Dive Brief:
- Grocery Outlet announced Tuesday that it has begun implementing a restructuring plan aimed at reducing costs and improving long-term profitability. The plan will cost the grocer between $52 million and $61 million.
- This restructuring, which got underway during the company’s fiscal fourth quarter, involves terminating leases for unopened stores in “suboptimal locations,” canceling some planned improvements to its warehouses and laying off an unspecified number of employees.
- The company expects to open between 33 and 35 stores this year — compared with the 50 to 55 locations it previously announced — Grocery Outlet Chairman Eric Lindberg told investors during the company’s fourth-quarter earnings call Tuesday.
Dive Insight:
Grocery Outlet’s restructuring plan comes after the company posted underwhelming financial results during the past several quarters and less than a month after Jason Potter, former CEO of The Fresh Market, took over the top role at the discount grocer.
For fiscal 2024, Grocery Outlet saw net sales increase 10% and comparable-store sales tick up nearly 3% compared to the prior year. The discounter added 67 new stores, including 40 stores from its acquisition of United Grocery Outlet, and closed two locations, according to its earnings release.
At $39.5 million, the grocer’s net income was nearly half the $79.4 million it brought in the previous year. The company ended FY 2024 with an over 11% increase in its general and administrative expenses, primarily due to the restructuring plan, and total debt of approximately $478 million, per its earnings release.
Lindberg, who took over as interim CEO in October when former CEO RJ Sheedy abruptly left the company, said during the call that Grocery Outlet’s performance suffered during 2024 because of ongoing problems relating to its conversion to new back-end technology, a process that began in 2023. In addition, Grocery Outlet ran into trouble because it tried to grow too quickly, he said.
“On the surface, this is a simple business that performs very well when operations are executed properly,” Lindberg said. “2024 was a year in which many critical operational elements were out of sync, which was further exacerbated by trying to do too much, too fast. But we’re working urgently to get back on track.”
Lindberg said that Grocery Outlet was trying to open too many new locations during the next two years. He added that the company had its eyes on expanding into an unsustainable number of new markets, noting that new stores perform better in existing markets or areas that are adjacent to regions where it already operates.
“A more narrowed focus to new store openings will allow our infrastructure to more effectively support our expansion efforts,” he said.
Higher build-out costs have also posed headaches for Grocery Outlet, Lindberg said, adding that “while we’re focused on ways to value engineer these costs down, it will take us some time to test and achieve a lower cost store build.”
In addition to cutting back on the number of store openings, Grocery Outlet is stepping back from plans to expand its distribution infrastructure, according to Lindberg. Instead of developing a multi-temperature distribution center, which Lindberg said the company realized would have been overly complex and expensive, Grocery Outlet will focus on improving efficiency by simplifying its regional supply chain operations, he said.
Potter said he would look to his experience building sales, profitability, shareholder value and the shopping experience at The Fresh Market as a guide as he settles into his role leading Grocery Outlet. “We worked hard there to build a service culture and really working as a team on a clear, defined strategy,” he said. “For sure, those are things I’ll take forward in my thinking here.”
Potter sought during the call to assure investors that he is suited for the job of getting Grocery Outlet back on track.
“These challenges and opportunities are familiar territory for me, as I’ve spearheaded multiple turnarounds across many grocery models. In each case, we were successful in driving sales profitability and ultimately returns for all stakeholders by improving collaboration, execution and the customer experience,” Potter said.
