Rusty Eddy is a wine marketer who is smart and knowledgeable about wine. So where does he shop for wine regularly?
Grocery Outlet, of course.
“Grocery Outlet is a great place to buy a $2.99 bottle,” he says. “And if it turns out to be junk, who cares? It’s $2.99. If I know what I want, I go to my local wine shop. If I just want some wine to suck down on the weekend, it’s Grocery Outlet every time.”
That’s the experience the discount supermarket chain hopes to bring to much of the rest of the US over the next several years. Grocery Outlet, which buys remainders, seconds and overstocks to keep prices down, went public in June 2019 as part of an ambitious growth plan. It has 323 stores, mostly on the west coast, but hopes to open as many as 4,000 stores across the country.
Nevertheless, Grocery Outlet faces stiff competition, say analysts. European discounter Aldi is well-entrenched in the US, while arch-rival Lidl still wants to open 100 US stores by the end of 2020. And that doesn’t include competition from chains such as Dollar General, which focus on the lower end of the market, and specialist retailers Trader Joe’s and Whole Foods, which target many of Grocery Outlet’s customers.
In this, Grocery Outlet’s secret weapon may well be all that lower-priced wine.
“That’s one of the things Grocery Outlet has going for it,” says supermarket analyst Bill Bishop of Chicago-area consultancy Brick Meets Click. “The three-tier system that regulates alcohol in the US imposes supply chain costs on other operators that Grocery Outlet doesn’t necessarily have. Kroger has to carry Kendall-Jackson Chardonnay, with all of the costs that come with it. Grocery Outlet doesn’t. It can carry whatever it can get cheaply, and it can pass those savings to its customers.”
A unique system
In one respect, US retailers that focus on seconds, remainders and overruns aren’t especially new. It’s become such a part of US retailing that there are even outlet malls whose occupants sell only seconds (which, for the most part, are not really seconds). What’s different about Grocery Outlet’s approach is that it has adapted the concept to food, and that isn’t common. After all, notes Bishop, it’s not exactly easy to get seconds on fresh eggs.
But Grocery Outlet has made it work.
“And that’s what’s innovative about their concept,” says Jan-Benedict Steenkamp, C. Knox Massey Distinguished Professor of Marketing at the University of North Carolina’s Kenan-Flagler Business School. “It’s not something that a lot of others have done before, and it’s not something that a lot of others have done successfully.”
Grocery Outlet was founded in 1946 in San Francisco, selling discounted military commissary surplus. Today, the third generation of the founding Read family oversees 323 stores in California, Idaho, Nevada, Oregon, Pennsylvania and Washington. The company says it offers significant discounts on brand-name products, so that a typical customer could spend as much as 40% less than at a conventional grocer’s during a typical visit. It also says savings can be as much as one-fifth of the total at discounters such as Aldi and Lidl. Grocery Outlet stores average 50,000 square feet or 4,645 square metres – about twice the size of an Aldi, but at least one-third smaller than Kroger and other national chains.
It touts its single operator system as key: almost every store is run by an independent owner-operator, who can bring local knowledge to the operation. That way, decisions aren’t necessarily made at the corporate level, but by someone who knows the community they serve. In this, Grocery Outlet prides itself on its full-range approach – fresh produce, meat and deli, natural and organic items, health and beauty aids and seasonal items. And, of course, wine.
“What we’re doing, and we’re doing it every day, is to find wine through the normal channels, but it’s wine that we can sell at the right price,” says Cameron Wilson, Grocery Outlet’s director of wine, beer and spirits. “But what we’re also doing is upgrading the technical quality of the wine we carry, so that everything we carry is in good shape and that it shows well.”
The typical Grocery Outlet wine department (where legal, stores also sell beer and spirits) includes about 300 SKUs, centred on varietals and not always brands. Hence, Chardonnay, but not necessarily Kendall-Jackson, and Cabernet Sauvignon, but not necessarily Robert Mondavi Cabernet. This allows tremendous flexibility in filling the shelves, and it’s something that Wilson says isn’t a handicap. Grocery Outlet customers are looking for a deal more than they’re looking for a brand, so a $7 Merlot is just as good as a branded Merlot. And the discounts are deep – there are 50 wines in each store that cost $5 or less.
“I buy a lot of wine at Grocery Outlet, especially if I know of a quality winery that’s ‘disappearing’ the end of a vintage or an old package,” says Eddy. Two examples, at about half their list price: previous vintages of Washington state’s Cadaretta SBS white blend and New Zealand’s Trinity Hill Sauvignon Blanc.
Making it work
Which goes a long way towards explaining how Grocery Outlet can offer such low prices when the US wine market is devoted to premiumisation: previous vintages, overstocks, wine in old packaging and the like. And, amazingly, it doesn’t carry any private labels at a time when private labels are all the rage, and it buys wine within the confines of the three-tier system. This limits which companies it can buy from – wholesalers and, depending on the state, some wineries – meaning Wilson and his buyers can’t buy from other retailers, something that’s common in the overstock business. But it’s not a problem.
“We get a lot of inquiries,” he says. “People are calling us all the time, and we get a constant flow of people wanting to sell us wine.”
The volume of inquiries is enough so that Grocery Outlet can stock trendy wines – Moscato, for example, several years ago, and rosé the past couple of years. Again, it’s not necessarily Whispering Angel, but it’s rosé that moves off the shelf.
It’s a combination of those two things – the ability to buy more expensive wine at significantly reduced prices, as well as a constant supply of core inexpensive wine – that can help Grocery Outlet expand across the country, says Layla Kasha, the company’s vice-president of marketing. “Wine is a key part of our growth strategy,” she says, and she points to a couple of things: first, there isn’t one particular Grocery Outlet demographic. Rather, its customers seem to span most age groups, including the younger consumers who haven’t shown much interest in wine. But they don’t seem to mind spending $5 for a bottle or two when they’re in Grocery Outlet, she says. Plus, its customers aren’t limited to the top wage levels, like Whole Foods.
Second, wine, given its price at Grocery Outlet, is a way to keep customers happy and to lure new ones in as the chain expands. They don’t seem to mind if something they bought last time is gone, Kasha says, and are eager to try the next $5 wine that’s in the store.
Grocery Outlet went public in June, raising some $250m to finance expansion; its stock price has doubled since then. Its growth plans aren’t specific; the company says only that it sees the potential to open more than 400 new stores in its current market area plus another 1,600 locations in neighbouring states.
Bishop says those figures may or may not have been overstated to boost the IPO, but there is no doubt that Grocery Outlet has the potential to expand significantly – even with competition from the discounters on one side, the specialist retailers on the other, and the conventional retailers that dominate the US supermarket business in the middle. “They have a different business model and different supply chains,” he says. “They’ve very good at executing it, too. They understand the need to separate themselves from everyone else, and to sell that idea to their shoppers. Their shoppers are energised that they know there may be something different the next time, but that it will still be inexpensive.”
It also won’t hurt that US consumers are increasingly driven to discounters, as measured by store openings. One estimate is that the dollar stores and Aldi have accounted for more than half of US retail openings this year. And that most consumers, says Steenkamp, don’t have easy access to a deep discounter like Grocery Outlet. But will that be enough?
“There is still lots of white space in America, and they will have lots of opportunity,” says Steenkamp. “Is there room? Absolutely. But can they continue to offer the same price and assortment they do now as they expand? That part of the supply chain can be unpredictable. And they are also going against companies like Aldi and Trader Joe’s, whose supply chains are the best in the world, even much better than Walmart’s.” As Grocery Outlet expands, he says, it must be able to duplicate the relationship that a chain like Trader Joe’s has with its customers. That is especially true with wine, where Trader Joe’s private labels are seen as both inexpensive and good value.
“Grocery Outlet might be able to offer good deals,” says Steenkamp, “but will they be able to offer the customer what Trader Joe’s does – what I like when I want to buy it, and not something I don’t know every time I go?”
That’s a challenge that Grocery Outlet is betting it can overcome.
This article first appeared in Issue 6, 2019 of Meininger's Wine Business International magazine, available in print or online by subscription.