Dive Brief:
- A few weeks after launching its IPO, Grocery Outlet has garnered positive support from stock analysts, and both Cowen and Jefferies are calling Grocery Outlet a "buy" stock, according to reports sent to Grocery Dive.
- Analysts at Jefferies describe the grocer as a high-growth company with stable financials and a top-tier leadership team. Its 70-year history and predictable business, which has 15 years of positive comps, are also advantages for the company, Jefferies said.
- Grocery Outlet's unique product assortment and good value are also a draw, according to Oliver Chen at Cowen. The model can't be replicated online, which makes the company even more special. Chen also points to the company's independent operator model as a key strength that helps drive the company's success.
Dive Insight:
E-commerce and digital offerings may be the trend du jour, but one thing shoppers will always crave is low prices. When it comes to grocery shopping, 88% of shoppers said cost is the most important factor when grocery shopping, according to a 2019 YouGov study.
Grocery Outlet is poised to capitalize on the discount retailer boom in part because it is not like Amazon, according to Chen. Its treasure hunt shopping experience offers a bit of fun and intrigue compared to digital perusing. It also features a curated assortment of products from both well-known brands and new brands that customers can discover for the first time. The grocer works with roughly 1,500 suppliers and prevents any seller from accounting for more than 5% of sales, Cowen reported. Shoppers never quite know what they will find at Grocery Outlet, but they do know that they will find an unbeatable price.
The independent operator model is the secret sauce to Grocery Outlet's success, according to analysts, because it drives an entrepreneurial spirit and usually leads to lower turnover. The grocer also uses a rigorous process to identify its owner-operators. In a previous interview, Grocery Outlet told Grocery Dive that the independent operator model is here to stay. "It’s a key point of differentiation for us. It’s a defining piece within our culture. It’s been part of our history for a long, long time now," Grocery Outlet president RJ Sheedy said.
Jefferies' report notes that Grocery Outlet's growth is compelling, with 323 stores currently and a growth rate of about 10% annually. Discount retailers also tend to be recession-proof as shoppers will start to look for better bargains when their wallets are feeling lighter than usual.
Despite the rave reviews, analysts at Cowen and Jefferies did flag some risks for Grocery Outlet’s future prospects. Relying on independent operators has advantages but if the talent well dries up, so do the benefits. Also, 99% of independent operators only oversee one store, which means that Grocery Outlet will need to tap a lot of new talent in order to expand or to replace any turnover. Competition from mainstream retail, especially when it comes to new digital offerings and services like grocery delivery, could also threaten the grocer's potential.
The discount grocery space is also heating up, with discount grocers accounting for more than half of store openings this year. A major risk factor looming in Grocery Outlet’s future could be competition from other discount retailers who are able to shave off an extra few cents to lure customers.
Dollar General is leading the discount growth crusade with 975 new openings planned, followed by Dollar Tree. Aldi has also been an aggressive player, pushing hard into the mid-Atlantic region, with recent reports showing that Aldi and Lidl have captured 3% or more of grocery spending in several markets. The data also shows that as many as 30% of shoppers at mass and traditional grocers also shop at Aldi and Lidl.
