Grocery Outlet Holding Corp. (GO) Earnings Call Transcript & Summary

Hi, everyone. I'm Michael Lasser, the hardline, broadline and food retail analyst from UBS. We couldn't be more excited to have the team from Grocery Outlet with us this afternoon. Grocery Outlet is one of the most unique and well positioned grocers in the United States. It's a discount grocer. It operates approximately 380 stores and is one of the fastest-growing retailers in its segment. It goes to market with a really unique value proposition. Today, we're fortunate to have Eric Lindberg, the company's Chief Executive Officer; Charles Bracher, its Chief Financial Officer; and Joe Pelland, it's Vice President, Investor Relations. The team is long-tenured at Grocery Outlet and has a really good perch on what's going on. So we're super interested in hearing the Grocery Outlet story. With that, thank you very much for joining us, Eric, Charles and Joe. Where I want to start is the Grocery Outlet has a really unique model in that it's independent operators run the stores. Why do you think Grocery Outlet has been so successful at operating this model? And can you give us a sense of how you balance the benefits of local ownership with maintaining a consistent shopping experience across the store suite.

Yes. So thanks for having us on. Really enjoy talking to you and look forward to answering some questions and helping people understand Grocery Outlet a little bit more. So the model is really -- it's one of the sort of the 2 elements of the business that make it unique. One of our differentiators, the model and then the way we buy. I think it works really, really well. We balance that sort of independence, if you will, from sort of the conformity and wanting to sort of be able to stamp it out in rapid succession. And we do that by a lot of training and investment in the IO and allowing them to really engage in their community to what they need. Our belief is we get that IO closest to the customer and help them with data to make the best decisions. They're going to make a better decision than we could in 380 different markets from where we sit here in Emeryville, California. At the same time, we can do things that they can't do very well. They couldn't possibly source or do logistics, or do supply chain, or technology, or back office, or marketing, or real estate selection. So we stick to the things that we're really good at, and we let the operators stick to the things that they're really good at. It works really well. And then at the core of this model is really the incentive, right? So we split the gross profit margin of the 4-wall unit with the operator 50-50. They have a list of line items they cover, including labor and sort of utility costs, and we have 1 that we cover. And it's a super motivating proposition for them.

And how satisfied are you with the pipeline of independent operators. As you get bigger, can you scale this model to thousands of stores? And what will be the challenges of that?

Yes. I do think we can scale it. We're seeing -- we think about it like a funnel at the top of the funnel, 2,000, 3,000 people per month. A lot of people are interested in it. What we're looking for is skill set and mindset, skill set is what is on paper, what have you done in your life. Mindset is a more important thing. So we're looking for the best we can find a mindset. I'm entrepreneurial. I'm a risk taker. I believe in getting up in sort of setting my own direction every day. And we've been amazed. About 65% of people come out of the industry. So they run at Walmart, they brought up the Whole Foods, a Trader Joe's, a Costco, whatever. And then about 35% are either internals that came from Grocery Outlet that have come from other walks of life. And we're really encouraged by what we're seeing in this other 35%, people from restaurants, people from running multiunit retail, lots of people that are very high on that skill set, but also very high in that mindset. So it doesn't take a lot of numbers for us from that 3,000 to sort of whittle down to 10,000 or 12,000 that we're looking per month. So we think there are plenty, and we're really encouraged by what we're seeing.

And I would point out that if anyone wants to add a question on our conversation, please feel free to do so through the window on that you're watching the webcast. On the subject of independent operators. How does that funnel work? How do you advertise new stores, potentially independent operators? And you mentioned someone who might have run a Walmart or other retail. It's been really super enjoyable, interesting experiences covering the Grocery Outlet story to get to know some of these independent operators and husband and wife's teams and all the different backgrounds that they have. What are the qualities that you look for that makes a really good aisle.

Yes. They have to really want to work for themselves. They have to believe in this idea of giving back to their community. And that's not a -- that's not something we say to publish on the website. That's really in their heart. If you look at their motivation, it's probably that first, working together with family, being involved in a community, making money, might be second or third in the list, but it's not all about the dollar, it's about this whole thing of being independent, being able to take the tools that we give them and go out and apply it to their trade. Most of the people that we're getting have been in the industry for 20 or 30 years, and they've just found Grocery Outlets. They get to apply everything they've learned to our model. And what we're seeing is they can be great at data, they can be great at merchandising, but they have to be good with people, have to be really comfortable leading and doing without us looking over their shoulders, telling them what to do every moment. We do data assisted ordering. It's not programmatic for schematic. They have to sort of go into an order guy, which is a representation of what we have that day in that warehouse. They got to select what they're going to put in their store the next time that truck comes in. And there's a lot of thinking that goes in. And the operators just are the best people to be local and be able to make those decisions.

Got it. And you mentioned the other unique part of the model. Is this buying method and the opportunistic buy, which accounts for typically half of the products or have the sales of a store. Right now, Grocery Outlet accounts for about 14% of the opportunistic by market. Is that right? And this is -- it's been accomplished with 400 or so stores, fewer of the 400 stores. Over time, you've guided about 4,000 Grocery Outlets across the store -- across the country. And so it's clear that Grocery Outlet is going to be bigger than the opportunistic by market. How do you broaden that sourcing strategy to be able to retain the uniqueness of the value proposition while you also serve what the customers want?

I'd like to describe it this way. First, go back to definitionally, our customers can't necessarily point to an item on the shelf and say, that's opportunistic, that's made to order. They come because we deliver a lot of value. At the end of every time you walk to the register, we circle the receipt savings on the tape. And we tell you, hey, you just save $53 and you spent $48, right? So big savings relative to what you spent. So our job is to deliver that value. I think the 3 things that you need to believe to think that we can continue to grow at the pace we grow at is: one, the pie, the total sort of addressable market of buying is going to grow 1% to 2% annually. Two, that you believe that Grocery Outlet can grow our share, meaning, we can do it better than anyone else, which we're really intent on. And three, is that we're going to be able to innovate on the fringes of things like NOSH, which is our natural organic, specialty and healthy initiative or what we've done with meat, what we've done with produce, what we've done with dairy, just adding things in that make it a more relevant shop. But keeping in mind, it's all about the value. So I think we've got a long way to go. We think the opportunistic will hang with the story, 800,000, 900,000 stores pretty easily at that sort of half and half. And then you got to believe other things will come in on the innovation bucket. So as Grocery Outlet get into sort of some private label offering, I don't think we're over 30%, certainly never what the hard discounters are doing at 80% or 90%. But I think we can be 10% or 15%. I think about it being more of an innovator versus just putting our name on a saltine cracker. Let's go out and actually work with suppliers like we have with them on opportunistic sourcing. And let's come up with a unique item that we can have and only we can have. And I think that's something that's worth building, it will take us some time, but we haven't even begun that. That will be another strategy that we have to sort of continue to offer values to the customer.

And I think Grocery Outlet build up a lot of street cred, if that's an official term because there was a lot of focus a year ago, oh, my goodness, we're selling every roll of toilet paper in this country, where probably every box of Cheerios, how on earth is there going to be any sort of opportunistic buy, And Grocery Outlet showed its scrappiness and its craftiness with being -- going to different manufacturers and different distributors that hadn't worked with in the past, buying an industrial size jar of mayonnaise and using that as a new opportunistic buy. So now we're a year forward, and we're going to see a shift back to food away from home, through food at home, could we actually see unique opportunities in the opportunistic bio market that you didn't see a year ago because we have to ask the question, if you're going to be adversely impacted when the world was going through such dramatic change, aren't you positively impacted now when maybe the pendulum is swinging to the other side?

I think there's a lot of logic to the way you described that. For certain, we have stayed in touch with the relationships we have with existing suppliers and new suppliers. The initiative for new supplier acquisition, we call it [ NESD ], alive and well. We added some 400, 500 new suppliers last year during a pandemic, doing it virtually was just amazing. But we do think that the suppliers are not going to get caught out on the supply that they had to basically tell Walmart to allocate, and tell Kroger, and tell Safeway, we don't have product for you. That wasn't going to happen against. They built the safety stock into the supply chain. I think as things start to shift, we're actually going to have perhaps a better buying year than we had last year and certainly one to remember in the last 5 or 10 years because innovation is coming back. They're changing the way they think about pack sizes. I think there's an opportunity for them to promote and put product, but they're not going to be short on product. So if they're going to be long to plan on product, I think Grocery Outlet will benefit. And look, we're keeping our ear close to that. It's too early to call because I think it's -- we're sitting here at March 1, essentially, but that's the orientation we have going in. And that will enable us to provide the values that are in excess of what the customer expects. And so with that comes a lot of good things.

So 2 questions in that regard. Number one, you said 400 to 500 added last year. In any given year, what might that number be? Is that -- so is that bigger than what you would normally do?

I think that's an average year. But I think just given the difficulty of the operating [ service expenses ] to have an average year of just adding. But I think the thing, Michael, that's a bigger point there is that we have an entire team like 80 people in that buy and assistant buyers and search buyers. And it's very much a learning culture of people teaching people. And they're all pounding the phones and looking through their categories and subcategories to see if they can find those new sources of supply and you'd just be amazed at the brands that we get in the store, you've never heard of, right? Like it doesn't even make sense as a marketing company, but they're on the shelf and we're trying it, we're buying it. So it's really a fun space.

That's awesome. And what are you hearing from [indiscernible] right now. Do they feel like they've properly prepared for what might happen? And we're going to -- like we are -- as we were talking before, like we are at the precipice of kind of see what happens next and it's going to be super fascinating time.

Yes. I do -- I think they're prepared. Look, I think they really want to get back to innovation. I think they're worried about a couple of things. They're worried about how regular retails are going to lean into their pocket book for promotional allowances and spend some of their hard-earned margin from last year. It's a good year for everyone profit-wise. So I think that's one. Two, I think they're building some of the keep in the food and home strategy. Look, we all are tired of cooking for ourselves, but there's some benefit with our families of just being home, making meal together, and we got to do it a lot last year. I think a lot of that sticks. And then I think health and wellness is sticking for sure. RJ and team went and did the FMI virtual, which is about 1.5 weeks of sort of meeting with all of our key accounts, and they took away a lot of stuff, but the thing that kept coming up is innovation, innovation, innovation. They want to get that pipeline open up again. They have to grow as well. And look, they're up against the same comps we had. They had an amazing year, most of them. And so how do you plan for that? Well, you build inventory?

Right. We did get a question in the audience. I'm going to lead into it with your 10% unit grower per year. I'll lead into this with, have you had any challenges in finding good high-quality sites, and what are you seeing from the real estate perspective, and this one might be a little bit more geared for Charles. It says, the numbers in the 10-K around rent, single imply that rent per square foot is up over 8% from 2019 to 2021. If that math is correct, it implies that rent on new stores is 25% higher than base stores despite base already being heavily concentrating in California. Could you elaborate on higher rent on new stores and how that might impact new store economics and profitability going forward. So Eric, I don't know, if you want to comment on this.

I -- let me take the first one. And then, Charles, maybe you can lend an ear on the second one. We're not having a hard time finding sites. It was really difficult to open sites. There's not a city office that's open. There's not a planner that's available. The bureaucracy that we had to deal with and sort of hoops we had to jump through was quite high. That said, we lowered our guidance sort of midyear, and then we sort of started to add them back. And I end up being right on top of what we said we were going to do. We were able to sign up a nice site selection list for this year, and we're working on next year. So we're pretty pleased with what we're seeing. I would not say that we've seen sort of the holy grail of open sites coming yet. I think there's been a lot of damage to people that are in sizes that we might be interested in. And I think it's just -- you need to wait a little bit longer for those landlords that own those assets to sort of decide, hey, we're going to sort of take our price down and start talking to others. But Charles, why don't you tackle the economics of '19 versus '21?

Yes. Yes, Michael, let me address that and happy to have any follow-up conversations if people want to dive into specifics. I'd say, we've always talked about the new store model that we use a blended store model, factoring in the reality that we're looking at store -- opening stores in infill locations. We're opening stores in developing markets like for us, Southern California. And then as we've talked about, we'll begin accelerating store growth in the east this year. So we look at kind of that -- how real estate vintage comes together. And we make sure that we're balancing economics across those markets such that we solve back to our blended store model, which, again, we've enjoyed incredible consistency across store performance for the past several years. So specific to the question, no, I'm not sure exactly the math that the person is doing, but happy to look at those specifics in the 10-K. But we're seeing very consistent economics relative to what we've posted in the past and continue to be really happy with the performance of recent vintages of stores. As you know, it's a pretty healthy sales growth between year 1 and what we call mature year 4, roughly 25%. So we spent a lot of time watching new store performance and seeing the maturation of those vintages, and we've been really pleased with, again, the performance of recent vintages as well as the stores we opened in 2020.

Got it. That's very helpful. And speaking of expanding on the West -- on the East Coast. A few years ago, you established a stake in the ground with your purchase of Amelia's. So 2 questions in that regard. How should we think about the overall economics of the business as you move beyond your West Coast roots? And b, is -- are acquisitions going to continue to be a key tool that you use as you expand? Or was this just an opportunity that was too good to refuse?

Yes. Let me start with the second question first. So just around as we think about M&A opportunities, to your point, so we bought the Amelia's business in Pennsylvania in late 2011. I'd say the thesis of that acquisition was really more about getting access to pools of opportunistic products, opportunistic supply that lay east of the Mississippi. And that was really the underwriting thesis there, which it clearly is delivered for us. Our primary orientation is around organic store growth. We've been very consistent about this disciplined clip of expanding the store base 10% per year. We just look at the map and believe we have huge white space in front of us. It's an incredibly portable model. It works in so many different locations across income demographics, across urban, suburban rural markets. So our organizational focus has been very much around that organic growth. And really, we talk a lot about reinvesting back into the business. And that is why the primary reason why we're so mindful about that is making sure that as we go after that huge white space opportunity, we've done the right things in terms of infrastructure building to support that across the organization. So as it relates to economics and as we go market to market, it really is this never-ending process of you're continuing to enjoy economics and higher levels of brand awareness in mature markets. And then you are developing newer markets like Southern California and you're dipping your toe into new markets like the East Coast for us. And so it really is just about making sure that we're balancing performance across those markets, which we feel really good about our ability to do.

One of the striking things about the Grocery Outlet model is how well it works in so many different geographic areas and demographic areas. I personally been in the stores in Sacramento, Oakland, seen locations in -- or rural Oregon. Is there any way where it doesn't work? Are there any demographics where it's just for whatever reason, it doesn't really resonate with?

Look, we've had sites that haven't worked. I can't couple any sites -- we'll close a store or 2 a year more around just sort of cleaning up, either a location we don't like or something about the town, but it really works everywhere. It works in incomes of 150 plus. It works in incomes of 20,000 minus. It works in towns of Lapine, Oregon, 900 to downtown San Francisco, we've got 150,000 in a 0.5 mile. And so they work because I think the value we deliver, the local community that's delivered by the operator. That all sort of hangs together the newness of this treasure hunt that is just really exciting to shop, something different for food shopping. So if there is a place that doesn't work, we haven't found it. We certainly are not sort of hell-bent on every site has to work. We will walk away from a lot of sites because they don't have good site characteristics. The sample of real estate, and you just go and grab a basket of stores and go look at them, they're good real estate, right? They might not be the AAA location, but they're going to be certainly something that you'd be proud of and are in that sort of relevant traffic area, and that's really important to us.

Who doesn't like an incredible deal, right? Everybody.

There you go.

Yes. Obviously, one of the enduring outcomes of this pandemic is that it accelerated the adoption of e-commerce within the grocery sector. And despite that and despite that grocery outlet is a store-based model, you guys have been able to definitely navigate around these changes in the marketplace. But do you worry that e-commerce penetration gets to a point where it starts to become a challenge for Grocery Outlet and/or is the alternative that it's going to be more challenging for the undifferentiated local grocer, conventional. And so Grocery Outlet just has a better opportunity to gain a bigger portion of the non e-commerce share of the grocery addressable market?

Yes. I think that's a very astute way to observe it, Michael. And where I come from, we know we deliver value. It's really hard to replicate the value in our format online. That all said, it's not part of our strategy today. Will it be part of our long-term strategy? Perhaps. For that reason, we have done 2 things. One is just sort of stay close to third-party providers, people that are sort of in the business of helping you get that last-mile delivered. And two, really being intentional about the investments we're making in technology, so that we never get too far behind from whatever that platform may be required if we wanted to get into the business. But at the end of the day, we are so small in terms of market share potential, right? So we're 1%, 2%, 3% market share in one of our markets with so much potential to go. We double that and what it does for our economics in terms of just putting more products to the pipe is amazing. And I think, two, the algorithm that we've asked people to sort of jump off with us on is, look, this 1% to 3% comp store sales growth, the 10% algorithm on the top end for new stores. And then ultimately, allow us to reinvest in the business on the bottom line so that we have sort of this flattish EBITDA margin. So we just think there's a ton of work that we can do. And to your point, there are a lot of customers that either can't afford or just don't want to shop online. That's not to concede the point that, gosh, they went from 0 to probably 5 years from now and 1 year during COVID in terms of adoption and success metrics. And I think that's great for the industry. I think it will challenge everyone, including us, and that's a good thing.

And when we talk to stakeholders and investors about the Grocery Outlet story, specifically as it relates to e-commerce, the naysayers make 2 points. They say, it's hard to have an e-commerce business when there's an inconsistent supply of products. But I guess the bullish argument would be, well, that creates the excitement because you're going to get more traffic because people are going to want to see what they can get online, eventually, if that's the direction that Grocery Outlook goes. The other skeptical argument is how do you attribute sales when you have this independent operator model? And isn't there the answer there that you can just do it easily by zip code and I mean...

Yes. [indiscernible] I'd throw out a third hazard, which is just the economics of the proposition. An omnichannel retailer like Walmart or Amazon can invest a lot and lose a lot and still sort of grow the share, and that's the name of the game. I think the economics are challenging for everyone. I'd like to walk people through, like, what would it cost you if you were getting paid to go to the store, pick out a $50 basket of groceries, pay for it, package it, get it into your car and go drive it to someone's house, those economics don't work for $9.99. They don't work for $29.99. You can't [ take one ], you can't insure them, all those sorts of things. So I think it is something that people will elect to spend money for. Our customers have told us they won't substitute the value that they currently get for the delivery. Now it may end up in a hybrid, with buy online, pick up in store, which I think you've seen Dollar General try with some success, that could be something that is engaging. But we still like what we're doing. We'll stay close to it. And it may be part of the strategy in the future, just not right now today.

And you alluded to this before, and I think it's an interesting point. How do you kind of lay the foundation, ensure that your systems are where they need to be in the event that you decide that this is a strategy we need to pursue. Are you pursuing that at a measured pace today to put Grocery Outlet there in the future?

Yes. Charles, do you want to take a stab at that?

Yes. I think it's, again, back to the theme of reinvestment. This is something we talked about on the earnings call. But specific to technology, we have a long history of continuing to reinvest and modernize our systems, really a combination of sort of customized tools we use in-house that have been homegrown as well as best-of-breed tools that we use to support the business and just had great success with that model. And so as we look forward for the next 5, 10 years, we're making investments today that will allow us and provide that flexibility such that, yes, we have the optionality to do what we want to do, whether it's with respect to any sort of e-commerce or buy online, pick up in-store or whether it has to do with personalization, making sure that foundationally, we have the right IT infrastructure and systems that will allow us that flexibility going forward. So we're really excited about some of the investments we'll begin making this year, again, just setting the stage for the next 5 or 10 years of growth.

That's awesome. I want to pivot the conversation a little bit to some more near-term topics. One of which is there's been some well-documented pressures on a lot of the cost items for retailers, whether it's transportation costs, wages. Grocery Outlet is in a unique position with regard to wages because those are borne by the independent operators. How are you seeing the overall cost pressure environment in addition to those two? Are there others that you're mindful of? And what levers are -- is the company working to either for its own P&L or the P&L of its IOs, try to engage in to better navigate through some of these cost pressures?

Yes. You have to really think a lot about your partner. They bear the cost of labor, and that's an important differentiator for the model, whether you like it or you don't like it. It's a big obligation for us. We think about it every day. And what we end up doing and we've been working on for probably 6 or 7 years is this eventual steady state where all of our operators are going to have rates of 15 plus. We've got [ 16 65 ] in Seattle, in every West Coast City, and I think it's going to be across the country, we'll end up at that place. So we talk to the operators about driving gross profit margin dollars, about driving their comp and we've done the math for them and show them and demonstrated over the last 5 or 6 years that they can't absorb those costs, but they have to be more efficient. And so efficiency is driven by dollars per labor hour in the store. And so measuring that, understanding exactly what you're getting out of your labor force as an operator; and two, it comes from what Grocery Outlet does, right? So we've done a lot of time studies on how the operator spends time. We really want them spending time with employees, with customers in their market and ordering and merchandising product being on the floor. We don't want them spending time checking in product, looking through invoices, clicking around on a slow Internet connection or whatever it happens to take time and slowing down that's of a repetitive nature. So we go after those with the dog [indiscernible] and we try and make them more efficient. And so we've had all these innovations go through just numerous innovations to help with the efficiency in the store. But at the end of the day, the operator owns that labor piece. So we can only do so much. They have to be smart. They have to think about who they're hiring, they need to not be afraid to hire people at $16 or $17 or $18 or $20. You can handle that wage if you can run your sales per labor hour at a higher rate. Maybe, Charles, you want to talk about some of the other cost pressures. I don't know if I mentioned freight, Michael [indiscernible].

Yes. Yes, we're always balancing those sort of as we think about headwinds and tailwinds across the expense structure. I think one, obviously, it's well-publicized now is inflation. Q4, we saw inflation running, moderated a bit from Q3, but still above historical levels and particularly seeing some commodity cost pressures in certain categories like protein and dairy. As best as we can tell, we would expect those similar cost pressures to continue. But I describe them overall is fairly benign. This gets to one of the big advantages that our model affords us is our ability to mitigate some of those pressures. And you can look back over time. Again, we're just proud of the consistency, not just top line, but you look at margin, gross margin and adjusted EBITDA margin. Consistency over time is just incredible. And it does get back to the uniqueness of this business model and the flexibility we have with respect to purchasing and merchandising. So it's worth remembering we're in the market every day, buying and pricing product. We've got, at any given time, 5,000 SKUs in the average store, but over the course of the year, 90,000 SKUs will flow through the system. So just incredible velocity there. And that means we're not locked into any particular item. We don't have purchase commitments with respect to vendors. We mostly have multiple vendors per SKU. So we have lots of different places we can go to the extent we're trying to navigate some of those headwinds. And just the ability to make those real-time purchasing and assortment changes is the key reason why we've enjoyed those -- that kind of margin stability through inflationary periods in the past. And then you also mentioned freight. So freight is another one that, for us is we feel the impact, but it's probably a little bit more muted relative to others. Just a couple of things to keep in mind there with respect to freight for us. Inbound freight is a small percentage of the business. We import a very low percentage of our mix as it relates to just general merchandise inventory. So we don't necessarily feel the impact that some others feel. And then in terms of outbound freight to stores, we service the majority of our stores through our in-house transportation fleet. And so yes, while we can feel the impact of increases in fuel costs were somewhat insulated from a cost standpoint. And in addition to the fact that we think -- we know that it gives us better service to our independent operators.

You raised a lot of good point, Charles. And first and foremost, the remarkable consistency of the margin structure at Grocery Outlet, which really is in sharp contrast to a lot of other grocery players, especially at a time where e-commerce has increased in penetration. So can you connect at a deeper level, how some of the mechanics work where you do encounter some of these pressures and then you're able to kind of pull the levers to be able to offset that. What strikes me is last year when there was sharp inflation in the protein complex. It didn't seem to really have an impact. We may see something similar given the recent rises in areas like soy, corn, wheat, will you use the same playbook this time around and navigate through that?

Yes. I mean, again, it gets back to the day-to-day of what the purchasing team and our inventory planning team does. It's just different than other models, given that we don't have fixed slots in the distribution centers. We don't have planograms at the store level. So we're able to, as we experience, whether it's a headwind from a particular vendor or a particular item, we can pivot and adjust accordingly. So there's just. I think 1,000 decisions are being made on a daily basis across the purchasing and planning team and as they are experiencing, they've all got their goals. They're working towards. And as they're navigating some of those headwinds, they're able to make adjustments. And we can, again, look back at the history of the numbers, and it's pretty incredible to see the consistency that, that ultimately delivers.

And would you expect higher overall food inflation this year than we've seen in the last couple of years? And does that have an impact on Grocery Outlet's model? Are you able to push it along?

Yes. Well, as best as we can tell, yes, it would be -- we're looking at higher inflation than we would typically see. And so it's just -- as we think about -- we talk about the stability in gross margin and the stability from EBITDA margin standpoint. You always have these headwinds and tailwinds or headwinds for us right now. Yes, we're feeling some higher commodity cost pressure than you'd feel in the typical year, perhaps a little bit more freight, but in terms of tailwind, and it just gets back to the advantages of always reinvesting, we've got a number of things that we're doing both across systems and just process as it relates to purchasing and some of the tools and the ordering tools that we give independent operators, whether it's inventory management tools we're using. There are things that we're doing that there are tailwinds to gross margin. So always looking to as best we can, offset sort of the headwinds and the tailwinds and managed for margin stability over time.

If I add $1 for every time, merchandising has been mentioned in this conversation, I would get a really nice steak dinner at least, which I think shows how influential and how critical to the Grocery Outlet model this function is. And one of the really important examples of that has been the rise of the NOSH or the natural organic, sustainable, healthy initiative over the last few years. Hopefully, I got the acronym right.

You got it. You got it.

So my question along those lines is, is there still more room to go with NOSH and what's next.

Yes. Absolutely. We're not seeing any of the growth retreat, which puts a smile on our face. We got more buyers dedicated to it. We follow the trends. We're out in retail stores, whose primary business it is to sell these products and not the -- the tendency for our buyers is to go to those stores look for the products that are on the shelf that we don't have, make an outgoing pitch to that store or to that supplier and pretty soon start our relationship where we're buying those products. And so that's a lot of what we saw last year in terms of growth of the [ NASE ] initiative. I would say most of the key categories are represented at a store. We added fresh meat. We added seafood, two fresh meat, which -- with something new. It's been very, very successful. It's driving a lot of dollars per week. It's really helped with penetration of the meat category and it's super efficient because it's in a 8 or 12-foot case plus a bunker in the front of the store. But NOSH, I think, grows by buying it and I think merchandising. And so we've tried some different initiatives in the store, we've integrated NOSH into the entire store. So that you walk throughout and you see organic product with your baking or organic crackers with your crackers. We've created a separate aisle. We've done a combination of both. We've led with NOSH on the front. So you walk in, you go through the power wall and the first churn is the NOSH aisle, which we like. So we've got a long way to go, I think, in terms of merchandising. The other thing is we've thought about NOSH as sort of the whole store, not just dry grocery. So we've got it in produce, we've got it frozen, deli. We started to get in beer and wine. So I think it's got a long way to go. It is not a fad at all. I think people, every American wants to eat a little bit more healthy. I think the other trend that's going on is the young consumer were rejecting some of the larger brands, such as Kellogg's or Nestlé or some of the Unilevers, the Krafts, the P&Gs, in favor of some of the smaller brands that we haven't heard of. And so you see this frenetic pace of acquisitions from the big guys buying the small guys and trying to keep them a little bit under the radar screen. And so we see all of those as opportunities. Disruption is our friend, and we think there's a lot of disruption as this category continues to find its maturity.

That's very helpful. And as we come up on the conclusion of our conversation, there's just a couple more topics I want to cover. But we are on the precipice of a reopening and as uncertain as the environment was a year ago as we entered this pandemic phase, I guess there's just much uncertainty about what happens next. If the [ lesser ] family is any indication, yes, I will -- I do cherish this time that I spend eating dinner with my family on a regular basis. My kids though, they want to go and see their friends and are, I think, very tired of hanging with their parents. What's the prospect that we overshoot into the other direction, the possibility that food away-from-home sharply increases. And in that environment, do you think that the overall industry becomes more promotional and that puts pressure on some of the price gaps from Grocery Outlet, and it will have to respond.

Yes. You mentioned some important that price gap. We have to maintain a vigilance and a focus on the value proposition, and we'll do that. We've bid another increasingly promotional environments over the last 10, 15 years, and we can maintain it. We have run in submarkets where Walmart is attacking Winco and vice versa. And so we know how to sort of play the game when we're in between the 2 big guys playing that promotional environment. I think there will be some overshoot. I think the brewing 20s they're talking about people getting out and doing all the things, said their pent-up demand has said they need to go do, whether it's travel or get out on an airplane or go on a vacation, that's not in their backyard. All those things are going to happen, but I think at the end of the day it's expensive. It was expensive pre-pandemic, I think it's going to be more expensive. So I think there is a great habit that's been made of buying product in our stores or others and then bringing it home. And I think some of the family events, which we count 10 or 12 family eating events a year, whether it's Easter or Thanksgiving or Christmas on the big side or just a Fourth of July picnic or a 3-day weekend. We think those will be huge because they weren't big last year. So we think we've got a reason to sort of merchandise a market around sort of those eating events that will be at home. And I think those are going to be larger as people get vaccinated, things start to open up and people feel a little bit more comfortable. At the end of the day, I think value is here to stay. We deliver it really, really, really well, and we'll pivot the way we need to pivot around the promotional environment.

Last question on just the overall operating environment. One of the short run outcomes of COVID was the cost of doing business increase, COVID costs, PP&E, paying some hero wages to your workers across retail. Do you think that some of these factors are here to stay such as the cost of doing business is going up? Or is that -- are those manageable and you will have an ability to -- and your IOs will have an ability to navigate through that moving forward.

Yes. I would describe it as the latter, Michael, that yes, we expect those costs to continue until we get on the backside of COVID. But ultimately, again, reflecting on the uniqueness of the model and the costs that are borne on behalf of the IO and the cost that Grocery Outlet bears, we view those costs as manageable.

Well with that, I want to thank Eric, Charles and Joe, I mean nothing -- no better way to finish our first day of the UBS consumer conference than finishing big with Grocery Outlet. So we want to thank you for your time. We will look forward to seeing your continued success.

Thank you so much.

Thank you to everybody who joined us this afternoon.

Appreciate the time, Michael. Thank you.

Great to talk to you.

Thanks, Michael.