Fort Worth area. One is in Shreveport, La. Patitucci said the company would eventually need to add a warehouse facility in the area to support the stores. It could not be determined how the stores would be supplied at first.

The first two former Yes!Less stores are scheduled to reopen as Grocery Outlets today in Dallas and Arlington, Texas. Patitucci said he expects to complete the conversion by mid-September.

The stores are slightly smaller than traditional Grocery Outlet locations -- about 15,000 square feet of selling space vs. 16,000 to 17,000 square feet at the company's traditional West Coast locations. As a result, Patitucci said he expects the Texas stores to offer about 500 to 1,000 fewer stockkeeping units -- about 2,500 to 3,000 vs. 3,500 to 4,000 in traditional stores.

Patitucci also said he expects to be able to take advantage of the design of Yes!Less stores to lower labor costs.

"We've got fixturization in there that is more labor-efficient, with back-loading refrigeration and freezers," he said. In addition, customers will bag their own groceries at the Texas stores.

The Texas stores will be company-operated. All but three of the company's other locations operate under a business model in which for individual store operators -- similar to franchisees -- earn commissions based on sales.

The company works with more than 2,500 suppliers to obtain discontinued merchandise, which it offers at up to 40% below retail prices, according to reports. Lately, it has been adding more perishable products, Patitucci said.

Grocery Outlet is venturing into one of the nation's most competitive markets, where Wal-Mart has tripled its market share in the past five years, and the three largest traditional supermarket operators -- Kroger, Albertsons and Safeway -- vie for consumers' grocery dollars with such regional chains as Minyard Food Stores, Brookshire Grocery Co., H.E. Butt Grocery Co. and Fiesta Mart.