SPROUTING UP ALL OVER

DAVID SCHWARTZ

PHOENIX - Sprouts Farmers Market here, an 18-unit chain specializing in farm-fresh produce and organic foods operating across three Western states, plans a major expansion that it hopes will nearly triple its numbers to 52 stores by 2011.

Top company executives told SN that the retailer will accelerate efforts to add stores to its existing markets, with the goal of growing the business to an estimated $700 million in annual sales in the next four years. It currently records annual sales of more than $200 million.

"We really like to cluster stores," said Kevin Easler, a Sprouts co-founder and board member. "We don't like a single store model in one city. We like to go into major cities and build a hub, manage it and grow it. That's going to continue to be our style."

The aggressive-minded company has stores in the Phoenix area; Tucson, Ariz.; Dallas-Fort Worth; and Southern California.

In addition to the new stores, plans call for the chain to build warehouses in Texas and California to handle the growth spurt. Sprouts now serves its three-state region from a 50,000-square-foot distribution facility in Glendale, Ariz., a Phoenix suburb.

Easler projected employment would increase to 5,000 workers by the end of the expansion, up from 1,500 now. A major hiring push is under way.

The expansion will be funded from internal cash flow as well as limited bank loans, he said. The company also just completed a third round of undisclosed financing from private sources.

"We don't really care about the competition," said Easler in an interview at the company's newly minted headquarters in northeast Phoenix. "We plan to put in as many stores as we can, wherever the deals are good, and keep growing."

That could include a foray into another as-yet-undetermined state by as early as 2008, said Shon Boney, the company's chief executive officer, president and co-founder. An outside industry consultant is examining possible expansion sites nationwide.

"We expect to know some time next year where we should go next," Boney said. "We'll see what our best options are and then see where we go from there."

For now, Easler said the company plans to fill in with a few stores in Arizona, grow as fast it can in the Dallas-Fort Worth vicinity and "grow like a weed" in Southern California. It also wants to stretch into Northern California as part of the expansion.

Wild Oats Veterans

The company has been on the fast track ever since its debut here in 2002, fresh from California where Easler and Boney worked for Wild Oats Markets. Wild Oats had bought Henry's Marketplace from Boney's family. A third executive, Scott Wing, also came to Arizona to help start the business.

Using fresh produce as the draw, Sprouts saw promise in grabbing a share of the vast organic market despite the state's reputation for being highly competitive. Estimates by the Organic Trade Association indicate that this industry sector has skyrocketed to $15 billion annually and has been growing at a 20% rate for the last five years.

The company sees itself competing not only with natural food stores like Whole Foods Market and Wild Oats, but also conventional supermarkets like Fry's and other food retailers, including Wal-Mart Stores.

"We use produce as our calling card - that's how we get people in the door," said Easler, who estimates that produce accounts for as much as one-third of the company's sales. "Everybody eats produce, and if you do a great job with produce, people will drive for it.

"They will make an extra stop for good produce at a great value."

The company described its typical customer as a 35-year-old female, with an average or above household income and slightly higher education than average.

A typical store spans 25,000 to 35,000 square feet, offering produce, healthful foods, all-natural meats, bulk items and a large array of vitamins and supplements. The stores tend not to carry mainstream CPG products, instead seeking to provide an all-natural and organic offering.

Company officials say they prefer build-to-suit spaces because they are easier and less costly to open. An average store costs roughly $2.5 million and takes four months to open.

Easler said Sprouts has no plans at this time to grow through acquisition of existing stores or smaller companies.

Room for Growth

Neil Stern, retail analyst and senior partner at McMillan-Doolittle Consulting in Chicago, said there appears to be more than enough room in this expanding industry.

"It is an industry that is growing and one that is going to be able to sustain multiple competitors within the niche," Stern said. "There's a big opportunity out there for someone."

Stern said Sprouts has operated under the radar so far because of its small number of stores, but such an expansion should get it noticed by the bigger players in the field.

"The nice thing here is that they are moving with the tailwind," he said. "The market is growing and the areas they are choosing are growing, so they are headed in the right direction."

To better prepare for the growth, the company recently reorganized operationally by naming Doug Sanders its new chief operating officer and Tom Foulds sales and marketing vice president. Both had been with the company in other capacities.

The plan is to free board members Easler and Wing, the former chief operating officer, to concentrate on duplicating the company's success and look toward the future.

"It will help us better direct the concept," Easler said. "We want to make sure the concept is right, which is ultimately who we are and how our customers perceive us. That has to be the same in every store we open and operate. That's the only way we're going to be successful."