Sprouts sees online delivery as key growth avenue

Sprouts Farmers Markets Inc. is well-positioned to extend its customer reach via online delivery, according to CEO Amin Maredia.

In a discussion yesterday at the Deutsche Bank dbAccess Global Consumer Conference in Paris, Maredia said Sprouts’ business through Instacart has been brisk since the natural and organic grocer hatched a partnership with the online delivery provider in January.

Previously, Phoenix-based Sprouts used Prime Now for online grocery delivery but later “unwound” that partnership with Amazon, he said. Last August, Amazon acquired Sprouts competitor Whole Foods Market.

“What I've been amazed by is how quickly the Instacart business has scaled, and I think a lot of that has to do with the brand, the trust, the quality of the product and the execution to the door that Sprouts is able to bring,” Maredia said in a Q&A session at the investor event.

“Today in the U.S., just about every midsize and above food retailer has home delivery or click-and-collect in some form or fashion,” he explained. “But the ability to execute freshness at perfection or close to perfection is what we think will continue to drive the business.”

Chief Financial Officer Brad Lukow said about 70% of Sprouts’ sales come from shoppers in a seven-minute drive time or less from its stores, which total nearly 300 in 16 states, and 60% of sales are from fresh food.

“What we're seeing generally is 70% of our sales come from within seven minutes of the physical store, and our home delivery business is the inverse. And so, we can truly extend the trade area and drive incremental sales to EBITDA, both EBITDA dollars and EBITDA margin,” Maredia said. “So now that we've gotten good operations and execution through this transition [to Instacart], we're starting to accelerate the marketing of this program because of what it opens for us. We can get more market share, I think, compared to conventional retailers.”

He noted that Europe has had a “problematic” experience with online delivery due to a higher density of stores, resulting in cannibalization. Online delivery accounts for just 2.5% of total U.S. grocery sales versus, for example, roughly 14% in High Street London.

“And within the 2.5% in the U.S., fresh grocery is actually less than 1% — so today, a very small portion of the overall industry within grocery. We continue to expect to see that to grow over time,” Maredia said.

“What's critically important for that experience, with the customer ordering online and getting home delivery, is you better be great in execution when that fresh item comes to your house. It better be a quality level that the customers themselves would pick in-store,” he pointed out.

Sprouts has demonstrated its fresh capabilities, for instance, in the produce category. “We control the supply chain logistics from the farm right to the store, and we turn produce every two-and-a-half days,” Maredia said. “So we are absolutely the freshest, and our customers are telling us that.”

Produce represents around 24% of the Sprouts sales, compared with 8% to 10% for traditional supermarkets, according to Maredia. What’s more, the company stands up well to competition in that category with pricing that’s “significantly cheaper” than conventional grocery stores and discounters, he added.

And along with fresh produce in the heart of its stores, Sprouts serves up a deli with prepared entrees and side dishes as well as the The Butcher Shop and The Fish Market meat and seafood departments.

“We were the first in the U.S. to really push same-day home delivery on the fresh food side,” he said. “We looked at the entire landscape of opportunities to think about how can we add value in this space.”