PHOENIX — Sprouts Farmers Market here is continuing to pursue its growth-through-acquisition strategy, and it may not be finished following its pending merger with Sunflower Farmers Market.
“We are excited to help the company prepare for continued growth throughout the U.S.,” according to Andrew S. Jhawar, a senior partner at Apollo Global Management, the New York-based investment firm that is Sprouts’ majority owner.
Sprouts this month agreed to acquire Sunflower for undisclosed terms, its second large acquisition in two years.
Andrew Wolf, managing director for BB&T Capital Markets, Richmond, Va., said he sees potential opportunities for Sprouts in the Pacific Northwest and the mid-South.
Sprouts is more likely to grow contiguously, rather than leap-frogging across the country as The Fresh Market, Greensboro, N.C., will do when it opens stores in California later this year, Wolf pointed out.
“There are a lot of smaller companies doing business in natural and organic products, and there is a lot of latent demand out there for those products, so I think there’s room for Sprouts to absorb some additional players,” he said.
The chain is well positioned to continue to grow, Wolf added, “and as it continues to get more sales following this merger, it will become more important to its vendors. In addition, it will be able to amortize the costs of its growth over a larger business and invest more in both store development and training.
“First, of course, it must integrate the two banners and cross-pollinate, but with the Boney family in charge, Sprouts has a good management team running it who knows the business.”
Scott Van Winkle, managing director for Cannacord Genuity, Boston, said Sprouts’ growth — with the acquisitions of Henry’s and Sun Harvest last May and the pending merger with Sunflower — has been opportunistic in nature, “and I’m not sure there are chains of sufficient size out there like Sunflower that would present future opportunistic growth,” he told SN.
Given that Sunflower “runs a good business with very productive stores,” Van Winkle said it appears it will make a good addition to Sprouts. “Sprouts will end up as a very significantly sized retailer, and once it integrates the operations and gets all platforms put together, it should be able to reap the benefits of a larger scale in purchasing and real estate,” he explained.
“However, given the size of the businesses, any synergies are more likely to be incremental rather than enormous. But they will make Sprouts a more efficient operator.”
Van Winkle said he doubts an expanded Sprouts will have much impact on Whole Foods Market. “Every regional chain in the natural and organic field seems to go up against Whole Foods with a different value proposition, but I doubt any of them has any real impact on Whole Foods,” he noted.
Sprouts said it expects to complete its merger with Boulder, Colo.-based Sunflower during the second quarter, which will create a company with sales of approximately $1.8 billion, encompassing $1.3 billion from Sprouts and $500 million from Sunflower.
Last May Sprouts acquired 43 Henry’s Farmers Markets and Sun Harvest stores from Smart & Final, Los Angeles, boosting its store total from 56 to 99. Apollo, which owns Smart & Final, became Sprouts’ majority owner through that deal and a source of capital for expansion.
According to Jhawar, “This combination [with Sunflower] makes great sense, given the rapid growth in demand for natural and organic products and the complementary nature of the geography of the two companies.”
FOUR NEW STATES
The addition of 35 Sunflowers will boost Sprouts’ total to 140 locations (including six stores opened since its merger with Henry’s) and extend its presence into four new states — Nevada, New Mexico, Oklahoma and Nevada — while expanding its operations in Arizona, California, Colorado and Texas. Sprouts said it also plans to open 13 new stores this year.
Shon Boney, chief executive officer of Sprouts, said that, although the merger is likely to close in mid-spring, it will be several months before the two companies integrate all merchandise and before the Sprouts name goes up on the Sunflower locations.
In a letter to employees of both chains that Boney shared with SN, he wrote, “As we learned during our merger with Henry’s and Sun Harvest last year, these things take time to work out, and we are realistic about that.
“Until the closing of the merger, Sprouts and Sunflower will remain separate and distinct entities who are competing with each other.
“Once the merger is finalized, changes will be phased in gradually over the rest of 2012. For example, because we have different buying systems and warehouses and inventories, it may take many months before the stores all carry the same products.
“Certainly it will be quite a few months before you see the name change on the outside of any store.
“But because we are a family-run business of high integrity — with the lessons of the Henry’s merger fresh on our minds — great care will be taken to minimize the disruptions and to incorporate the best of both companies into the new stores.”
Boney said the merger will bring “an influx of interesting new products” to the Sprouts stores, “and prices may get even better as our improved access to suppliers should allow us to find efficiencies in purchasing and distribution.”
He also said he anticipates “improvements in operations as we take the best practices of each company.”
NEW-STORE GROWTH
Chris Sherrell, president and CEO of Sunflower, said, “Merging the resources and talents of both companies means we’ll be able to accelerate new-store growth and optimize our offerings. I’m confident that Sunflower and Sprouts customers and employees will be impressed with the evolution and advancement our companies can achieve together.”
Sprouts evolved from a series of retail businesses operated beginning in 1943 by Henry Boney. His sons Stan, Steve and Scott opened a group of stores in 1969 that were re-named Henry’s Marketplace in 1997; two years later those stores were sold to Wild Oats Markets, which spun them off to Smart & Final in 2007.
Sunflower, founded in 2002, is owned by co-founders Libby Cook and Randy Clapp, along with KMCP Advisors. Sagent Advisors, New York, served as financial adviser to Sunflower.