Sprouts’ Strategic Return to Smaller-Footprint Stores

Sprouts Farmers Market Inc. knows what it isn’t. It’s not Trader Joe’s. It’s not interested in competing with Amazon on convenience nor Walmart on pricing. And according to CEO Jack Sinclair, it dislikes being identified as a “grocer” altogether.

In-depth research of its target consumer and the new realities of a COVID-19 world, as well as a deep-dive analysis of its store size format, product assortment and brand identity, has led the Phoenix-based company to reevaluate its business. Based on remarks at the Sanford C. Bernstein Strategic Decisions Conference call this week, the company is Sprouts Farmers Market first and foremost, and it is committed to a return to its smaller footprint and more down-to-earth roots, Sinclair insisted.

“Going forward, our new stores will be smaller, 21,000 to 25,000 square feet. And I want that farmers market feel with smaller square footage but no less categories—just refined to really meet our target customers’ needs” said Sinclair, according to a Sentieo transcript.

There are many advantages to smaller stores without the expensive and “too modern” fixtures, added Sinclair.

“As we evaluated our strategy, we realized our box was just becoming too big and too expensive to build to maintain the economics we had historically,” said Sprouts Chief Financial Officer and Treasurer Denise Paulonis.

The company’s smaller stores, which are about 20% smaller in square footage and with a similar reduction in fixture costs than its more expansive locations, leads to a blended cost to build of about $3.2 million, including inventory and preopening costs. “It’s important to note that the cost of our enhanced-layout store had reached upwards to $4 million in 2019, so this is a substantial reduction in costs,” Paulonis said.

Through targeted research, Sprouts also identified two specific groups within its overall target customer base that have become its core consumers: “health enthusiasts” and “innovation seekers.”

“That’s where our future path will be focused,” Sinclair said. “Those customers are looking for healthy, innovative options at a good value. We have a tremendous opportunity to gain share in this segment, and we can double our business by capturing just an additional 3% share with our target customers. We should be the destination for healthier food.”

In the past, Sprouts tried to be everything to everyone, which diluted its efforts to grow sales, he continued. Moving forward, the retailer will work to build brand recognition, and rather than focus on promotions, it will emphasize product differentiation, with marketing inside and outside the store that highlights its differentiation in each category.

“To be clear, we are still promoting and providing good value every day for our customers, but we are doing so differently by being much more targeted,” noted Sinclair, who pointed to a January 2020 promotion of locally grown strawberries for the Southeast region that was a smash success.

“In the past, this would have meant trying to be the lowest price in town on a broad promotion across all berries, and we would have sold a lot of them, but with very little profit. Fast forward to 2020. We focused on a single item—strawberries—and the differential of the product being local. Strawberry sales in this region comped north of 20%, with a margin that was up tremendously from last year,” he said.

In terms of product assortment, COVID-19 has given Sprouts a fresh perspective on areas of importance for its shoppers. It plans to spotlight produce; vitamins and supplements; plant-based, keto-friendly and vegetarian frozen foods; and an expanded emphasis on center-of-plate proteins, including plant-based offerings, grass-fed beef and organic chicken.

Small But Mighty

Sprouts research revealed that its customers liked the smaller footprint stores, and the sales per square foot were significantly higher.

“We believe these smaller stores can deliver sales on a par with the larger store as proven with many historic locations we have today, resulting in strong returns of a simple model that we had in the past, setting us up well to expand across the country,” Sinclair said.

Sprouts' expansion plans are forecast to grow at a minimum 10% annual unit growth rate, and will focus on its areas of strength, such as California and Texas, while building out Florida and the Mid-Atlantic to achieve a larger concentration of stores.

“The target economics of the new box include year-one sales of approximately $14 million, with sales growing 20% to 25% in four years to annual sales of $16 million to $18 million,” said Paulonis.

“How do we recapture that magic of an authentic farmers market and put it into a context where we're providing all the products that are available in bigger stores?” Sinclair asked. “We create a model that’s kind of gone back to where we were. We draw our inspiration from where this company started.”