Grocery Outlet Bargain Market reported softer-than-expected Q3 results and lowered its outlook for sales and gross margin. (For reference, same-store sales increased by only 1.2% for the quarter.) Grocery Outlet Interim President and CEO Eric Lindberg (who previously served as CEO until 2022) shared some insights during the earnings call that piqued our interest regarding what Placer data might reveal.
First, last year's system upgrades and issues related to the transition to SAP severely impacted the company’s ability to maintain its “WOW!” treasure hunt experience, potentially affecting in-store standards and operational efficiency. These deficiencies led to a decrease in units per transaction (UPTs) and a slowdown in comparable transactions since last fall. Second, Grocery Outlet raised prices too much, narrowing the price gap with competitors at a time when competition in the industry was intensifying.
We’ve described this increased competition as “no one is staying in their own swim lane,” meaning consumers are (1) shopping more frequently at value retailers like Walmart, Sam’s Club, Costco, and Aldi; (2) picking each retailer's best offerings; (3) cherry-picking promotions; and (4) utilizing loyalty digital coupons. (Every retailer claims they’re gaining more loyal customers this year, which likely reflects consumers downloading and using multiple loyalty apps.)
On pricing, Lindberg stated, “We missed the mark on value earlier this year due to a combination of pricing actions we took to reestablish healthy margins that coincided with competitive pricing increases,” implying that the company lost volume and basket size to competitors and tried to counter shrinking profits by raising prices—an approach that didn’t succeed. Looking ahead, Lindberg said, “We're going to continue to pull the lever on price, particularly with opportunistic pricing, to make sure the WOW! is there.”
The table below illustrates the basket size dynamic for Grocery Outlet and Aldi based on Placer data. Dwell time has declined for Grocery Outlet but remained stable for Aldi. The critical 15-44 minute dwell time (which we assume indicates a full shopping cart or basket) has decreased by 3% per location for Grocery Outlet, while Aldi saw an increase of 14% in this segment. The less-than-15-minute segment has increased for Grocery Outlet, likely reflecting smaller, “half-basket” transactions. Conversely, Aldi’s half-basket segment grew at a slightly below-average rate.
The table below illustrates the cross-shopping or “no swim lanes” dynamic. Aldi has seen a 15% increase in visitors this year compared to last, and many of these visitors were also Walmart customers. This includes a 13% increase in Aldi customers who also shop at Walmart, suggesting that Walmart may be losing some visits to Aldi.
In our prior analysis, we observed a 19% increase in Aldi customers who also shop at Sam’s Club, likely indicating that Aldi is encroaching on Sam’s Club’s customer base. (Sam’s Club’s own customer growth was only 4% year-over-year.) In contrast, visits and visitors at Kroger are down year-over-year, and the modest 5% increase in Kroger customers shopping at Aldi likely reflects Kroger also losing customers to Aldi, as with Walmart.
For Grocery Outlet, the 22% increase in shared customers with Sam’s Club is notable, potentially supporting Lindberg's comment that Grocery Outlet raised prices too much. The overlap with Costco has also increased, though to a lesser degree.
Notably, Sam’s Club has far less overlap with Grocery Outlet due to the differing footprints of the three retailers. However, there is a much higher level of three-way competition in Pennsylvania, where Grocery Outlet operates 39 locations, compared to 24 for Sam’s Club and 11 for Costco. Pennsylvania, therefore, offers a useful case for examining differences in consumer segments.
We analyzed the combined variance among the retailers in Pennsylvania using Experian Mosaic data. The table indicates that Sam’s Club customers are 3.2 times more similar to Grocery Outlet customers than to Costco customers, which underscores our interest in the +22% Sam’s Club overlap mentioned above.
Lastly, our prior/post visitation data below indicates significantly less cross-shopping for Grocery Outlet with neighboring conventional grocers (-25%) and an increase in single-destination trips (+9%). This suggests a positive shift in consumer perception that Grocery Outlet can meet a greater share of their needs. As a reminder, Grocery Outlet aims to price 40% below conventional grocers. This 40% discount, combined with the 27% increase in grocery prices (CPI) since 2019, effectively brings Grocery Outlet's prices below 2019 levels.
