[Image of: RetailWire Logo and Tagline (for print)]

BUSINESS TIPS

IRI:
Shopper-Centric Execution
ChannelAdvisor:
Online Selling Strategies
RR Donnelley:
In-Store Marketing
LoyaltyOne:
Enriching Customer Relationships
 
[18 comments]

Sprouts beats Whole Foods on price

May 23, 2014

A new market basket study by Bloomberg Industries finds that Sprouts Farmers Market is about two percent less expensive than Whole Foods when it comes to everyday retail prices. Add the promotions that Sprouts regularly runs into the equation and the savings differential grows to 13 percent.

"Sprouts is being very aggressive, especially in produce, on being a value-oriented organic retailer," Jennifer Bartashus, an analyst with Bloomberg Industries, told Bloomberg News.

Sprouts' everyday price on organic produce is about 22 percent lower than comparable items at Whole Foods.

The chain, which operates 170 stores in nine states, is focused on shoppers who want to buy natural and organic foods but at value prices. The company recently reported an increase in same-store sales of nearly 13 percent for its first quarter.

"Our strong comps in this quarter were driven by our ability to aggressively promote fresh produce which gives us a broad appeal with the everyday grocery shopper," said CEO Douglas Sanders during the company's earnings call earlier this month. "A strong produce comp coupled with our store [widened] department promotions into a solid traffic and balance performance across the store."

While Whole Foods has gotten more aggressive with its pricing of late, the company continues to struggle in ridding itself of its "Whole Paycheck" nickname.

"We haven't been investing in price as aggressively as we probably needed to do," said John Mackey, Whole Foods co-CEO, in the company's earnings call earlier this month. "So we're going to be investing more aggressively in price going forward while continuing to take our expenses down and continuing to innovate and differentiate."

FINANCIALS:     [NASDAQ:SFM]

Discussion Questions:

Is Sprouts Farmers Market positioned for significant growth in the future? What do you see as the biggest opportunities and challenges for the chain going forward?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How optimistic or pessimistic are you that Sprouts Farmers Market will continue to achieve significant same-store sales growth in the years ahead?

Comments:

Well, since Sprouts isn't in Florida or anywhere else on the East Coast, I had to look the company up.

The biggest challenge is simple - Scale. It's all well and good to manage this message in a small chain (which Sprouts most definitely is), but there are all kinds of things that happen when you get bigger. You outgrow your vendor base and are suddenly required to find new suppliers. Shipping costs go up, and so you have to find a way to recoup the costs. Quality control (the look and feel of the store) becomes an issue. Top management can't keep its eye on the ball all the time.

I've been reading about the pending demise of Whole Foods for many years. It seems to be holding its own nicely against a variety of competitors from Walmart (remember when it was going to kill off Whole Foods?) regional and national grocers, and even Warehouse clubs.

These places are missing two ingredients: trust, and a well-curated assortment.

Trader Joe's is the closest national competitor, but its assortment is curated to a point where it is incomplete.

I think Whole Foods' expansion of its 365 private label value brand is instrumental in its future success, along with its excellent mix of local and organic fresh produce. The transparency is superb.

Oh, and it doesn't hurt that Whole Foods employees are happy, helpful, and generally enjoying their work experience because they share in the company's wealth.

[Image of: View Braintrust Panelist button]
Paula Rosenblum, Managing Partner, RSR Research

One of the biggest stumbling blocks to organics is the cost over conventionally grown food items. Lower prices definitely will attract a larger number of consumers, but until organic is closer on price to conventional, the majority of food shoppers won't have enough interest to seek them out.

So for Sprouts, they may increase the overall market size some, but to really grow the company in the next few years or so they probably will have to take direct aim at Whole Foods. In places where they share the same market and can demonstrate better value and a similar or better experience, they have a good opportunity to leverage the price differential and poach customers.

[Image of: View Braintrust Panelist button]
Ken Lonyai, Digital Innovation Strategist, co-founder, ScreenPlay InterActive

In our Southern California valley, we have Sprouts, Whole Foods, Lassen's, Stater Brothers, Valley Produce Market, plus the national chains and warehouse clubs.

Sprouts offers an easy to shop open floor format with healthy foods at good prices. Fresh produce will be key to their appeal and to better leverage their strong vitamin supplement department. Their deli is small but is very popular with the lunch crowds and very good prices. They currently don't have a loyalty program and have an opportunity to integrate mobile technology into the shopping experience. Sprouts has a good growth story and potential ahead.

[Image of: View Braintrust Panelist button]
Mohamed Amer, Vice President, Global Consumer Industries, SAP

The biggest problem I see with Sprouts is that their growth is fueled by debt rather than using excess profit. Dividends were paid by borrowed money as well to private equity shareholders. Instead of building one store at a time with excess profits, training employees one store at a time, they are choosing to roll the dice, build a lot of stores in new markets, and use other people's money. My experience has been this type of business model is not sustainable, especially if interest rates rise and there is an economic downturn.

Sprouts for the most part is still a low volume, low sales per square foot operator compared to Trader Joe's or Whole Foods. A 10% same-store sales increase at a typical Spouts is fewer dollars than a 5% same store sales increase at Whole Foods or Trader Joe's. Its very easy to get a high same-store sales percent when you start out at low volume. Its also easy to grow when you are not spending your own money. In the end, when I see the store by store sales volumes, they come across as all hat and no cattle compared to Whole Foods. Hopefully for them they will prove me wrong.

David Livingston, Principal, DJL Research

Sprouts is a great alternative to the big three supermarket chains and the much pricier Whole Foods. They carry many non-traditional brands, have good produce and offer butcher services. The biggest challenge faced by the chain is the limited number of items they carry and competition from Trader Joe's.

Sprouts does not carry the same breadth of items as a traditional grocer, so consumers might have to visit a second store to get everything on their shopping lists.

Trader Joe's also leans heavily towards organics and at prices that undercut Sprouts.

To be successful, Sprouts will need to continue aggressively pricing and continue to offer strong customer service. There is a niche for them in the marketplace for health-oriented consumers who want quality products without the Whole Foods price.

[Image of: View Braintrust Panelist button]
Max Goldberg, President, Max Goldberg & Associates

I do see significant growth in Sprouts' future. Let's see, sales were in the range of $720 million for its first quarter, comps were up 12.5%. It's had 27 consecutive quarters of same-store sales growth. Traffic is up, basket sizes are up, and Consumer Reports ranked it the fifth-best supermarket in the country, behind only Wegmans, Trade Joe's, Publix and Costco. (Whole Foods came in 15th). Produce is priced 25% below its competition, accounts for 15% of store selling space and 26% of sales. It carries only 16,500 SKUs and you won't find Doritos, Tide or Lucky Charms.

Sprouts is big into health and wellness, on trend with consumer interest in fresh produce, and reads its customer base well, taking good advantage of its enhanced digital platform for customer engagement. It plans 22-24 new stores this year, and sees room for as many as 1,200 from under 200 today. Its balance sheet is strong, with net income up by 163% in 2013. So, why shouldn't it see significant growth in the future?

The challenge will be in attacking new markets (as it plans to do, in the Southeast) as traditional retailers are waking up to the need for copying what Sprouts is doing. Kroger, Sprouts says, is doing a great job with this, and others are following. But it looks to me like Sprouts "got there "firstest with the mostest," as Civil War Gen. Nathan Bedford Forrest said.

I do not own stock in Sprouts. But I did a story on them in our April issue.

[Image of: View Braintrust Panelist button]
Warren Thayer, Editor & Managing Partner, Frozen & Refrigerated Buyer

I am impressed by David's thoughts and statistics regarding Sprouts Farmers Market. While I think they will grow so will Trader Joe's and possibly Whole Foods. Organics have proven their value in today's marketplace but they are struggling a four-way battle with future "opportunity" vs. "pricing" vs. "saturation" vs. the "economy."

Are Sprouts' skills up to mastering their business challenges? While we all like to root for the small guy the jury on Sprouts is still out.

[Image of: View Braintrust Panelist button]
Gene Hoffman, President/CEO, Corporate Strategies International

I don't get it...saying you're less than WFs is tantamount to saying that the car you just bought costs less than a Mercedes. So what? Do they have sales people that are as good as WFs? Are their stores as well done as WFs? Do they have a value brand that crosses into center store like 365? Do consumers trust their brand as much as they do WFs?

Sprouts should grow because there's plenty of room for players on the "better" side right now, but I wouldn't tout the price issue if I were them. Others have been going after WFs for years on that and they continue to open store after store after store. Talk to your P.R. firm, Sprouts. Try again.

[Image of: View Braintrust Panelist button]
Lee Peterson, EVP Creative Services, WD Partners

Whole Foods is expensive and will face greater competition. Where I live, coops are big. The prices are always less at the coops for the very same thing. And you get to see exactly where the products come from. Whole Foods doesn't have that local personal connection, and I see more people shopping at the coops and less at Whole Foods.

Edward Chenard, Consultant , Echenard

Isn't that kind of saying Coach is cheaper than Louis Vuitton? I am sure the poor and downtrodden are rejoicing at the news that they can save 2% by shopping at Sprouts. Let's face facts, those shopping at Whole Foods and/or Sprouts aren't counting pennies anyway. It's fashionable to complain about pricing at Whole Foods. People complain in public only to let others know that "they" can afford to shop at Whole Foods. A 2% difference means less than nothing and I will almost bet that Sprouts will increase their prices to be equal to Whole Foods.

Neither of these retailers ever increased market share by advertising price. They made their name delivering products that were free of pesticides, contaminants, hormones, etc. that adulterate grocery products. People realize that yields are lower when things are grown without the benefits of the above and expect to pay more.

While Whole Foods has endured barbs and slings, they have not seen serious erosion of their business in spite of one of the worst recessions this country has ever experienced.

Ed Dennis, Sales, Dennis Enterprises

Sprouts needs to watch where they grow and how they locate. They seem to favor power center type locations and I find they get lost among other stores in these types of locations.

Personally, I like Sprouts in northern California as they're a well priced alternative to the poor competition that exists in that market. The same goes for Sprouts in Oklahoma. But when I'm in places like southern California, Arizona, or even Colorado with other good choices, I don't go to Sprouts unless it's to check on traffic.

Sprouts, remember, got where it is due to internal issues at Sunflower and a cash need by Smart & Final so Henry's was sold. Sprouts was the worst of the three similar chains but managed to get into a position of control not by being the better operator, but by luck. Henry's was the superior chain and I'd go out of my way to shop there in southern California.

'storewanderer'

I'm a little curious if some of those commenting have visited a Sprouts store or taken a look at Sprouts weekly ad. 90% of the produce floor space at Sprouts is NON Organic. Sprouts advertises hot prices on conventional meats and produce. Value oriented customers do shop Sprouts for these items.

I don't think Sprouts and Whole Foods are going after many of the same customers. Sprouts will hurt conventional stores with high prices and lackluster meats and produce. I'm not naming names, but there is good reason Sprouts targeted Atlanta to expand into if you look at the execution of the dominant conventional there, compared to other regions....

Mike B, Storewanderer, None

According to Warren's piece - which I found well done and certainly timely - they see room for a 6-7 fold increase, but the obvious question is how many other operators are saying the same thing? Organics at the moment are, of course, "hot," so the field is likely to see heavy competition, and we could well end up with an over-saturated market. The other downside, obviously, is that their (relatively) small size gives them little market power - either with suppliers or consumers...being a little sports car makes it easy to be nimble, but it also makes it hard when you're run over by a truck.

'notcom'

Storewanderer's point of Sprouts being the worst of the three similar chains has me concerned. When I see the worst in class expanding I have to wonder if they can sustain and growth. We have above average natural food operators and we have below average operators. Now all of them can't be above average and Sprouts I'd put in the below average ranks. In some ways with their sales and unit growth, they remind me of Fresh & Easy, just build lots of them anywhere there is a vacant piece of real estate and hope for the best. Same store sales increases will look impressive but sales per unit not so much.

The elephant in the room is Sprouts is no Whole Foods, and if the only think they can beat Whole Foods on is price, not market share or profit, at some point they will hit a wall.

Hy Louis, Tea buyer, Wong Imports

Another challenge not yet mentioned is in California it is easy to secure low cost conventional produce and transport it to the stores quickly. This is just what Sprouts does. As you expand, transport time and cost increases, impacting quality and price. The main traffic draw for Sprouts is low cost conventional produce; if you look at a basket at Sprouts it is mainly produce and not much else. This gives them the opportunity to grow baskets of existing customers. Add Sprouts fresh departments and vitamin area to Trader Joe's center store/dairy/produce and you'd have a true winner.

'storewanderer'

Yes, growth is certainly in Sprouts' future. Managing change, growth and customer service while preserving their corporate culture and image will be Sprouts' biggest challenges and opportunities as they grow in both store locations and numbers....

[Image of: View Braintrust Panelist button]
Kai Clarke, President, Kowa Optimed, Inc.

Sprouts has tried to mesh its mix and the old Henrys and Sunflower mixes but the net result is a store better than the original Sprouts, similar to the original Sunflower, and a downgrade from the old Henry's. Henry's had stronger meat, deli, and bakery and Sprouts has added some items, but cut others, decreased sizes in some, and increased prices.

I don't think it is anything like the Fresh & Easy situation, but I think Sprouts is a bit headstrong and should have just taken all of the old Henrys programs rather than trying to haphazardly mesh their inferior ideas in.

'storewanderer'

Sprout's claim to be a "value-oriented organic retailer" left me disappointed with the in-store experience. As storewanderer points out, the main attraction is low-priced conventional produce. While, the packaged goods are predominantly natural or organic, this is unlikely to be a differentiator in most markets. The layout is open and easy to shop, but customers looking for high-quality or organic produce will be disappointed, making the comp to Whole Foods much less meaningful.

Sprouts' opportunity for growth hinges on the popularity of smaller grocery formats and fresh foods, which are likely to be strong trends in the future. Long-term success will depend on its cultivation of a convincing store experience. The Sprouts stores in central Texas feel sterile and unwelcoming compared to Whole Foods, Trader Joe's, and HEB. The science lab of nutritional supplements is emblematic of the dull experience. I like the small size of the stores and cheap prices on produce, although it is hard to imagine Sprouts satisfying a quality-concerned shopper or keeping a value-concerned shopper where more enjoyable shopping experiences are available. The biggest opportunity for Sprouts would be to focus on lowering prices on all perishable categories like deli, bakery, and dairy to position itself as a low-cost neighborhood market.

Jacob Suher, PhD Student, UT-Austin

Search RetailWire
Follow Us...
[Image of:  Twitter Icon] [Image of:  Facebook Icon] [Image of:  LinkedIn Icon] [Image of:  RSS Icon]

RetailWire's
Getting Started video!

View this quick tutorial and learn all the essentials...

RetailWire Newsletters