Organic Garage sees lots of runway for growth after a pivotal period for the grocery chain

2021 has been a watershed year for Organic Garage Ltd (CVE:OG) (OTCQX:OGGFF), the organic grocery chain founded in 2005 by CEO Matt Lurie, a fourth-generation grocer.  Apart from partnerships and deals, some of which have been close to a year in the making, customer growth has been boosted by the coronavirus (COVID-19) pandemic.  Like many other grocers, Organic Garage benefitted from more Canadians eating at home over the past year due to COVID-19. Unlike many, however, it has still recorded net growth in customer numbers as restaurants reopen and the COVID-19 vaccination program is rolled out across the Greater Toronto area where its stores are located. Organic Garage relies on word of mouth to get its feet through its doors, with limited spending on traditional advertising. Its mission is to deliver healthier food for less, which it does by focusing on the basics and filling its shelves with a selection of organic groceries that many of its competitors just don’t stock.  “What COVID-19 did for us was it acted as a giant advertising campaign,” Lurie said. “It forced people to evaluate what grocery stores were nearby, with a renewed focus on health and wellness. People were looking for alternatives to their conventional grocery stores and buying organic and all-natural items and so they went out to the market to search for what was around them, and they found us for the first time.” “Not only did we gain that incremental business during COVID, but it's actually increased our broader customer base with those preparing for a post COVID period. It’s kind of reset and increased our overall customer base,” he added. Sales continue to exceed pre-COVID-19 levels While sales levels are not expected to remain as high as the early 2020 period when hoarding and panic buying set in during the early stages of lockdown, Lurie said it is encouraging that numbers are still up on pre-COVID-19 levels.  “First off, our sales increases were almost twice what was experienced by a lot of the publicly traded large conventional grocers and yet our decrease this year is more in line with what they experienced,” Lurie noted “When we look at our numbers, pre-COVID compared to what they are currently, what we're seeing is, specifically across our newer stores, a much, much higher sales level. The increase, on average, between our two newest stores is about 25%. Even if you include one of our older stores, it's around an 18% increase over pre-COVID numbers. We've definitely taken a step forward from pre-COVID in terms of accessing an increased customer base and keeping them long term, which is really exciting.” Lurie credits Organic Garage’s value proposition, unique store experience and ethos for the net growth in shoppers at its stores. With the company in its best state ever, financially and from a customer awareness perspective, he said it was ready for its next round of expansion. Move away from decentralised distribution frees up capital Organic Garage has announced several pivotal deals this year, many of which were set in motion in 2020. It also moved to a decentralised distribution model, which Lurie said would free up a lot of capital that was tied up to fund its warehouse and the distribution of its groceries.  “That's approximately going to save a million dollars plus per year on our income statement, which is really exciting,” Lurie said. “It makes us a much healthier financially viable company, and puts money in the bank, so we're really excited about that.” In addition to rising in-store sales, the company also entered an exclusive agreement with online delivery platform Instacart that significantly increased its online delivery service area, giving it access to over 2.1 million households including new markets such as Mississauga, Milton, Brampton, Newmarket, Scarborough and Pickering in the Greater Toronto Area.  Organic Garage already had a taste of the online market. Just before COVID-19, it signed a deal with another online delivery platform, which Lurie said was fortuitous for the business as it was one of the few independent grocers that had a solution for its customer to buy online as the pandemic spread. “We learned a lot through that process and the next step in the maturation of what our online offer was how can we offer to a broader base and so we went out to the market and wanted to work with somebody who could offer an extended delivery range,” Lurie said. “That's something that we discussed with Instacart very early on. We said “If we're going to utilise your service you have to provide customers in Ontario with an extended delivery base to broaden our customer base.” With Instacart, Lurie said the company is targeting four to five times the market it reached with its previous online provider. Future of Cheese deal opens Organic Garage up to potential new investors  Adding fuel to its expansion, Organic Garage acquired plant-based cheese company Future of Cheese (FoC) in March 2021, followed up by the announcement of commercial production partnerships with industry-leading Flamaglo Foods Ltd three months later. It is also in the process of scaling up its research and development operations to accelerate advancements in its plant-based, dairy-comparable proteins.  “The Future of Cheese acquisition was a unique opportunity to access a really hot space, being plant-based foods, where there's a tremendous amount of capital inflows coming into that industry,” Lurie said. “We looked at it more from a public company standpoint; it has allowed us to get our name out there to a broader investor base that was looking at the plant-based sector but might have not been looking in the retail sector for investment. “It allows us to access potential new investors and it was a unique opportunity to acquire a company with a management team that in my view is second to none.” Runway for growth Moving away from its previously “hub and spoke” model has expanded the company’s horizons geographically as well as financially as it is no longer tied to its warehouses. So, from the Greater Toronto Area, it is now looking for opportunities across Ontario. With COVID-19 opening up real estate opportunities that match its requirements according to size, it offers Organic Garage the potential to become the largest natural and organic grocery chain in the province. From four stores currently, the company believes Ontario can easily support 20 to 25 outlets.   “That's really exciting because the market here is approximately a billion dollars a year so there's lots of runway for growth,” Lurie said. “We're aggressively looking at what opportunities are out there to grow our bricks and mortar side of our business for sure.” While that’s Organic Garage’s growth trajectory, Lurie said the Future of Cheese also has big ambitions, with new products coming to market and potential acquisitions in the plant-based sector to augment the business and help it grow provincially, nationally, and internationally.  “Plant-based foods transport very well so it broadens who we can ship products to,” Lurie said. “The name of the game is growth on the investor side and both companies have a tremendous amount of opportunity for growth and that should be exciting for existing and potential investors because growth usually translates to share price. And that means that there's potential for upside on the share price as well. Contact the author at stephen.gunnion@proactiveinvestors.com