Disrupted Supply Chain Is Good News for Grocery Outlet

Extreme discounter Grocery Outlet delivered robust sales and earnings figures against strong expectations in its fiscal second quarter, and intends to plow its momentum into a faster pace of store openings, as well as deeper and more specialized relationships with both suppliers and shoppers.

For the quarter, which ended June 27, the Emeryville, Calif.-based discounter said sales improved by 24.5% to $645.3 million, with same-store sales increasing by 16.7%. That helped the company post $29.3 million in net income, representing a swing from a $10 million loss in last year’s second quarter as it prepped for a public stock offering.

The rapid sales turnover reduced inventory waste and boosted gross margins as a percent of sales by 8 basis points to 31.6%. The sales and earnings figures exceeded high expectations of analysts.

“We are very pleased with our strong operational execution in the second quarter. Our financial results reflect incredible teamwork across the organization, including our independent operators, distribution center teams and our corporate staff,” CEO Eric Lindberg said in a release. “While the safety of our communities and the entire Grocery Outlet team is our No. 1 priority, we remain committed to delivering exceptional value to our customers while continuing to extend our reach. Consistent with our approach to reinvesting in the business, we are accelerating talent and operational initiatives which we believe will drive long-term growth and shareholder value.”

In a conference call discussing results, Lindberg said the chain’s unique model and strengths—opportunistic sourcing on the corporate level, with those items sold at bargain prices on consignment by independent store operators in six states—continued to benefit from COVID-related supply chain disruption, a consumer desire for value in a weakening economy, and the sustained trend of meals consumed at home, despite less traffic in stores. That said sales in the current third quarter had moderated to about 10% gains.

Grocery Outlet opened seven new stores in the quarter and said it now expects to open between 30 and 32 stores for the fiscal year—it previously guided to 28 to 30 new openings. Lindberg said the chain was also “excited” about increased availability of retail store sites amid larger retail industry struggles as it builds a pipeline to support 10% annual square footage growth.

On the sourcing side, Grocery Outlet President R.J. Sheedy described a move to strengthen relationships with suppliers and widen selection to new and smaller providers, many of whom have shifted their own supply chains toward grocery since the onset of the pandemic.

“Opportunistic supply remains plentiful, and our specialized approach is helping us capture even more of this product,” Sheedy said, according to a Sentieo transcript. “Our buying team continues to develop and strengthen supplier partnerships, ranging from our largest strategic suppliers down to smaller, high-growth companies. We also continue to deploy new strategies to identify, establish and develop relationships with new suppliers.”

Partnerships with smaller suppliers include purveyors in high-growth categories from whom Grocery Outlet represents an avenue for brand awareness and growth. “In some cases, our partnership helps them scale their business by reducing manufacturing costs,” Sheedy said. “In other instances, we help them by driving new customer trials, which increases brand awareness and loyalty. We provide an easy go-to-market retail option for them to grow their business.”

Grocery Outlet, in the meantime, is investing in more specialization among its buyers with an eye on identifying new sources of supply and supporting strategic category management in everyday items. “Benefits here include more relevant items, higher sales productivity and better seasonal planning,” he said. “One recent example is improvements made to our relatively new seafood category. We optimize and focused our assortment according to customer demand, which drove higher sales and margin while also streamlining store ordering and execution.”

Sheedy said the retailer continues to be “bullish” on a long-term opportunities in the disrupted supply chain and retail upheaval.

“Manufacturers have increased production. They don't want to get caught again like what happened back in March and April,” he said. “We've already seen some opportunities that have come our way from overproduction, [and] we expect more to come in the future. We continue to benefit from retail closures and slower reopenings and that time will tell how quickly others open, but we’ve been able to help out some suppliers in tight situations there. And any time there are changes in assortments, whether it's SKU-related or category-related, packaging-related, we see those opportunities. And ultimately, any type of supply chain imbalance is a positive thing for us.”

An increasing consumer emphasis on value is continuing to result in more new shoppers for Grocery Outlet, which the company intends to capture via developing personalization and a move from print to digital-based promotions, Sheedy added. “These new customers represent a mix of different shopping behaviors and patterns, consistent with our overall customer base,” he noted. “We are the primary store for some and secondary or tertiary stores with others.

“Investments made in our email database have enabled the launch of our ‘Welcome’ series email campaign. Customers that sign up to receive emails now receive a welcome message followed by a customized program of additional emails and videos that serve as an introduction and education on the unique attributes of Grocery Outlet. We supplement this brand marketing with regular Wow alerts that communicate the best deals currently available. This is just one part of communicating the Wow beyond the four walls of the store. Customers have responded very well to this outreach, and we plan to further increase engagement as we advance our personalization strategies.”