Whatever Happened to Sprouts?

There’s a new accent at Sprouts Farmers Market, and it’s not just the Scottish brogue of Jack Sinclair.

The international retailing veteran is only weeks into his new role as CEO of the Phoenix-based natural foods chain, but in his first remarks since taking the reigns this month, Sinclair suggested there ought to be more changes coming to the natural foods retailer: a better handle on pricing and promotions to smooth out volatility and stabilize margins, for one. The company will also reevaluate its store model and expansion pace, as well as pursue new marketing strategies to build more sustainable brand awareness and communicate its points of difference to shoppers.

Change of course has been happening at Sprouts for some time: Sinclair’s appointment topped a whirlwind of front-office activity that began with Amin Maredia’s sudden departure as CEO late last year and has continued ever since. Chief Customer Officer Shawn Gensch departed for a new role at J.C. Penney earlier this year. Former CEO Shon Boney—whose grandfather Henry Boney founded the San Diego produce stand from which the company evolved and was the last family connection to its founders—departed his board seat upon the announcement of Sinclair’s appointment in June, as did Chief Financial Officer Brad Lukow, who was doing double duty as an interim co-CEO following Maredia's departure.

Then there is the forthcoming exit of Jim Nielsen, Sprouts’ president and chief operating officer, who has formally moved to an advisory role that he’ll serve through early next year. Nielsen, who had also been named an interim co-CEO, had actually been out of action for months dealing with a health issue but many in the industry view him as a kind of embodiment of the Sprouts brand and its institutional memory. Nielsen is an energetic operations pro who infused experience in conventional grocery with a genuine passion for the Sprouts mission.

It’s hard not to view the underwhelming results of the second quarter Sprouts reported earlier this month as being at least partly related to the upheaval in the executive ranks. Sinclair’s too-soon-to-say stance was mirrored when he professed not to know if that’s the case.

But by Sprouts’ standards, it was not a good quarter. The 0.1% comp gain in the period marked the company’s 49th consecutive quarter of positive comps, but it was the weakest gain going back to at least the second quarter of 2012, when Sprouts began publishing those figures as a public company. And a flat forecast for the remainder of this fiscal year makes it possible the streak will come to an end.

So what’s going on here?

I put that question to a half-dozen industry observers over the past week. While some mystery remains as to the circumstances of the Maredia exit that triggered the cascade of executive changes that followed, a couple of truths, and a few more bits of speculation, emerged.

Sprouts Might Be Encountering Struggles Anyway

Any number of retailers would sign up for the kind of comp record Sprouts can boast over the past five years, but a closer look reveals that comps have been sliding toward this level for some time. We’re well past the nines, 10s and 12s the company flashed as it raced out of its IPO, but as stores have matured, those figures have dwindled to fives and fours, then then threes and twos, and now the ones and flats.

Sinclair says he’s identified a few issues: One is marketing. He believes that Sprouts could draw more shoppers by more precisely communicating the purpose of its brand—in particular by tempting shoppers in existing markets who haven’t considered it, whom he called a “massive white-space opportunity.”

And while Spouts is lauding some great recent store openings, keeping the success building has been a challenge, in part because with stores so scattered, it’s been inefficient to advertise them. So where the previous leadership was skipping up the coast to a flashy debut in the center of Philadelphia, charging into the Pacific Northwest and plotting an assault on Boston, this group could pursue expansion even faster than the 30-stores-a-year pace of their predecessors but with an eye on concentrating stores geographically, realizing marketing and distribution benefits Sprouts is currently going without.

Whole Foods Redux?

In some ways, the Sprouts situation draws parallels to what Whole Foods Market experienced in 2017. Like Sprouts, Whole Foods was a differentiated retailer that raced out way out ahead of competitors—at least, until those competitors developed similar assortments and skills, and worked to reel them back in. In Whole Foods’ case, the evaporating advantage was natural and organic food itself; in the case of Sprouts, it’s cheap produce.

Sprouts deserves credit for its role in turning the industry over on its ear: While the traditional supermarket model called for competitive prices in center store to drive traffic and made their margins in fresh food, Sprouts did just the opposite, taking lower margins on its massive produce sets and making it up on bulk, vitamins and private label groceries. But the industry is onto that trick by now—everyone from from Aldi to Whole Foods have been focused on taking down price on produce, blunting one of Sprouts’ big advantages.

Sinclair confessed during the earnings call, “I do not have all the answers as to how we’re going to improve, develop and grow this business.” The obvious yet refreshingly honest remark is also admirable for a guy in his first weeks on the job, but it’s worth a cautionary mention that Whole Foods never really solved its problems on its own. In short order, the wounded company drew activists, an acquisition offer (said to be Albertsons) and a subsequent shotgun auction resulting in the surprise Amazon acquisition.

What’s Next?

Some believe that Maredia separated from Spouts over a difference of opinion with the board on the company’s willingness to sell. If this speculation—and it's only that—were true, we can assume Maredia had decided it was time to sell, or you could presume the company would have sold since.

That said, not one of the sources I spoke to considered a sale of Sprouts any less of a possibility today, especially considering how the stock price has dwindled. Sprouts has often been a topic of acquisition speculation, with Albertsons and Target said to be its pursuers. Albertsons presumably is still looking for a growth vehicle and a way back to the public markets, and Target, for all its progress, arguably still needs equity in fresh foods. Sprouts could benefit from greater scale, especially as more of the industry goes online. But it takes two to deal.

Sinclair, in the meantime, has pledged to get work on the things he can influence: Pricing, marketing, expansion and the rebuilding of an executive team to take the company to the next chapter in its story.

 “As for grocery retail, we all read the same headlines: The competition is fierce, and there are many retail outlets where customers can find food, even healthy foods,” Sinclair said. “The future will be defined by those that follow the customers, those that stay in front of or create the product trends, those that bring a differentiated and unique experience, both in-store and digitally, and those will grow profitably. They will be the winners. I’m confident that Sprouts can be at the forefront.”