Sprouts Farmers Market is the leading “pure play” high growth, value-priced, specialty food retailer, with a primary offering being farm-fresh produce at an extreme value. Earlier in 2012, Sprouts completed a merger with Sunflower Farmers Market, giving Sprouts the #2 spot in the natural organic retail market, behind Whole Foods Market. What’s most interesting about the retailer, however, is that their gross margins actually increase as the stores age & they have never had a negative comp store sales space since their first store opened in 2000!
Highlights from Goldman Sachs conference call with Doug Sanders (President & CEO, Sprouts) and Amin Maredia (CFO, Sprouts):
- High-Growth Natural / Organic Sub-Sector of the Grocery Industry
- Established & Successful Farmers Market Store Format
- •Value-Priced, Recession Resistant Business Model
- •Industry Leading Same Store Sales Performance
- •Dynamic Financial Performance
- •Attractive & Proven New Unit Economics
- •Significant “White Space” Opportunity
Today, Sprouts Farmers Markets operates 148 stores in eight states (76 of which were acquisitions from Henry’s Markets & Sunflower Farmers Markets), ranging from 19,000 square feet to 32,000 square-feet in selling space per store.
For your reference, you will find examples of a typical Sprouts Farmers Market in the slide show below. (Photos provided by RetailNet Group’s Store Tour Database)
Value-priced produce has been the key driver of growth for Sprouts ($500mil of volume in produce alone!). To put it in perspective, Sprouts Farmers Market is able to offer similar if not better quality items for 25-30% less than its high-end competitor, Whole Foods Market.
Private label brands (9-10% of Sprouts’ package grocery sales) play a large hand in the retailer’s ability to keep prices down. What’s interesting about Sprout’s portfolio of store brands too, is that it integrated the private label brands from Henry’s and Sunflower into its offering. Common across all of the private label brands, however, is a strict screening process. That means no preservatives, artificial ingredients, colors, flavors or additives.
A Broad Customer Base
Sprouts is a secondary stop for many of its shoppers. Much of its traffic consists of conventional store shoppers that shop at multiple stores, similar to Costco, Trader Joes, etc. Transitional and trial customers are coming to the store for the produce, then marketing, service, and pricing pushes them across the rest of the store.
Shoppers average 1.5-2.0 trips per week, but what makes Sprouts customer base so interesting is its breadth. While the retailer continues to see an expanding shopper base, 45-50% of its shoppers make between $45-100k per year. “Preventative health, health & wellness, food safety, and fresher foods have been an increasingly more powerful characteristic in winning the trip in recent years,” according to Sprouts.
Historical & Potential Growth
Sprouts senior executives believe there is 25+ years for growth with the belief that it will flat-line at 1,200-1,400 stores (similar to the 1,000 stores that Whole Foods talks about). Also, they believe that the sourcing model can be replicated across markets… a feat that may be harder than expected if they expect to maintain quality. However, during the conference call there were mentions of holes in the growth forecasts. For example, it was made clear that smaller markets pose more of a problem.
Sprouts can win, based on: (1) the idea that they appeal to a much broader base of consumers, as compared to their major competitors, (2) their economically resilient business model due to value-pricing strategy (their gross margins actually increase as the stores age & they have never had a negative comp store sales space), and (3) a proven & replicable new store economic model with low capital investment requirements (results in extremely attractive cash-on-cash returns of 40%+ in Q3.