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Sprouts Returns to its Roots

The natural chain uses a differentiated assortment, including innovative new frozen items, to win over core consumers.

Since the pandemic struck in March, consumers looking to cut back on trips to the supermarket have been all about one-stop shopping, leaving specialty retailers with limited assortments at a bit of a disadvantage. Despite not offering much in the way of toilet paper and hand sanitizer, Phoenix-based natural foods grocer Sprouts Farmers Market managed some pretty solid gains nonetheless. Net sales hit $1.6 billion during the third quarter, up 9.5% versus a year ago, while comp store sales jumped 4.2%.

Sprouts Storefront

Although fresh produce is still the star of every Sprouts store, grabbing 25% of total selling space, frozen foods play an increasing important role. In fact, CEO Jack Sinclair noted in a third quarter earnings call that frozen comps were higher than the company average, highlighting a prescient decision to invest in the department pre-pandemic. “We were already committed to giving a lot more space to that section to allow us to appeal to our customer base [with more] vegan, paleo and vegetarian,” he explained. But the pandemic has reinforced that resolve.

Although new stores have a 20% smaller footprint, industry observers confirm that the frozen section is getting a higher percentage of total space than it did previously. But consistent with Sprouts’ new focus on “health enthusiasts and innovation seekers” more attracted by assortment than low prices, much of that additional space is being reserved for unique new products.

INNOVATION IS KING

“There’s a huge push for innovation in 2021,” says one manufacturer partner. “Sprouts wants to be able to make that first-to-market claim and has really energized vendors to step up with new flavors, formats, ingredients, etc.” She adds, “I wish other retailers were more aligned on new innovation.”

Sprouts Ethnic Foods Display

Sprouts offers a broad array of ethnic meals, including several plant-based options, under its own brand

Another observer says the company defines innovation three ways: line extensions, interesting changes to existing items (making a product keto, for example) and “new to the world.” But it’s the two latter categories that Sprouts believes can truly differentiate it from competitors, particularly in other channels. While there are certainly exceptions, “If your brand is in conventional and mass channels, the chain will likely not be as interested.”

However, some suppliers think Sprouts takes that strategy a little too far at times. One frozen manufacturer said the chain refused to take on a “must-have,” core flavor of its product because it was “too mainstream.” Instead, it went with No. 11 on the list of top sellers. “I know they want innovation,” she says, “but it can’t be too far out.”

Another common complaint about the frozen assortment is Sprouts’ focus on expanding high-volume categories such as pizza, entrees and ice cream, where scads of orange 

“new for you” shelf tags call out recent additions, while others have disappeared completely. For example, the frozen bread section was reportedly eliminated in January — right before the segment caught fire in March. “I know Sprouts is tight on space,” says one manufacturer, “but all the other retailers out there are seeking innovation in every category. We’ve seen compression at other chains, but not complete elimination.”

Although frozen bread and dough may not have a permanent home at Sprouts, we did spot a few SKUs in a special holiday bunker alongside Tofurky, Wholly Wholesome, truwhip and the like, highlighting the growing importance of seasonal in-and-outs that meet demand for certain products at key times of the year. (“Sprouts really does do a nice job with holiday displays,” says one manufacturer.) But for new frozen products without a spot in the planogram, the chain is creating dedicated “innovation centers” in all new stores, providing another opportunity for manufacturers to get items in front of consumers. What about the ones that really take off?

Sprouts’ holiday displays get high marks from manufacturers and provide merchandising space for seasonal in-and-outs.

Manufacturers say Sprouts has a pretty rigid category review schedule, so it’s hard to get new items on the shelf out of cycle. But Sinclair is working to change that. “We’re trying to avoid becoming a super-efficient, planogram-driven retail business — because then you miss things along the way,” he explains. To make sure that doesn’t happen, the chain offers a “speed-to-shelf” program for “key first to market or innovative new items.”

Another knock on Sprouts’ frozen assortment is that it’s not as clean as one might expect from a natural grocer. While the company claims that 90% of its offerings are natural or organic, “Some items at Sprouts contain artificial ingredients, colors and sweeteners, which may be perceived as a negative by the ‘health enthusiasts,’” says Don Stuart, managing director at Wilton, Conn.-based Cadent Consulting. “The ‘innovation seekers’ probably won’t be bothered,” he adds. But it’s worth noting that one of the reasons consumers say they shop at Whole Foods is because they don’t have to read labels.

Other suppliers question Sprouts’ commitment to shoppers’ well-being. For example, says one, “The chain has moved pretty aggressively into plant-based, but a lot of it is ‘Franken-food’ that isn’t necessarily healthy. As a natural foods retailer, the company should probably be a little more concerned about whether products are actually good for its customers.”

DIFFERENTIATION OVER DEALS

Sprouts Refrigerated Bakery

The frozen bread category was eliminated earlier this year as Sprouts transitioned to a “Refrigerated Bakery.”

Despite some minor disagreement over the wholesomeness of its assortment, Sprouts’ “more curated, intentional selection of differentiated food choices” is helping it target a narrower but more desirable customer base, says Pamela Goodfellow, director of retail insights at New York-based Kantar. “The company’s larger store format and wider customer focus wasn’t differentiating the Sprouts offer compared to larger competitors,” forcing it to lean more heavily on low prices and frequent promotions instead, she explains. “But the new differentiated product strategy focused on the needs of core consumers gives it more leeway to avoid…a race to the bottom against larger players, which always win that game.”

Thanks to its new, more niche positioning, Sprouts has been able to eliminate loss leaders and

many of the aggressive price points that only attracted “promiscuous shoppers,” not core customers likely to stick with the chain for the long haul, says Sinclair. “In a lot of ways, we’re going back to our roots,” he adds.

Transitioning to everyday low prices is a positive step for a retailer that needs to attract higher-income consumers needed to drive continued growth, says Neil Saunders, managing director of retail for New York-based GlobalData. However, “Sprouts still needs to be broadly competitive on price in order to retain existing shoppers.” One way it can do that is by expanding its own brand offerings.

Although Sprouts’ private label share has grown from 7% to 14% in the past six years or so, “It’s still relatively underdeveloped,” says Cadent senior analyst Suren Wanasundera. For the most part, he says, Sprouts uses its own brands to offer more traditional items at competitive prices while leaving innovation and differentiation to national brands. But that’s starting to change.

In fact, one manufacturer notes a disturbing tendency of Sprouts recently to replicate unique national brand products under its own brand and then pull the national brand once the private label version reaches critical mass. “Unfortunately,” he adds, “I see more of that coming given the current CEO’s background.”

Sinclair does have plans to grow private label, especially in grocery, where he expects store brand share to top out at 20% to 25%. And he’s definitely planning to use private label differently than Sprouts has in the past. For example, he says, “We have some great seasonal items coming through private label. And I’d really like to see that level of innovation coming in and out to constantly create interest for the customer, particularly the experience seeker customer.”

Industry observers say the single-serve entrée category appears to be private label focus. For example, we spotted a fairly extensive line of international meals — Indian, Mexican, Chinese, etc. — that boast many of the attributes Sprouts shoppers are seeking (plant-based, gluten-free, organic, etc.).

One caveat, says Goodfellow: “We’re also seeing this focus on fresh, healthy and compelling private label innovation from the likes of Kroger, Albert-sons and others, which has the potential to turn the heads of Sprouts’ target customers.”

As a result, says Stuart, even as the chain works to build out its private label program, Sprouts must continue to emphasize its in-store experience, which evokes a real farmer’s market. “Post-COVID, shoppers will be seeking real, authentic, experiential shopping even more,” he says. So it’s important to preserve that unique character.

ADVANCEMENTS IN DIGITAL PAY OFF

Sprouts Frozen Pizza

The frozen pizza set includes innovative offerings such as Imported Organic Mushroom with Truffle Sauce and Sunflower Pesto on Organic Sourdough.

Along with its strategic shift to everyday low prices and fewer promotions, Sprouts made the jump from a print flyer that went to everyone in its market area to a digital flyer aimed at target consumers. But instead of just advertising hot deals, the chain is using the piece to highlight new and different product offerings, often in real time, says Sinclair. With shorter lead times, he explains, Sprouts has a lot more flexibility as far as what’s included in the flyer, allowing it to source better buys and build smarter promos. Eventually, the company plans to create more targeted digital communications, though it’s still figuring out how best to leverage that opportunity.

What does the shift to digital advertising mean for the frozen department? First of all, reports one manufacturer, despite the obvious cost savings, Sprouts did not lower prices for participating suppliers, which is disappointing. But more important, the number of spots reserved for frozen items was cut in half, from four or five every week to just two or three, which has some a little worried. Pulling back on deals is one thing, “But Sprouts isn’t promoting some products at all,” says the manufacturer.

Sprouts’ other big advancement in the digital space is its new online shopping platform, which drove a whop-ping 337% increase in Q3 e-commerce sales — now at 11% of the chain’s total sales. Customers can order directly from Sprouts via its website or app,

Sprouts Ice Cream

Although Sprouts’ private label share has risen from 7% to 14% in recent years, the goal is 20% to 25%.

says Sinclair. And although the platform utilizes Instacart order management technology, “The customer remains in the Sprouts ecosystem.” That means the retailer’s digital coupons can be applied and order histories and favorites can be accessed to speed reordering. Sprouts employees pick orders in store, but Instacart handles delivery for consumers who don’t opt for curbside pickup. “The hybrid approach works for us,” says Sinclair.

“Sprouts was behind the curve in digital,” says Saunders, “so it was smart to partner with Instacart for a quick solution. But it really needs to own the whole digital transaction. Plus, the website isn’t as functional as other grocers’, and it’s hard to navigate. But it’s a great start.”

Sprouts also continued to expand its brick-and-mortar presence in Q3, adding six new stores for a total of 356 in 23 states. It expects to open two before the end of the year, for a total of 22 in 2020. Because of the pandemic, the chain will probably open about the same amount next year, though its goal is 10% annual growth. (All of the new 2021 stores will have a smaller footprint, which Sprouts was transitioning to pre-pandemic.)

 

As soon as 2024, Sprouts hopes to have between 500 and 600 locations throughout the United States — all part of a five-year plan to double its business. “We’re a $6 billion grocer in a $1.2 trillion market, so we only need a small portion of market share to double in size,” says Sinclair.

MANUFACTURERS HAVE THEIR SAY

So what’s it like to work with Sprouts? Well, suppliers we talked to were all over the map. We heard some good, some bad and some downright ugly. But let’s start with the good. “The company works extremely well with young and innovative brands,” reports one new manufacturer partner, who also says slotting fees are reasonable compared with most national accounts. In addition, “The sets evolve at a faster pace than at most retailers, and category managers aren’t afraid to take risks.” And when a product hits, Sprouts can pivot faster than most other chains, thanks to its speed-to-shelf program.

She adds that Sprouts expects a higher level of communication from suppliers than almost any other retailer. “But it also provides a higher level of transparency and partnership than almost any other retailer.”

Open communication and a strong partnership were also cited as strengths by Eric Martin, national sales director at long-time Sprouts supplier Happy Egg Co., Rogers, Ark. “They’re great advocates for us,” he says, pointing to the retailer’s assistance with a recent supply chain adjustment. “Their support helped us test some new programs and products, which proved to be a great success over the long term.”

But not every manufacturer has felt the love. One long-standing partner, whose products ranked among the best sellers in its segment, found itself out in the cold after its category was moved from freezer to fridge. The supplier happened to be launching a refrigerated collection that would’ve allowed loyal fans of the product to find it in the category’s new location, but he couldn’t even get a call back from the category manager. “The lack of respect for our company and the work we did to build that customer base as well as for the consumers who still write to us asking why our product is no longer available at Sprouts really didn’t sit well with me,” he remarks.

But for every “category manager from hell” story, there was another one about “the best, most accessible merchant out there.” So any problems don’t appear to be systemic.

Other manufacturers say Sprouts is a decent partner but a tough negotiator. “They’ll squeeze every last margin point out of you,” says one. In fact, Sinclair touted the chain’s “industry-leading margins” in his Q3 earnings call.

“Sprouts has exceptionally high entry requirements yet it wants to compete with Walmart on pricing and Whole Foods on quality and innovation, all at the manufacturer’s expense,” says another supplier, who was finally forced to walk away from the chain after barely breaking even. “They show no loyalty to manufacturers for reducing their margins and will jettison well-selling products for the latest fad without warning.” He adds, “Smaller manufacturers do business with Sprouts at their own risk. They make Whole Foods look good and Walmart look princely, which is quite an accomplishment!”

On the other hand, says one supplier, Sprouts can really help a small manufacturer look good in syndicated data because it skews the natural channel so strongly. In fact, the supplier whose frozen category was eliminated at Sprouts ended up getting picked up at three other chains based on its performance there.

Says another: “Sprouts is the go-to chain if you want to goose up your revenue and don’t care about EBIDTA.”

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Sprouts Returns to its Roots
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