Meet The Quirky Discount Grocer Making Billions By Solving Inflation

Grocery Outlet is benefiting from supply chain disruptions, happily selling mountains of overstocked wine, meat, cheese and snacks at bargain-basement prices to American families rocked by inflation.

---

At a Grocery Outlet in a suburb of Portland, Oregon, shoppers scoop up baby back ribs priced to sell at $2.99 a pound. Chunks of Kerrygold cheddar, Cafe Olympia feta and Buholzer Brothers Havarti are piled high under a banner that reads “More Cheese For Less Cheddar.” A festive tin of sugar cookies that lights up and plays music, yours for $6.99, has been flying off the shelves. Two pallets of frozen pizzas (three for $2.49) vanished in three days.

“I think everybody is trying to stretch their dollar as much as they possibly can,” Hana Brown, who operates the store with her husband, James, told Forbes.

The discount grocery chain, which has 431 stores and has been described as the T.J.Maxx of groceries, has seen an influx of new customers at a time when inflation has soared to 40-year highs. Grocery Outlet is like a promised land for anyone on a budget, offering name-brand products marked down by 40% to 60%. It’s also a multibillion-dollar business that makes its money by purchasing the glut of overstocked, discontinued and nearly-expired items that have nowhere else to go. In the first nine months of the year, sales rose 15% to $2.6 billion.

“I think what happens in times like this is a lot of people come in because of a need and they stay because of what they see,” said chairman Eric Lindberg, who joined the company as a cashier nearly 30 years ago after marrying the founder’s granddaughter and this week stepped down as CEO. “People are literally looking for a solution to the problem of high-cost food.”

More shoppers are trying to stock their fridges for the week when they visit, said James Brown, the operator of the Oregon store, rather than just browsing for deals on snacks, desserts and other fun items. The average amount spent per trip has inched up to $40 from $35 to $37, he said.

To serve these customers, Grocery Outlet has been working to offer a more consistent selection of everyday products, adding 600 new items in the past year. While they aren’t necessary sold at a deep discount, it makes it possible for customers to purchase all the items on their lists.

“I think everybody is trying to stretch their dollar as much as they possibly can.”

The retailer relies on a network of independent operators to staff stores, run advertisements and choose which products they sell, and splits profits with them in return. That allows stores to be nimble when responding to local preferences and shifts in demand. Justin and Ellie Maenner, who operate a Grocery Outlet store in Lancaster, Pennsylvania, noticed that people began spending less on general merchandise, like makeup, cookware and blankets, around the time that gas prices spiked. So they stopped stocking many of those items and doubled down on fresh offerings, with fruits and vegetables delivered six times a week and meat twice a week. A recent deal on Tyson chicken drumsticks, priced at just 79 cents a pound, was a hit.

“Customers come in and say I wouldn’t be able to feed my family if you weren’t here,” said Justin Maenner, 35. He has seen a lot of older customers on fixed incomes come in and roam the aisles with calculators to tally their purchases. Old dollar bills, which look like they’ve been stashed away for years and only recently rediscovered, are sometimes fished out at the checkout counter.

Supply chain disruptions have been a boon for the company. Why? Many of its suppliers are dealing with a mountain of excess inventory — a result of delayed shipments and shifting consumer preferences that have made it difficult to forecast orders — and they’re unloading a lot of it to Grocery Outlet.

“The buying environment has gotten a lot more favorable,” said Lindberg. “It seems there’s both a deepening on the level of buys, which means there are more cases per offer, and a broadening, which means there’s more stuff on the list.”

Grocery Outlet, which began as a military surplus store in 1946, has spent decades building relationships with over 2,500 suppliers. The list spans giants like Hershey, Mondelez and Tyson, as well as buzzy new brands like Olipop, Beyond Meat and Hippeas. It serves as a critical release valve for these companies when they change the packaging, make too much of something or introduce a new product or flavor that turns out to be a dud.

“This is one of the ways they are un-Amazonable,” said Oliver Chen, an analyst at Cowen & Co. The retailer has a robust buying team that works hard to make sure it’s the first call that suppliers make when they are trying to get rid of something, he said.

For instance, Grocery Outlet recently purchased all 90,000 cases of biscuits and cinnamon rolls that a large packaged foods company was looking to jettison, then turned around and sold them to customers for 75% off. It bought 75,000 cases of miniature-sized Bota Box Chardonnay and Cabernet Sauvignon after the winemaker stopped selling them in four-packs.

During the Super Bowl earlier this year, the Maenners’ store got a shipment of 40-pound boxes of frozen chicken wings at a time when there was a chicken shortage. Priced at $99, they still sold like mad, with employees frequently dispatched to help customers schlep them out. “We seemed to be the only ones who had frozen wings available for customers at the time,” said Justin Maenner.

There are plenty of deals left for the taking. According to estimates from Cowen, Grocery Outlet has only grabbed 16% of available inventory on the secondary market. The California-based grocer is using its momentum to fuel growth, currently opening stores in the mid-Atlantic, with ambitious plans to open 4,800 stores over the long term.

“We have an opportunity to serve a customer base that may not have otherwise found Grocery Outlet,” said Lindberg. “These kinds of opportunities come around every ten years or so, and they tend to be great for building.”