Family-Founded Banners Unite in Sprouts Acquisition

ELLIOT ZWIEBACH

PHOENIX — Like reuniting long-last family members, Sprouts Farmers Market here does not foresee significant challenges merging the two chains it acquired last month — Henry's Farmers Markets in California and Sun Harvest Markets in Texas.

“The stores are strikingly similar in terms of concept, culture, layout, offerings and pricing strategies,” Doug Sanders, president and chief operating officer of Sprouts, told SN.

Those similarities are not coincidental.

Both Sprouts and Henry's were originally founded by members of the Boney family of San Diego before Henry's, and the Sun Harvest chain it had acquired were purchased by Wild Oats in 1999. When Wild Oats was acquired by Whole Foods in 2007, Smart & Final, Los Angeles, bought the Henry's and Sun Harvest stores.

Stan Boney began opening Sprouts stores in 2002 and continues as corporate chairman.

“Having these stores come back to the family is a great story,” Sanders said. “And it's nice to be able to put two successful companies together to create upward mobility for our employees.”

The merger created a 99-store chain with stores in Arizona, California, Colorado and Texas, and sales of approximately $1 billion.

Sanders said most growth is likely to come in California. “We just opened our first store in Northern California, and we see a lot of room for growth there. And even in Southern California, where we're combining 34 Henry's and 17 Sprouts, there's still a lot of room for growth.

“But we'll also continue to grow in the other states as well.”

There are no immediate plans to pursue other acquisitions, Sanders said “We plan organic growth for the next couple of years in the markets in which we already operate, but at some point we will probably have to venture outside those four states and look for new territories and possibly other acquisitions,” he said.

Sprouts leases distribution centers in Phoenix and Dallas, and it recently contracted with a third-party logistics company in Southern California, Sanders said.

Asked about negotiations with its wholesaler, United Natural Foods Inc., Providence, R.I., Sanders said, “Hopefully, by doubling our volume we can negotiate more attractive discounts.”

CONVERSIONS PLANNED

Sprouts plans to begin putting its banners on the Sun Harvest stores in mid-July, Sanders said — a process that will take about three weeks.

Sprouts already has 14 stores in Texas — 10 in Dallas and four in Austin. The stores it acquired include three in San Antonio, two in Austin, and one each in Corpus Christi, El Paso, Lubbock and McAllen.

Sanders said he expects it will take 45 to 60 days to rebanner the 34 Henry's stores in California, with the process beginning early in August. “There's a single Henry's in Northern California, so we'll start with that one and work out way down the state, through Los Angeles to San Diego,” he explained.

Sprouts stores run 20,000 to 35,000 square feet, with most around 28,000 square feet. Henry's stores range from 25,000 to 28,000 square feet, and the Sun Harvests range from 15,000 to 20,000 square feet, with some of 28,000 to 30,000 square feet.

Asked about remerchandising the stores, Sanders said, “We're not going to do a whole lot. Once we've rebannered the stores, we plan to work on standardizing the item mix and introducing the Sprouts private-label into the converted stores and incorporating some of their private-label lines, which use the Sun Harvest name, into the existing Sprouts stores.

“The goal of the merger is to take the best each company offers and install those best practices and best products into all locations to improve the overall operation.”

As the stores are converted, Sprouts plans to introduce some of its programs at the acquired stores, including its gluten-free offerings, its bulk food program and its sandwich program in the stores' delis, Sanders said.

In addition to the consolidation activity, Sprouts is moving forward with plans to open seven new stores this year. It's already opened two of the seven — one in Texas in January and its first Northern California store, in Roseville, in mid-April; it plans to open the third new store in two weeks in Westlake Village, in Southern California.

Sprouts will also move forward with two Henry's openings scheduled for this year, Sanders said.

He said there's very little overlap among the stores — “only a little in Austin and even less in Southern California,” he noted — “but we have no plans to close any stores at this time. We still have to review our options at some locations.”

That lack of serious overlap was part of what drove the merger, Sanders explained.

“We've had conversations on and off for the past couple of years with Apollo Management (majority owners of Smart & Final, which became Sprouts' majority owner as a result of the deal) about the possibility of putting the two companies together,” he said.

“It was an ongoing process, and what it all boiled down to was the right time and the right place. Sprouts was focused on organic growth — we opened 23 stores in 2009 and 2010 — and it was getting to the point that if a merger was going to happen, it was going to happen now.

“Sprouts was growing and Henry's was continuing to grow, and before the two companies had too much overlap that would complicate any future merger, we thought the time was right.”

With most corporate functions handled by Smart & Final, the Henry's-Sun Harvest operation maintained an office in Irvine, Calif., with 49 employees. Of those 49, 36 have already started working for Sprouts, most of them continuing as regional merchandisers and regional managers, Sanders said.

Of the rest, a handful will relocate to Sprouts' headquarters here; and Sprouts is in discussions with vendors and others to try to place the 13 employees whose positions are being eliminated, he said.

Jim Nielsen, who was chief operating officer of Henry's, has already been named COO at Sprouts — a title Sanders gave up while remaining president. Nielsen is expected to relocate here in about 60 days, Sanders said.

In response to analyst speculation that Sprouts is likely to do a public offering, Sanders told SN, “There's always a possibility that could happen in the next year or two.

“For now we're pretty busy putting the two companies together.”