Sprouts Officials Speculate on Effects of Tariffs on Fresh Food

Heavy crop yields are again driving retail price deflation in fresh food categories, but a second trigger of deflation—this one related to an escalating international trade war—could be on the way.

That was a message from Jim Nielsen, Sprouts Farmers Markets’ president and COO, speaking during an Aug. 2 earnings conference call.

Neilsen said he anticipated that categories such as domestic apples, grapes and nuts could see deflation in the coming months if the current tariffs making those products less attractive to foreign buyers remain in effect. Nielsen said that older crops of apples, for example, now in cold storage, have already experienced lower demand resulting in some deflation. He said Sprouts would keep a close eye on apples, grapes and nuts as they anticipate the coming season’s crops.

“We’re seeing a little bit of that [tariff] impact on apples today in the cold storage environment,” he said.

Noting he was cautious in making assumptions, Nielsen said he anticipated growers of the aforementioned crops would work to reduce their chilled inventories before new product arrives, signaling the potential for lower prices on those items into the second half of the year and into 2019.

As evidenced during a stubborn streak of inflation in 2016, lower prices tend to challenge retailers’ same-store sales, which in turn puts strain on leverage. While dropping prices can present opportunities to win margin, some retailers reacted to the last streak by aggressively promoting in an effort to increase volumes, causing scattered but costly regional trade wars.

Related:Sprouts Named 2018 Grocery Business of the Year

Utilizing data and insights, Nielsen said “some of these things can better be accretive to gross margin or create a good promotional opportunity for us to drive in footsteps. So there are puts and takes on both ends, but it's really too early to tell of the overall implication.”

As previously reported, Sprouts overcame deflation of about 1% in its fiscal second quarter—almost entirely consisting of lower prices for vegetables on the strength of high crop yields—to post a 2% comp gain and overall sales gains of 12%.

CEO Amin Maredia credited strong performance of new stores—supported by increased advertising investments so the fast-growing brand is familiar to customers as it arrives in new markets—and strong traffic at existing units, supported by a reputation for low prices in fresh items and a growing reputation as a destination for ready-to-go meals.

Maredia said he was also bullish on the effects of having added delivery service through Instacart to about 190 of its stores through the end of the quarter. While still a headwind to profits, Maredia said the company was hopeful the offering could be profitable next year while growing incremental sales.

“We are pleased to have some of the best customer service scores on the Instacart platform, reflecting the freshness of our products and our strong operational execution," he said.