Grocery Outlet eyes expansion in lean times

Thrift is hot.

With consumers fervently pinching pennies, "deep-discount" retailer Grocery Outlet, a 138-store food market chain headquartered in Berkeley, is drawing flocks of new customers seeking deals like giant 99-cent bags of tortilla chips, half-price Hamburger Helper and $4 family-size frozen pizzas.

Now the West Coast bargain chain is poised to capitalize on the new frugality with a major expansion in California, Washington and Oregon.

"The economy has amplified our message to consumers," said co-CEO MacGregor Read, 39, whose grandfather Jim Read founded the chain in San Francisco in 1946, selling government surplus canned goods. "Our goal as the economy recovers is to retain these new customers."

In other words, he hopes recession-spawned frugality will persist, just as thrift became a lifelong habit for Depression-era folks.

Grocery Outlet, which offers about half off supermarket prices by selling manufacturers' excess inventory, rang up 5 million additional customer transactions last year compared with the prior year and has clocked double-digit annual sales growth since 2008.

Backed with a new infusion of capital (it won't say how much) from Boston's Berkshire Partners, Grocery Outlet is planning significant growth, including new stores in Pinole, Concord, Dublin, Gilroy and Watsonville this year, as well as expansion in its other core markets of Oregon and Washington. It also has stores in Arizona, Idaho and Nevada.

"We could conceivably double the size of the company in the next five to seven years, adding about 15 to 20 new stores a year," said co-CEO Eric Lindberg, also 39, grandson-in-law of the founder.

More products

In the past decade, Grocery Outlet has evolved beyond its roots as a canned-food outlet into carrying a full line of groceries, including fresh items like produce, meat and milk. Organic goods and beer and wine are fast-growing categories.

"Supermarket guru" Phil Lempert, the food-trends editor on NBC's "Today" show, is a huge fan.

"I love Grocery Outlet," he said one recent afternoon on a tour of its latest addition, a sparkling new store at a strip mall in Pinole. "It's like a blend of a dollar store and Trader Joe's. They're very intelligent about their relationship with customers, (promoting) the emotional, fun, adventurous side of shopping."

While fans of "Gross Out" - the store's nickname - enjoy its treasure-hunt flavor, the outlet's "opportunistic sourcing" means its inventory fluctuates widely. While it will always have roughly the same proportion of cereal, frozen vegetables and bread, for instance, the brands and package size are likely to vary widely from one visit to another.

"Even if you prefer Miracle Whip, you might have to settle for Hellman's next week," Lempert said.

Grocery Outlet doesn't offer the "specialty perimeter" of a traditional grocery store - i.e., there is no butcher and no baker. Even the most loyal customers usually supplement with trips to other supermarkets. A Grocery Outlet might carry 4,000 distinct products, versus the 40,000 found on a Safeway's shelves.

The time does seem right for consumers to abandon their profligate ways. A May survey from food giant Con Agra Foods showed that 71 percent of Americans said they would "continue the savings habits they developed during the economic downturn" such as cooking at home more often, using coupons and store specials, and cutting back on premium purchases.

The time is right in real estate, too, with lots of vacant storefronts and cheap prices.

Cautious approach

But growth comes with pitfalls.

"The world is littered with retailers who have over-expanded," said Lindberg. "We will remain cautious."

The chain has had some stumbles, including an ill-fated foray into Texas and an unsuccessful stab at running a Costco returns center.

The grocery business has notoriously slim margins, and Grocery Outlet must take even slimmer margins - or a loss - on fresh goods like milk and produce, because it can't buy them as surplus. But it compensates by getting deep discounts from about 2,500 manufacturers when they have an overrun, discontinue a product, change packaging or test new concepts.

Take Tiger Woods Gatorade and Michael Phelps Cheerios, for instance. When news broke of Woods' cheating and Phelps' bong hit, those products featuring their smiling faces showed up on Grocery Outlet's shelves.

The privately held company is close-lipped about its financials. Supermarket News pegged its 2009 sales at $875 million. It has 120 employees at its Berkeley corporate offices and another 270 in warehouses and the four corporate-owned stores.

Franchise with a twist

Grocery Outlet's business model is a twist on franchising. Stores are independently operated. Grocery Outlet owns the store leases and heavy equipment such as refrigerator cases and cash registers. Store operators hire and train employees, and buy fixtures like shopping carts and computers. It's a significant six-figure investment to become an operator, Lindberg said.

Operators order products from the chain on consignment and are obligated to present and sell the merchandise in a certain way. The chain and the operators split profit 50-50.

Sam and Asifa Ahmad, who operate the new Pinole location, said they appreciate the chance to be independent so their store can reflect the community.

Donna McGee of Richmond, a home health aide, was among the first shoppers in Pinole, although she was already a customer at the San Pablo location.

"Their prices are awesome; I probably save a good hundred bucks a month here," she said. Gesturing to the heaping piles of frozen corn dogs, giant bags of cereal and oversize bags of chips in her cart, she said she visits Grocery Outlet at least three times a month to stock up on snacks for her two hungry teenagers.

"They're home a lot in the summer and they eat a lot of snacks," she said. "I'm going to have to get a second shopping cart now."

E-mail Carolyn Said at csaid@sfchronicle.com.

This article appeared on page D - 1 of the San Francisco Chronicle