Dive Brief:

• Grocery Outlet plans to begin testing online shopping within the next several months, executives said during the company’s second-quarter earnings call on Tuesday.
• CEO Eric Lindberg and President RJ Sheedy said the company is currently in talks with technology companies over delivery as well as pickup options that it could pilot. “These tests will assess several factors, such as alignment with our unique model, operational and technical considerations, and total market opportunity,” Sheedy said during the call.
• Grocery Outlet has resisted incorporating e-commerce up until this point, noting that its frequently rotating assortment is difficult to replicate online, but acknowledged that the channel is now too popular to ignore.

Dive Insight:

Investors and analysts have regularly pressed Grocery Outlet over the past year about offering online shopping. And executives regularly responded that, even though sales in the channel were soaring amid the pandemic, it wasn’t a priority.

“It’s really hard to replicate the treasure hunt experience online,” Sheedy said during Grocery Outlet’s earnings call last November. “And then on top of that, just the close connection customers have with the operator and the overall store — what we call the ‘wow’ shopping experience.”

But with e-commerce sales in the U.S. on track to hit as much as $250 billion by 2025, the discount grocer is now leaning into the opportunity, reflecting the new digital reality for retailers, including those that have resisted online shopping in the past. Costco, another retailer that promotes a treasure-hunt shopping experience, recently began testing curbside pickup.

Sheedy and Lindberg said the company is exploring both delivery and pickup options, with a goal of finding a solution that can channel its frequently changing, discovery-focused shopping experience.

“That’s part of the test also — how well does that translate online as items are in and out? Does that come across? Do customers see the excitement online as they would walking up and down the aisles of the store?” Lindberg noted.

He continued: “We think the right approach for us is a, I’ll call it, a lighter investment, lower CapEx investment approach to learn. And then once we settle on the one, two or three several options that are a good fit, we will adjust and figure out our longer-term plans from there."

Grocery Outlet’s move toward digital also reflects the company’s struggles during the pandemic and its need to reach new shoppers. Trip consolidation has kept many consumers shopping at conventional supermarkets, and inflation has driven up freight and product costs, pressuring company profits. Comparable-store sales during the second quarter were down 10% compared to last year’s Q2, in line with analysts’ expectations.

Despite current pressures, Sheedy and Lindberg said product supply for the company’s opportunistic buying model remains strong. They also expressed confidence in Grocery Outlet’s long-term prospects, noting consumers’ focus on value will increase as trip consolidation and the impact of federal stimulus dollars subside. They also pointed to future initiatives like a personalized marketing program set to kick off next year.

Grocery Outlet opened 11 stores during its second quarter, which ended on July 3, bringing its total to 400 locations across six states. The company plans to open between 36 and 38 locations in fiscal 2021, with three to five of those locations planned for the East Coast, including its first one in New Jersey.

Grocery Outlet’s net sales decreased 3.5% during Q2, to $775.5 million, while EBITDA fell 15.7%, to $50.8 million. The company’s gross margin rate was 30.7% — ahead of expectations and mostly in line with pre-pandemic performance despite inflationary headwinds.