Sprouting Amongst the Competition

Sprouts Farmers Market, Grocery Headquarters’ 2015 Natural Supermarket Chain of the Year, is on the fast track to success. The game plan is simple. Step one: Win consumers over with a strategy that emphasizes affordable, healthy and quality products. Step two: Keep opening stores at a robust rate. Step three: Watch sales and earnings grow. So far it seems to be working extremely well for Sprouts Farmers Market, the Phoenix-based supermarket chain that is quickly becoming the talk of the grocery industry. Just 15 years old, the publicly-traded company, with more than 200 stores scattered throughout 13 states from the South to Southwest, is on pace to rake in revenues in excess of $3.5 billion annually. Its annual profits are in the $110 million to $140 million range, according to financial statements released by the company. This may be just the beginning. Despite an expected slightly cautious tone by the company’s executives, there is little doubt that their goal is to take this company national over the next decade, entering key markets in the Southeast and eventually the Northeast. In 2015, for example, Sprouts has opened or will open 28 stores and a fourth distribution center, this one in Atlanta, is coming soon. Some of the units are in new areas like Alabama, Missouri and Tennessee, and the growth is on par with the chain’s stated goal of an annual 14 percent organic growth rate. While Sprouts competes against conventional grocery stores, Whole Foods can be considered a much larger and better-known natural foods rival. Whole Foods is a worthy competitor, but it is also a company that has run into some difficulties in recent times with its own marketing and merchandising strategies that first alienated consumers with high price points and now seems to be playing havoc with its expected profits. There might just be an opportunity for a company that bills itself as offering shoppers “healthy living for less.”   “Obviously we are one of the most dynamic companies in all of retail,” says Amin Maredia, who became the CEO in August after serving about four years as the company’s CFO. “We want to offer more affordable and healthier foods to our customers. They are speaking with their wallets. Our job is to give these consumers the opportunity to shop at a store where they don’t have to worry about making hard choices because they cannot afford everything.” For all the buzz Sprouts is making, as well as its growth, unique merchandising strategies and its positioning in the marketplace, Grocery Headquarters has chosen the retailer as our 2015 Natural Supermarket Chain of the Year. It is obvious from the start that Maredia and his management team have a strategy designed to make Sprouts stand out in a marketplace that is becoming increasingly crowded and where is it less likely a chain can create a unique shopping environment. Natural products, plus clean labeling, have become the key words in all of food and nonfood retailing, and those retailers that gain the trust of an increasingly inquisitive and demanding consumer are going to win the game—and the millions of dollars in profits that come with it. Sprouts officials appear to take this trend seriously and are equally mindful of the need to make consumers aware of how the chain is different from its competitors. In fact, Maredia is quick to note that Sprouts is unique in many ways from other natural supermarket chains. One big difference is the fact that the company offers what he describes as a “full shop experience,” carrying a complete line of products in virtually every traditional category, including produce, a full-service meat/seafood section, organic/natural grocery, bulk foods, vitamins and health and beauty care. In total, it carries approximately 17,000 SKUs in a typical store. Sprouts is not looking for, or at least attracting, all consumers. Company literature states that the average customer at a Sprouts store tends to be a well-educated, middle to upper-middle class consumer, who is looking for healthy food alternatives and still wants to spend their money wisely. “I think that makes us quite unique,” Maredia says. “Consumers can do a full grocery shop at value prices across a wide array of categories. That access, in the past, has been a challenge to find for shoppers. They either had to go to specialty stores with a very limited assortment or larger stores that offer a high-end experience and prices that follow accordingly.” Even though more retailers are getting involved with natural products, the growth of the category seems to offer a lot of opportunity for those who merchandise and market the section correctly. Price points are extremely important, but carrying a broad selection of product takes the front seat, industry observers say. Maredia is well aware of the trends. “Consumers want to eat healthier,” he notes. “The Millennials want to make sure that their young families are getting the right ingredients. Older consumers want the same thing. In fact, the trend is toward an active, healthier lifestyle across all demographics; but they want those products at great prices.” So how can Sprouts offer these great prices? Maredia says it is all about creating efficiencies and passing those savings on to Sprouts’ shoppers. Besides working with suppliers to get good price points to begin with, he says the physical look of a typical Sprouts store is quite basic, almost like a farmer’s market. “We build great stores but at just $2.5 million to $3 million per store,” he adds. “Then we pass those savings on to our shoppers.” Merchandising is important too. Maredia is fast to point out that Sprouts offers a full-service meat/seafood section, a benefit that some other supermarkets are doing away with for various reasons, including costs and logistics. “The strategy here is to engage the consumer at every opportunity and give them the cut of meat or fish that is to their liking,” he says. “It is our ‘Old Tyme Butcher Shop’ and it is all about personalized service. Deep service and knowledge are what we focus on.” Other categories get the royal treatment too. The vitamin and supplements section, which Sprouts sees as a preventative care section, is a crucial area for the retailer because it shows its commitment to products that can help consumers with their everyday needs. The health and beauty care and vitamin sections feature more than 6,500 items, and they are staffed by full-time trained employees, in order to address any consumer questions. “We want to be pro-active in as many areas of the store as we can,” he notes. “We are at the front end of health care. We have seen deterioration on the health side over the last few decades. We want to offer consumers products that can help them.” The company’s private label program is another area of emphasis. Maredia says that Sprouts carries about 1,600 Sprouts Brand products, up from just 600 about four years ago. He stresses that many of these items are unique products that consumers will not find anywhere else. He is also quite proud of the Sprouts commitment to gluten-free items, saying that a typical store offers about 3,200 gluten-free products. “You will not find the depth and breadth of our gluten-free foods anyplace else,” he says. He is also quick to list other benefits of the company. For example, Sprouts offers a very large assortment in the natural and organic produce area at prices that Maredia says are 20 percent to 25 percent lower than offered at most traditional supermarkets. The bulk foods section is placed very visibly and contains a broad array of merchandise. Advertising plays a big role too. The company sends out about 14 million flyers every week through various means. “Our core shopper is the everyday supermarket consumer,” says Maredia. “We want them to have the latest information from us. We do a lot of marketing to consumers who are used to seeing ads and respond to them.” External marketing is playing a larger role at the company as well. Sprouts is extremely involved in community efforts. The company participates in a food rescue program where unsold and edible, but not marketable, groceries are offered to local area hunger relief agencies. It also is part of a SCRIP fundraising program, helping non-profit organizations raise money, as well as local community events. Backing all of this up, he notes, is an employee-training program that is designed to make store workers as knowledgeable as possible about every aspect of the store, its services and its products. Sprouts employs more than 20,000 workers in total, with about 90 to 100 employees at an average store. “Consumers have a lot of questions and we have the answers they need to be better shoppers,” Maredia says. “We have always invested in training our employees, and over the last two to three years we have accelerated that training program because it is becoming more and more clear to us that we need people who are trained very well at our organization, both in the stores and at out store support office.” Good employees are rewarded. Maredia says that about 20 percent of Sprouts employees are promoted each year. “For a young kid straight out of college, this is a great place to work,” he notes. “If motivated, it allows them to move quickly through the ranks.’ Given where Sprouts is at this point—as well as how it is viewed by others in the supermarket industry—it is amazing how fast the chain got here. Sprouts was founded in 2002 when the Boney family, long-time San Diego area grocers, opened a store that focused on abundant produce and natural, organic foods. The company continued to open stores in the Southwest during its first few years of existence. In 2011, it acquired Henry’s Holdings, which ran 35 Henry’s Farmer Markets stores and eight Sun Harvest Market units. A year later, Sprouts purchased the very well respected Sunflower Farmers Market, which coincidentally was the 2011 recipient of the Grocery Headquarters Natural Supermarket Chain of the Year. Bucking a trend in the industry, Sprouts went public in 2013 and is traded on the NASDAQ stock market. “We have not made any public announcements on where we plan to grow but we want to continue to grow at about the same rate,” Maredia says. “We want to expand on the West Coast, expand in the middle of the country and expand further into the Southeast part of the country. Then we hope to move up the coast. The way we see it, we are only in 13 states. We have incredible growth ahead of us. We are excited about today and our long-term future.” In the end, Maredia says that Sprouts’ success speaks for itself and is the company’s best marketing tool. “We get people asking us all the time whether we work for Sprouts,” he says. “Then when we say ‘yes,’ they ask when are we coming to their town and opening a store there. It doesn’t get better than that.” Responsible Retailing For a natural/organic grocer like Sprouts Farmers Market, responsible retailing and a focus on sustainability comes naturally. Sprouts’ commitment to responsible retailing has been part of the company since it was founded, and “not just because we are a natural/organic grocer and our customers expect it, but because it is the right thing to do,” say company officials. The company’s sustainability efforts encompass four areas that include sourcing, operating, building responsibly and being a responsible neighbor. For one, Sprouts partners with suppliers and vendors to ensure that the products it sells are sourced in a sustainable way. The company also aims to reduce waste and its environmental footprint. Additionally, Sprouts stores are constructed and operated in a way that reduces energy use. The Dunwoody, Ga. store, for example, features an advanced refrigeration system that does not use any ozone depleting substances or any high-global warming potential (GWP) refrigerant. The Dunwoody store recently received the 2014-2015 GreenChill Best of the Best award for being the best GreenChill certified store of all stores certified in the past year. The Environmental Protection Agency’s (EPA) GreenChill Partnership works with supermarkets to reduce refrigerant emissions and decrease their impact on the ozone layer and climate change. The Partnership helps supermarkets transition to environmentally friendlier refrigerants; reduce harmful refrigerant emissions; and adopt greener refrigeration technologies and environmental best practices. There are approximately 11,000 GreenChill Partner stores across the nation. Sprouts also received the 2014-2015 Store Certification Excellence award for having the most stores that met GreenChill store certification criteria in the past year. “Sprouts Farmers Market is setting an excellent example of environmental leadership among supermarkets by voluntarily reducing the company’s impact on the earth’s ozone layer and climate,” says Tom Land, EPA’s GreenChill manager. “We at EPA hope that Sprouts’ commitment will spur its competitors to meet these high standards and take the same challenge.” Waste Not, Want Not Being a responsible neighbor and giving back to the community are core philosophies for Sprouts Farmers Market. Through its waste management programs the company can do both. Sprouts has implemented several programs to reduce the waste it sends to landfills. In 2014, the retailer diverted 40 percent of its waste away from the landfill through its recycling, food donation, composting and animal feed programs. “We have identified our major material streams and have developed a road map for significant reduction,” say company officials. The company’s Food Rescue Program plays a significant role in its approach to waste stream management. At the end of each day, Sprouts donates all unsold and edible—but not marketable—groceries to local area hunger relief agencies and charities. Each store has one or two food rescue agencies that they have designated to pick up from their store. The store’s departments follow certain guidelines to determine what they can and cannot donate. In 2014, Sprouts stores and distribution centers donated more than 8.5 million pounds of product to those in need, reducing the impact of hunger and the company’s environmental footprint. Since the program began, Sprouts has donated 12 million meals to people in need. Packaging and recycling are other ways the company reduces its waste. Approximately 35 percent of the products Sprouts sells—produce and bulk items—are package-free. In addition, the company is evaluating its private label packaging for opportunities for package reduction, increased recycled content and recyclability. Sprouts also encourages customers to bring in their own reusable bags by providing a five-cent credit for every reusable bag used at checkout, which reduces the need for paper or plastic carryout bags. The incentive resulted in more than 32 million reusable bags used at checkout in 2014. Overall, Sprouts recycled 25,000 pounds of plastic in 2014.