Grocery Outlet banner soon to fly over Texas

DSN Retailing Today, Sept 8, 2003 by Debbie Howell

MESQUITE, TEXAS -- Extreme-value and dollar store concepts have been one of the hottest growth trends in retailing this past year, especially given the sluggish economy and shoppers' demand for increasingly lucrative bargains.

Grocery Outlet, primarily a retailer of closeout food items, is making a play for a larger part of this business with the first acquisition in its 57-year history.

In July, the California-based chain purchased the leases to 17 stores in Texas and Louisiana formerly operated by Fleming as YesLess!, a deep-discount format. Sixteen of the stores are in Texas, and all reopened last month under the new Grocery Outlet name. After filing for bankruptcy protection in April, Fleming sold most of its retail and grocery wholesale operations.

While Grocery Outlet had considered the Texas market in the past, the company originally was just interested in buying excess inventory from Fleming. But the opportunity to expand in Texas was too good a deal to pass up.

Due to the acquisition, Grocery Outlet now operates 138 extreme-value grocery stores in 10 states, most of which are in California and other western states. And while the format is similar to Yes Less!, which also sold closeout items, Grocery Outlet emphasizes more well-known brands and a heavier proportion of food items. The mix is about 80% food and 20% general merchandise items that include health and beauty care, toys housewares and gifts.

"Our core competency has been our food," said Chuck Moore, head of the new Texas region for Grocery Outlet. "We have contacts with major manufacturers like Quaker, Kellogg and Kraft. We take their excess inventory or factory seconds."

Items that are overstocks, out-of-season discontinued items or products with packaging mistakes are examples of the closeouts sought by Grocery Outlet. Products are then resold at prices typically 40% below regular retail prices.

The store stocks some 2,500 to 3,000 SKUs, including some everyday items such as milk and eggs that aren't closeout items as such, but provided at a slight discount for shopper convenience. The food assortment is comprehensive, including dry grocery, snacks frozen, dairy and produce. Lacking are fresh meat and seafood and service departments such as deli and bakery.

The produce section, while small, does cover basic high-demand items such as potatoes and apples. Items are sold by the piece or group rather than weighed, such as four oranges for $1 and a 2-pound bag of seedless grapes for $1.29.

As opposed to a regular supermarket, the assortment changes frequently in response to the deals Grocery Outlet can secure. Items that don't sell quickly are marked down until gone.

"There's one thing we're consistent at--we're inconsistent. It has allowed us to create this treasure-hunt aspect in the store. There's always great deals," said Moore.

Keeping costs low enables Grocery Outlet to make a profit. Low-frills merchandising is used, with most items kept in cardboard shippers and then placed on two-level shelving. At the Mesquite, Texas store toured by DSN Retailing Today, frozen and refrigerated cases were on one side and along the back wall. Upon entry, shoppers must walk down a "Wall of Bargains" aisle that showcases the store's best deals, then along the HBC aisle toward produce, at which point the store opens up to multiple aisles that all run vertically.

Most forms of payment are accepted, including debit and credit cards, but not checks. The receipt prints out the total, along with savings. On a basket total of $57.34, for example, a shopper saved $97.20.

"We want to be priced better than anybody in the market," Moore said. "Our customer is a bargain shopper."

Among the deals offered during a visit to the store in late August were a Bond patio umbrella for $24.99, Oreo Double Stuf cookies at $1.79, Hamburger Helper at $1.99, The Dreamery ice cream pint for $1.29, Butterball lunchmeat for 79 cents, a 75-foot roll of Reynolds Wrap foil for $2.49, Special K Red Berries cereal at $2.49 and a 14-ounce bag of M&Ms for $1.49.

Moore said the typical customer is the bargain hunter, which includes both low-income households and those more affluent who still like to shop for deals. The chain also appeals to price-conscious ethnic groups, and offers more extensive selections of Hispanic food items at some stores, such as in Mesquite.

The privately owned company that is still largely operated by the founding Read family generated sales of $580 million last year. Revenue typically grows 3% to 4% per year, said Moore, and in a typical year Grocery Outlet will open eight to 12 new stores. This year was an exception due to the acquisition, and more stores in Texas are anticipated once the company opens a distribution center there. Currently, the chain is using a third-party distributor.

So far, Moore said customer response in Texas has been positive, with sales exceeding forecasts before a grand opening marketing blitz planned in September.

Moore said the company didn't have to spend too much to remodel the stores, since part of the acquisition included fixtures. Averaging 12,000 square feet, the Texas stores are smaller than the typical Grocery Outlet box of 17,000 square feet and will enable the chain to experiment with a smaller size.