Ahead of the Curve: Sprouts Wins Retail Excellence Award

At the crossroads of healthy, organic and natural, convenient, fresh, local and affordable, about a mile beyond most conventional supermarket operators — there you can find Sprouts Farmers Market.

Based on its integration of those trend-forward attributes and its successful financial model that has helped it absorb two rivals and triple in size in the last three years, the Phoenix-based chain has been selected as the winner of the 2013 Supermarket News Retail Excellence Award.

“Sprouts is at the intersection of two mega-trends in the industry today — health and wellness and value, and that’s really what we hang our hat on,” said Steve Black, chief information and marketing officer, Sprouts, in an interview with SN. “That’s the model we’ve built for the last 10 years — to make healthy eating easy, understandable and affordable. That’s what we talk about with our tag line, ‘Healthy Living for Less.’”

Steve Black, chief information and marketing officer, Sprouts Farmers Market (Photos by Tom Gerczynski)

As the chain’s president and chief executive officer, Doug Sanders, told SN in a separate interview at the launch of the company’s recent initial public offering that Sprouts is well positioned to be a gateway for shoppers of conventional supermarkets seeking a more healthy diet.

While traditional supermarkets seek to lure some share of consumers’ food spending away from restaurants by touting the healthfulness of home cooking, Sprouts seeks to take that one step further and teach those shoppers how to live even healthier.

“Most people want to eat better, they just don’t feel like they can afford to, and they don’t know how to,” Black explained. “That’s the secret to our success — that it’s affordable, and we have team members in the stores that can help you understand the vitamins and the supplements.

“If you are on a gluten-free diet, or wherever you are in life from a health perspective, we have people in the stores who can help you with that.”

The focal point of Sprouts’ relatively small boxes — they measure about 25,000 to 28,000 square feet — is the farmers’ market-style produce display, where Sprouts leverages its longtime relationships with growers and suppliers to make a statement on price. Founder Henry Boney began his food retail career with a farmers’ market in 1943, and his legacy lives in the chain’s current positioning.

SN Blog: Sprouts Wins by Flipping the Margin Model

Stores devote about 15% of their floor space to produce, which generates about 25% of sales, according to Sprouts’ filings with the Securities and Exchange Commission related to its recent initial public offering.

In the company’s recent second-quarter earnings conference call with analysts, Sanders explained the vital role produce plays in Sprouts’ go-to-market strategy.

“We attract both the lifestyle customer and everyday supermarket customer by featuring fresh produce at prices that are significantly lower than the conventional supermarket,” he said, noting that emphasizing produce not only helps enhance the stores’ healthful image, but also helps drive repeat traffic, “because you can’t pantry-fill with produce.”

Produce is the focal point of Sprouts stores, where customers are attracted to the selection and value, company executives say. Stores have a farmers’ market ambiance with low shelving for better visibility and to create a bright, open-air atmosphere.

“Most of all, it’s because produce is relevant. It’s something the everyday consumer is buying every single week, so they know the prices and can see that Sprouts offers far more value for their money than any other store in the market. This gives us something that no other natural food retailer has — the ability to take market share from the $600 billion supermarket industry by targeting the everyday grocery customer with the product they understand and buy every week.”

He noted that although Sprouts is competitive on produce, it doesn’t use the products as a loss leader. Instead, it seeks to achieve a balance of margins with volume in other departments such as bulk foods, packaged grocery and vitamins and supplements.

The stores are designed with a bright, open feel, with wooden barrels and crates and low fixtures for better visibility.

'Everything You Need All in One Place'

Although they lack many national mainstream brands shoppers are familiar with, Sprouts stores do offer a full shop, Black pointed out.

“You can get everything you need for a healthy diet — produce, baked goods, meat, seafood, frozen food, natural and organic groceries, bulk foods, vitamins and supplements — all in one place,” Black said. “In the early days of natural and organic stores, you couldn’t do a full shop. You could get bulk foods, or you could get natural and organic produce, or you could get vitamins and supplements, but you also had to go somewhere else.”

The stores seek to serve a broad demographic — a distinguishing feature from Whole Foods Market, which has historically attracted higher-end shoppers (although recently Whole Foods has been seeking to expand its demographic reach to more lower-income shoppers).

Sprouts’ service departments also leverage Sprouts’ farmers’ market ambiance with an emphasis on crafted products, such as store-made sausages and fresh ground beef in the Olde Tyme Butcher Shops. Bakeries, positioned near the front of the store, feature store-baked offerings.

Delis offer sandwiches made to order.

Sprouts stores also carry a selection of hundreds of bulk foods in barrels, and feature a seafood department, a deli — some stores are branded with Boar’s Head delis — as well as dairy and frozen offerings that emphasize natural and organic, vegan and gluten-free options.

The chain offers about 4,200 vitamins and supplements, plus about 4,000 natural and organic grocery items, as a well as a selection of some 1,000 private-label grocery items under the Sprouts name.

“If we open a jar of Sprouts-brand salsa and let them taste it, then we’ve typically got a customer for life,” Black said of the company’s private-label line. “We have a lot of pride in our Sprouts brand.”

Local products are also an important part of Sprouts’ offering. The chain defines “local” as products that are made or produced in the same state where they are sold. Sprouts employs a local buyer who goes into each market to scout for suitable offerings, which often include items like locally made salsas, barbecue sauces and honey.

“True to the farmers’ market concept, we want our customers to walk into the store and see products made and produced by their neighbors and their friends,” Black said. “They want to buy those products and support their communities.

“Our goal is to always offer the right product at the right value, and strike the right balance between quality, flavor and price.”

Many wines are priced under $10 as part of the chain’s value positioning throughout the store.

Stores also carry beer and wine, including an assortment of craft beers, and wines priced at $10 or less, as well as kosher, organic and sustainable wines.

Black noted that by eschewing many of the conventional national-brand lines in its grocery offering, the chain can be much more flexible in its selection.

“From a business perspective, one of the things that makes us different is that we are not handcuffed today by all the CPG contracts that the conventional stores have to deal with,” Black said. “At the end of the day, in that environment you don’t have the flexibility to react to things like new trends and customer engagement.”

Privately owned natural product wholesaler Nature’s Best is the company’s primary supplier for dry grocery and frozen food products, garnering 17% of purchases. United Natural Foods Inc. is the company’s secondary grocery supplier.

Sprouts also operates three produce distribution facilities — one each in California, Arizona and Texas — through which all local produce is sourced.

Produce, Vitamins and Service

It is often the produce displays that first attract new shoppers to Sprouts, according to Black.

“What happens with our customers, particularly when we go into a new market, is they are drawn into produce aisles first, because we have such nice center store produce displays. Then, through the promotions we run, we try to pull them into the other areas of the store, and educate them on some of the other products we have.

“As they become a repeat shopper, they do so because of the customer service and education that they receive at Sprouts.”

Having well-trained, knowledgeable and service-oriented employees is the “single most important cornerstone” of Sprouts’ success, Black explained.

Sprouts offers a selection of 4,200 vitamins and supplements.

“We believe there is a significant education component to shopping in the vitamins and supplements department, so we do a lot of training,” he said. “You can’t just have someone go in and stack the shelves without knowing what they are talking about.

“Our customers very much believe that our team members really know the product better than anyone else, and they know they can get the help getting the vitamins and supplements they need.”

Regional trainers help develop store personnel, often staying with stores for weeks until they are ready to serve customers.

“I think in my 36 years in the business, we have an educated team that is more passionate about what they are selling than I have ever seen in my career,” Black said. “Usually when someone comes to work for Sprouts and they get fully engaged in their career, they don’t want to go anywhere else, because they feel they are making a difference, and helping customers prolong their lives.”

The passion of Sprouts’ workers — and its customers — is palpable in the stores, Black explained.

“You can feel the culture when you walk through the doors,” he said.

Black said Sprouts seeks to maintain an “ever connected, always on” relationship with its customers, which he refers to as clients.

Sprouts places an emphasis on quality offerings in the meat and seafood departments. Sprouts grinds its own beef and also makes sausage in-store.

“With the farmers’ market concept, we like to think of our customers more like clients,” he explained. “The traditional customer mindset just isn’t personal enough for us. We try to warm up that relationship to the client level.”

Although Sprouts does not have a loyalty-card program, it seeks to maintain relationships with customers electronically and through other means — one of the reasons that Black himself is both the chief information officer and the chief marketing officer.

“We are able to have quick two-way communications with the customer, on their smartphone or the iPhone or their iPad, or on our website, or however they want to connect with us, so we can react immediately to their needs,” Black said. “Our customers can expect to be able to access our content any time, anywhere. You have to take care of your customer across the entire spectrum.”

Sprouts is also increasingly seeking to provide more product information in its stores, using QR codes that allow shoppers to learn about products using their smartphones.

“In the true spirit of the farmers’ market concept, we want to be able to show where the product comes from, where it’s grown and how it’s made,” Black said.

Expansion Plans

After two major acquisitions — Henry’s Farmers Market in 2011 and Sunflower Farmers Market in 2012 — Sprouts in now focusing primarily on new-store growth.

The company operates about 165 stores, and has plans to open 20 stores next year — including its first location in the Atlanta market— and to continue expanding at about a 12% pace annually.

“Mergers and acquisitions have always been a part of our history, with the Henry’s and the Sunflower mergers, but now we have shifted our focus back to organic growth,” Black said.

Sprouts typically looks for stores on main roads, with ample parking, and within 10 minutes of residences in markets of at least 100,000 population, he explained.

Stores, with their relatively simple design, require an average cash investment of $2.8 million to build and generate about 35% to 40% cash-on-cash returns within about three to four years, the company said in its prospectus.

“We have 20 new stores planned for next year in new and existing markets, and I really think that is one of the keys to our success in the future — that we grow at a pace so that we can maintain our core values and our connection with our communities and our customers,” Black said. “We want to be that farmers’ market concept for these communities.”

The company seeks to have a “balanced” expansion strategy, with 70% of its new stores in existing or adjacent markets, and 30% of new stores in new markets, Amin Maredia, Sprouts’ chief financial officer, said in the second-quarter earnings call.

“With that sort of balanced strategy, that really allows us to continue to accrete margins in the stores that we open in our existing markets,” Maredia said.

The second-quarter results illustrated the financial success Sprouts has enjoyed, even through the recession, as the company reported its 25th consecutive quarter of positive same-store sales.

Pro-forma comparable-store sales gains — including the Sunflower acquisition from May of last year — were up 10.8% for the fiscal second quarter, which ended June 30.

Net income was $12.5 million for the second quarter, up 135% over year-ago results. Net income in the most recent quarter included an $8.2 million pre-tax loss on extinguishment of debt and pre-tax store closure and exit costs of $0.9 million.

Sales for the quarter totaled $622.4 million, an increase of 45% over year-ago results.

For the 26-week period, net income rose 106%, to $30.6 million, on a 48% increase in sales, to $1.2 billion.

During second quarter, Sprouts opened six new stores — four in California and one each in Oklahoma and Texas. Another five stores have been opened in the third quarter to date, bringing 2013 new-store openings to 17, for a total of 165 stores in eight states as of Aug. 22. The company expects to open two more stores in 2013.

For the full fiscal year, Sprouts is projecting pro forma sales growth of 19% to 21%, and pro forma comps of 8.5% to 9%. Net income is projected at $44 million to $47 million.

Read more: Sprouts Posts 10.2% Comps in Q2

Black said Sprouts is being careful to remain true to its principles as it expands.

“It’s very important that we grow at a pace so that we will always be able to remain true to our core values and do all the things that make Sprouts a unique and fun shopping experience,” he said.

“We want everyone to walk in and make that connection that it really is a true farmers’ market and that the team members there are passionate, and want to help them to live a healthier lifestyle.”

Sidebar: CEO Sees Sprouts as Gateway for Conventional Shoppers

By Jon Springer

Competing in the same niche of the market as natural and organic juggernaut Whole Foods Market is daunting for sure, but Doug Sanders said he’s every bit as concerned with what’s happening with conventional supermarkets.

It’s the latter group, after all, that’s providing Spouts with what Sanders considers to be its best source of new shoppers.

Doug Sanders

“We compete with Whole Foods in every market we’re in. In three of their four biggest markets, we operate in as well,” the Sprouts president and CEO told SN in a recent interview. “But we’re focused on the broader base, and on health and value. Getting that everyday customer in using our produce proposition and gradually shifting them over to a natural foods shopper.”

The philosophy around Sprouts rests on the belief that health-and-wellness is a long-term trend that will change the way most everyone eats, Sanders said. So he is therefore positioning Sprouts as a “gateway” to that lifestyle, drawing shoppers who may not be dedicated natural/organic shoppers yet (the traditional supermarket base) rather than those who already are (the Whole Foods shopper).

“We price-check the traditional supermarkets and other competitors every week, but we base our pricing against the traditional supermarket,” Sanders explained. “Because if you think to the broad appeal of Sprouts, the value and health proposition allows us to operate in the broader spectrum of groceries —the $600 billion or $700 billion supermarket industry and not just limit ourselves to the natural foods industry.”

This pattern is reflected in the financial performance of the company, Sanders said. Sprouts stores generally gain sales and increase profits over a three-year period, although stores tend to mature faster in markets where the company already has brand equity.

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Sprouts’ average shopping basket is between $27 and $28, Sanders said, but comps are improving equally as a result of new shoppers and bigger baskets. He said he would rely on promotional programs and “high-touch, knowledgeable customer service” to encourage shoppers to explore more of its stores.

The commitment to low prices in produce means attention to efficient sourcing and quality control, he said. “We really work hard to squeeze costs out of the supply chain while maintaining the quality and sizing that our customer expects,” Sanders said. “Then we are able to push that cost savings down to the customer.”

Though Sprouts has grown through acquisitions in the past — most notably, when it scooped up Southwest rival Sunflower Farmers Market in 2012 — Sanders said, “We don’t see anything on the horizon right now that’s a good fit for Spouts from an acquisition standpoint.”

Instead, Sanders said, growth will be organic. The company has plans for 20 new stores in 2014 and a goal of expanding by 12% a year after that. The expansion will take Sprouts out of its Southwest base for the first time: Atlanta is the first new market Sprouts will hit next year. “Getting that market established will give us connection capabilities into the remaining markets in the Southeast,” Sanders said.

Read more: Sprouts Shares Double During IPO

Sanders attributed Sprouts’ spectacular initial public offering to a combination of Sprouts’ compelling growth story and tailwind in natural and organic. The $333 million raised rewards some founding shareholders and provides fuel for growth. Majority shareholder Apollo Capital Management did not sell its shares into the IPO and remains a 43% owner, Sanders said.

“They’ve been a great partner, a very supportive partner of Sprouts through all we’ve done. [Apollo partner and Sprouts chairman] Andy Jhawar has been a tremendous supporter of Sprouts. They didn’t sell into the IPO, so they see the long-term opportunities in the sector too.”

Sidebar: Mergers Make Sprouts a Major Player

By Mark Hamstra

Sprouts Farmers Market has gone from just a single store in Chandler, Ariz., in 2002 to a nearly $2 billion chain with 165 stores spanning eight states just 11 years later.

The growth has been marked by two major acquisitions — the first a merger with Henry’s Farmers Market, the chain started by the Boney family, which also founded Sprouts — and the second with Sunflower Farmers Market.

In 2011, Apollo Management, which had acquired Henry’s from Whole Foods Market in 2007 when that company acquired Wild Oats, merged Sprouts with Henry’s. That added 35 Henry’s stores in Southern California and eight Sun Harvest stores in Texas to Sprouts’ portfolio, giving it 99 locations and pushing it over the $1 billion sales mark.

Steve Black

The next year Sprouts, now controlled by Apollo, added 37 Sunflower Farmers Market locations across the Southwest, helping drive pro forma sales for 2012 to about $2 billion.

Sprouts’ mergers with both Henry’s and Sunflower were considered successful, the company said.

“It was a very successful merger, and it went as smoothly as anyone could have expected,” Steve Black, chief information and marketing officer at Sprouts, said of the Sunflower acquisition.

Black, who had spent most of his career at United Supermarkets of Oklahoma, was one of the executives who joined the company through the Sunflower acquisition. He had joined Sunflower in 2009.

Doug Sanders, president and chief executive officer, Sprouts, said one of the key benefits of the mergers has been the addition of experienced personnel.

“Being one of the leaders in an evolving industry like natural and organic food requires tremendous industry and product knowledge,” Sanders said in a recent conference call with analysts. “Our recent acquisitions have allowed us to assemble the finest talent from all three companies to create one of the strongest and most experienced teams in the business. In addition, our executive management team brings a wealth of experience in both high-growth and large, publicly traded companies.”

SN Power 50: Sprouts CEO Doug Sanders profile

Sanders himself joined Sprouts in 2002 after holding IT and operations posts at TCI Solutions, Associated Wholesale Grocers and Brookshire Brothers.

Another key executive, James Nielsen, the current chief operating officer at Sprouts, had been president of Henry’s before that chain merged with Sprouts in 2011. Before that, he had been with Wild Oats. He started his food retailing career at Smith’s Food & Drug in 1986.

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Black said retaining store managers and other store-level personnel through the merger with Sunflower helped smooth the transition.

“The thing I was most proud of as we were changing those stores [from Sunflower to Sprouts] is that I don’t think most customers had any idea that there was this massive change in infrastructure going on behind the scenes,” he said. “We kept the majority of the store managers and staff in all the stores, so it was the same friendly faces they were used to seeing, and a lot of the products were the same.”

He noted that Sprouts examined carefully what both companies were doing well, and developed a best practices model.

Sprouts and Sunflower already operated similar formats, making the conversions easier, executives said.

About the Award

Supermarket News has named Phoenix-based Sprouts Farmers Market the winner of its 2013 Retail Excellence Award, based on its strong sales performance, its successful assimilation of two major acquisitions and its unique approach to integrating value with health and wellness. The annual award, now in its 11th year, recognizes a retailer that demonstrates innovative strategies that set it apart from the competition, with a deep understanding of its customer base and a positive impact on the food-retailing industry.  Past winners of the Retail Excellence Award were H-E-B in 2003; Kroger Co. in 2004 and again in 2008; Hannaford Bros. in 2005; Hy-Vee in 2006 and again in 2012; Safeway in 2007; Stop & Shop and Giant-Landover in 2009; Publix Super Markets in 2010; and Wakefern Food Corp./ShopRite in 2011. The selection of Sprouts Farmers Market was made by SN editors after consulting with industry experts, analysts and other observers.

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