“I’d rather work a hundred hours for myself than 40 hours for someone else,” says Ryan Stack.
Sounds like entrepreneur spirit, where the punchline to “set your own hours” is “pick any 14.”
Stack and his wife, Amanda, co-own and operate a Grocery Outlet Bargain Market in Tustin with its Emeryville-based parent, Grocery Outlet Inc.—a 72-year-old, family-founded and private equity-owned chain of about 300 locations in six states and annual revenue pushing $1.6 billion.
Grocery Outlet—GO, for short—renewed a Southern California expansion in 2015 when, like the bargain-priced shoppers it attracts, the chain picked up more than a dozen leases in the Fresh & Easy bankruptcy. It had stores about seven years ago in Buena Park and Fountain Valley that closed.
It has a store each in Tustin, Lake Forest, Irvine, Orange, Costa Mesa, La Habra and Westminster and plans to open one in Huntington Beach next month.
Three others are in border towns Long Beach and Whittier, and 26 total are spread among Orange and Los Angeles counties and the Inland Empire.
Tustin’s GO was previously a Trader Joe’s, which moved across the street to a bigger space and more parking. Lake Forest’s GO is a 15,400-square-foot former Fresh & Easy co-owned and operated by Joel Collar and Paul Ah Sing.
“They gutted the store and built it to Grocery Outlet standards,” Collar says.
‘Extreme’ Deals
Tustin opened in June, Lake Forest in December. The former pays $17 a square foot a year for its 12,500 square feet at Tustin Crossings—half what smaller tenants in the center pay, CoStar Group Inc. records show.
Richard Rizika, vice chairman and managing director of CBRE’s Southern California retail services group, says it’s not uncommon for anchor tenants—Grocery Outlet has 45% of the Tustin store’s leasable area—to strike better deals and that in each case, “they’re paying fair market value”—even if that includes property owners’ need to fill big empty spaces.
CBRE’s most recent OC retail report shows a 3.6% vacancy rate and average rates of $28 per square foot.
GO locations move in a subniche of retail called “extreme discounting,” which the Wall Street Journal cited in December as a bright spot of bricks-and-mortar activity.
The paper called out Goodlettsville, Tenn.-based Dollar General Corp.’s plan to add 900 stores this year, following 1,200 new locations and 1,000 remodeled ones in 2017.
Low food prices can also hurt farm-state economies, as another Wall Street Journal piece the same month indicated—the very shopping populations many such stores depend on. But it called Dollar General, with $22 billion in annual revenue and a $29 billion market cap, “rural America’s store of choice.”
And therein lies one of the challenges to GO’s effort here.
“The business model typically does well in struggling communities,” Stack points out, “but this is an affluent area.”
Beer & Wine
GO’s SoCal plan looks like this:
Corporate leverages its buying power to negotiate discounts—name brands at off-brand prices, including boutique choices.
“I love a good bottle of wine,” Stack says—and he carries them.
Lake Forest has “tons of craft beer” in an eclectic mix, Collar says.
“There are no schematics here,” he says of set-in-stone store layouts conventional chains hew to. He and Ah Sing are familiar with those after putting in a combined 25 years for Safeway in Oregon.
“We set our store to the area’s demographics.”
A vendor distributes 200 different beers, and “Stater Bros. can only order 20 of them” because of the schematic.
“If we’re approved [by corporate] for 180 of them, we can order all 180.”
That also allows regional sourcing.
“We have local produce, local meat,” Collar says. “Our eggs come from Downey; our milk comes from Fontana.”
Odd Steals
All at a discount.
Walk into a location, and it seems everything is half-off, including the good stuff.
“We only carry items you can save 40% to 70% on,” Stack says. “It wasn’t here last week and might not be next.”
And he says the store is “absolutely crushing it on customer service” with “happy staff and a family feel”—the Stacks and their two toddlers live a “2 ½-minute walk” away.
Store loyalists, he says, call GO trips “a treasure hunt every week.”
That can net you four Power Bars for a buck, as well as the odd item or two: products in out-of-season packaging or flavors that may have failed to live up to taste tests—limited-edition “Crush Orange” Pop-Tarts, let’s say.
Systemwide average unit volumes top $5 million, which means some stores do even better. Stack says the Santa Rosa GO, run by a guy he used to work for, is in the top five, but his own first-year results will be “more humble.”
Pizza Man
Stack, 31, was managing a Papa John’s Pizza near Sacramento when the recession hit.
“You can spend $40 on pizza, but $40 at a grocery store will get you a lot farther,” he says.
Eateries began to close—including Stack’s, which shared a parking lot with a Grocery Outlet.
He’d gotten to know its co-owner, Dave Herout, and one day Herout asked why he was in the bank when it “wasn’t payroll Friday?”
Stack replied, “It’s last-paycheck Tuesday,” and went to work for Herout the same day.
“He said, ‘The fact you don’t know anything about grocery is good. I can teach you anything you need to know.’”
Walmart grabbed the spot when GO’s lease expired 11 months later. Herout opened the Santa Rosa site, and Stack went to work for corporate, helping open stores.
“In three years, I’ve been in more than 100 Grocery Outlets,” he said.
He and Amanda, in company lingo, became “aspiring operator trainees” in 2016 and came south last March.
OC’s Allure
Stack was born in Fountain Valley; Amanda, 29, “is a Disney fanatic; she bought annual passes and treats it like the corner park.”
The family goes to the beach more now.
“I’m a beach bum,” he said. “I love the sand.”
Both can also be found in the store.
“We’re doing this to be mom and dad,” he says. “My 4-year-old stands on a milk crate and stocks the shelves. He sets products on the candy aisle with front labels and logos showing ‘for a small reward.’”
Work “absolutely requires more of my time” than a regular job, and even the friendliest, most familial staff “won’t build it the way I want to, though they can keep it running.”
But “when I need to and want to,” Stack steps away. “Owners never miss a t-ball game, never miss a school play.”
Collar and Ah Sing were unfamiliar with OC before relocating from Oregon, but Collar had been to Disneyland, and the duo told the Business Journal there are suburban similarities between Beaverton and Lake Forest—families, dogs, sidewalks.
They “looked at a map, and [OC] was gorgeous,” and “we did our due diligence,” Collar says.
The duo were two of 4,000 applicants for stores in 2017 and trained in Santa Cruz for six months last year.
“We want to bring affordable, quality groceries to Lake Forest,” he says.
SoCal Challenge
The challenge is that Southern California is where grocery concepts go to die, in 2015 two at a time.
After Fresh & Easy, there was Haggen’s, a Bellingham, Wash.-based chain that tried to grow from 18 to 164 stores in 2014, including about a dozen in OC, but filed bankruptcy in September 2015. It has 15 stores now, all in its home state.
Fresh & Easy filed for the second time the following month. Before Haggen’s there was Smith’s, a Salt Lake City chain whose 1990s SoCal adventure cost it $500 million; it was bought in 1997 by the Fred Meyer chain, which sold to the Kroger Co. in 1999.
Grocery chains elsewhere are down: Williamsville, New York-based Tops Market LLC asked investment bank Evercore Inc. for help with its $723 million debt load in January, and Moody’s Investors Service Inc. dinged it for a limited footprint in just four states, Reuters said.
Amazon.com’s purchase of Whole Foods Market last year should put further pressure on the sector.
Grocery industry analysis in news reports as GO’s local push picked up steam in the past two years pointed to its lower cost of goods based on corporate bargain-buying as a big advantage.
Another chain trying to make it here is Germany-based Aldi Sud—sister company Aldi Nord owns Trader Joe’s—which has the same benefit, in that its inventory is largely private-label and therefore cheaper.
Last week, Portland, Ore.-based New Seasons Market curtailed its Northern California expansion—including a planned store in Grocery Outlet’s headquarters city—and a vision to double the chain to 25 stores. Its chief executive and the plan’s architect, Wendy Collie, left the company.
It’s Personal
GO’s second edge is the community feel from individual operators.
The Stacks, Collar, Ah Sing and the rest aren’t franchisees but connected to the parent via individual LLCs. Collar and Ah Sing, for instance, co-own Grocery Outlet JPB-Go LLC with an affiliate of Grocery Outlet Inc.
Operators don’t own it all, as a franchisee might, but it costs less to get rolling—$100,000 to $200,000—than a full-fledged fast food franchise, say—and the groceries industry generally isn’t open to indie operators nowadays.
A spokesperson said, “Our model is most similar to … consignment.” GO “secures the sites and buys the inventory … operators invest in equipment, hire staff, and have the freedom to adapt their stores to the community.”
They decide what to sell from deals corporate negotiates, and the two split the profits.
Irvine attorney Rodney Hatter, who focuses on franchises, likened it to the Good Neighbor Pharmacy model, a 3,200-location co-op backed by Conshohocken, Penn.-based pharma AmerisourceBergen Corp., which owns the name. The backer doesn’t run the stores, but it’s a $136 billion-revenue distributor of pharmacy products.
“This could help give [Grocery Outlet] the mom-and-pop feel,” Hatter says.
It’s Private
An affiliate of private equity investor Hellman & Friedman LLC in San Francisco bought Grocery Outlet in 2014 from Boston-based Berkshire Partners LLC, which had owned it since 2009.
A price couldn’t be determined, but Dow Jones said first-round bids exceeded $1.1 billion, and Reuters said before the deal that its earnings before interest, tax, depreciation and amortization were about $100 million, and that it anticipated an acquisition at “more than 10 times that figure.”
Grocery Outlet’s website says Jim Read founded predecessor company Cannery Sales in 1946, selling surplus government food. He sold the business and bought into a Bay Area chain in 1959—again strong in surplus goods—bought at least one other chain, and started signing supplier deals—Del Monte was first—and independent owner-operators in the 1970s.
Third-generation Read family members MacGregor Read and Eric Lindberg are co-chief executives.
The chain passed $100 million in revenue in 1982, $500 million in 2001, and $1 billion in 2011. It had 100 stores in 1995 and about 200 when Hellman bought it in 2014. Each store employs 25 to 30 people.
Opportunistic buying has always been a feature: During the early 2000s dot-com bust, the company bought “large remaining inventories of Webvan and wine.com” out of bankruptcy, its website says.
Payoff
Then comes the 100-hour weeks.
“Hard work is the only thing that pays off,” Ryan Stack says.
Sometimes it doesn’t—GO locations have closed here and elsewhere—but such fallout appears minimal.
A spokesperson says the chain opened 29 stores last year and closed one, in Pennsylvania. It plans to open 25 to 35 this year. In the past few years it had locations in Arizona, now closed.
Operators can buy as much as they want of inventory corporate finds for them. They don’t own all the profits—but it’s more than they would as store directors for a conventional grocery chain who are employees of someone else.
And they get to give back. The Stacks send 2,000 to 4,000 meals a month through Second Harvest Food Bank in Tustin. They give $100 food vouchers to graduates of Orange County Rescue Mission’s life-turnaround program.
Ryan found “one of my best managers” from one of them, he says. “She turned out to be an absolute all-star.”
