Kathleen McLaughlin
The Bulletin

The Redmond Grocery Outlet sells everything from odd lots of organic canned beans to sriracha ranch dressing.

When Grocery Outlet Holding Co. begins selling its shares on the Nasdaq stock exchange next week, the Downs family of Redmond will know their store played a pivotal role in the company’s history.

The late Leonard Downs struck a deal in 1973 with Grocery Outlet founder Jim Read to sell on a consignment basis surplus canned goods. Downs’ store at 798 NW Fifth St. has been in business ever since.

Their agreement, which company lore says was written on a napkin, formed the basis of Grocery Outlet’s business model. The Emeryville, California, company boasts 15 consecutive years of sales growth across comparable stores, according to a prospectus for potential investors. Grocery Outlet says much of that is owed to independent contractors like the Downses, who run the stores and share in their profits.

“Leonard’s store … is a testament to all of the independent operators who have placed their trust in the Grocery Outlet management team over the years,” the company says in a 59-page report aimed at recruiting independent operators.

Downs, who died in 1999, handed the store off to his son, Bob Downs, and now it’s operated by a third generation. The Downs family was not available for an interview before the initial public offering.

Grocery Outlet plans to trade on the Nasdaq stock exchange under the symbol GO. The price, estimated between $15 and $17 per share, is expected to be set June 19, according to a Nasdaq announcement.

Changing mix of bargain hunters

Redmond resident John Hoffman said he’s been shopping Grocery Outlet since the early 1990s, when the store was still called Redmond Canned Foods. “It’s one of my favorite stores,” Hoffman said.

Over the years, Grocery Outlet introduced meat and produce, which come from conventional sources rather than the company’s “opportunistic” buying model.

Hoffman said he notices more selection of organic food. “Seems like they’ve kind of gone to that ability to provide something you wouldn’t get at Safeway,” he said. “Like their cheese, for instance, they have a really good selection of cheese there at very good prices.”

Hoffman’s most memorable bargain: organic tomatoes at 17 cents per can.

Scott Whiteside, a satellite installer from Crooked River Ranch, said that when he was growing up, he would never have wanted his friends to see him grocery shopping with his mom at a canned food warehouse. But as an older adult, he was introduced to Grocery Outlet by fellow wine aficionados.

“Then I kept going there because the prices are so good, and the employees are so cool,” Whiteside said.

Grocery Outlet says it still serves traditional bargain hunters, who are trying to stretch a small income to feed a family. Some stores are busier in the first 10 days of the month because that’s when families receive government food assistance, the company says in its report for independent operators.

But the chain also draws “the shopper who makes well into six figures who stops in at our store on their way to Whole Foods.”

Growth strategy

With more than 300 stores in five Western states and Pennsylvania, Grocery Outlet plans to expand in contiguous states.

That strategy hinges in part on recruiting independent operators, who tend to be couples with an entrepreneurial bent, according to company reports. The Grocery Outlet in La Pine, which opened in 2017, is operated by Brett and Gina Turner, who relocated from the Bay Area after working for Safeway.

Grocery Outlet says its business model is different from franchising. The company leases real estate and supplies the food, which the independent operators select based on their knowledge of the local market. The independent operators buy the store’s equipment and hire employees. Then Grocery Outlet pays a commission based on a share of gross margin. “This can be a very lucrative outcome for both parties,” according to a company report.

Grocery Outlet fans might be excited about buying shares in a company they know well, but IPOs rarely benefit common investors, said Bill Valentine, a chartered financial analyst at Valentine Ventures in Bend. “If you are not an insider, and you are a secondary buyer of that IPO, temper your enthusiasm,” he said.

Current owners commit to paying a price set by investment bankers. The first trade on opening day tends to come at a premium to that pre-IPO price.

If the price continues to climb, IPO investors win. “Watching the market for 30 years, more often than not, they flame out,” Valentine said.

Most of the $275 million Grocery Outlet hopes to raise will go toward retiring debt. An investment fund run by the private equity firm Hellman & Friedman LLC acquired 80% of the company in 2014, and that fund, H&F Investor, will continue to have a controlling interest in the company.

— Reporter: 541-617-7860, kmclaughlin@bendbulletin.com

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