Sunflower Grows With Fresh Round of Financing

MARK HAMSTRA

BOULDER, Colo. — There was nothing silly about Sunflower Farmers Market's recent effort to obtain financing. In fact, it was quite serious.

The natural-food specialist, whose motto is “Serious Food — Silly Prices,” was able to wade into a difficult credit market this month and come away with $35 million in new funds to fuel its expansion efforts.

“It's not easy out there — it's not like we were weighing six different offers,” Mike Gilliland, Sunflower's founder and chief executive officer, told SN. “It was a long, hard process.”

The new financing includes a $5 million equity investment from Pacific Corporate Group, the La Jolla, Calif.-based investment firm that had previously bought a stake in the chain, plus $30 million in loan financing from Fifth Third Bank, Cincinnati.

Pacific Corporate Group in 2007 had provided a $30 million equity infusion to spur growth at Sunflower, and the commitment of the additional $5 million this year went a long way toward securing the loan in a tight credit market, Gilliland explained.

“Fortunately, we have a pretty good relationship with our venture investor, PCG,” he said. “I think that gave us a fair amount of credibility in the bank's eyes that they were happy with their investment.”

Sunflower, which operates 27 stores in six states, said it would leverage the new financing toward opening between seven and nine stores each year for the next few years, with a goal of having at least 50 stores open by the end of 2013.

True to its low-overhead approach to doing business, Gilliland said the company generally spends about $2 million to open each store; they measure about 28,000 square feet.

“We are hoping this is our final round of financing for the foreseeable future,” he said. “We think as long as we don't screw up, we can throw off enough cash to pay down our debt and continue to self-fund our store growth at a seven-to-nine- or seven-to-10-store pace.”

Gilliland noted that while retail space is abundant in the current climate, the chain is still being cautious during the site-selection process.

“There's a fair amount of devastation in the retail business, so there are plenty of sites available, but we are trying to be careful where we go — so we don't miss a site and don't pick a wrong one,” he said.

The company exceeded a previous growth target, announced at the end of 2007, when it said it would double in size by the end of this year. At that time, when Pacific Corporate Group made its initial $30 million investment, Sunflower was operating just 13 locations.

Gilliland, who founded Wild Oats Markets, now owned by Austin, Texas-based Whole Foods Market, said Sunflower expects to record just over $300 million in revenues this year, and to approach $400 million in revenues by the end of 2010. The company is profitable, he said.

He noted that Sunflower has put in bids on “a few” of the 32 Wild Oats locations that Whole Foods is being forced to sell by the Federal Trace Commission for antitrust reasons, although he said the company does not anticipate winning any of those bids. He said he is unaware of any other bidders for the stores.

Whole Foods has been granted an extension until March to find buyers for the 32 Wild Oats locations, many of which have been closed since the 2007 acquisition.

Sunflower anticipates that its near-term growth will be confined within the six states where it currently operates: Arizona, Colorado, New Mexico, Utah, Nevada and in Texas (where it operates as Newflower Farmers Market).

In terms of demographics, the company considers a high level of education important, but said it is targeting a broader demographic in terms of income than Whole Foods has traditionally attracted.

“We probably have similar parameters, but while Whole Foods might be looking at the top 10%, we are a little more flexible,” he said. “We don't really go after the super-affluent, because they are not as price-conscious.”

Separately, Sunflower last week said it has named Chris Sherrell president of the chain, succeeding Gilliland, who had been both president and CEO. Sherrell, who remains chief operating officer, joined the company in 2003 and has held several executive positions. He began his food retailing career in 1993 at age 17.