Differentiation is key to Sprouts Farmers Market’s success

It was not an easy decision for Sprouts Farmers Market to concentrate solely on the health enthusiasts, not when it cost the retailer over a half a million customers. 

The company, however, had a plan in place, and today that strategy has fueled the specialty grocer’s success in a challenging marketplace. 

“The team was very much focused on being quite traditional in their grocery approach,” said Sprouts Farmers Market CEO Jack Sinclair at the Goldman Sachs Global Retailing Conference on Thursday, according to a transcript from financial services site AlphaSense.. “We decided to focus on the 200 billion, the health enthusiasts, and when you become more focused on that, it changes what you do in merchandising”

But, Sinclair added, that laser focus did not come without some challenges.

“The start of the exercise led us to losing customers. We probably lost about a half million customers overnight.”

Phoenix-based Sprouts, however, is now producing quarters even the likes of Costco and Walmart could admire. In July, the retailer reported on a stellar second quarter which consisted of $1.9 billion in net sales, a 12% year-over-year increase. First-quarter earnings showed net sales growing 9% compared to the same period in 2023. 

But when the pandemic and its aftermath hit, they brought along record food inflation and supply chain issues. The key for Sprouts was offering products no other grocer was offering, especially when it came to organic produce. 

“When I see a product at Walmart,my first instinct is, ‘Let’s make sure we’re not selling that’,” said Sinclair. 

Finding products that are unique only to Sprouts has been the task of the company’s foraging team. The whole idea is to find what nobody else has, and those products end up in an innovation center at stores where shoppers have the opportunity to try them out. The product remains at the innovation center for a limited time, about 90 days, and Sprouts makes the determination to either keep the product or pass on it.

Alcohol alternatives are currently thriving at Sprouts, executives said. Plant-based dairy and organic produce, which account for more than 45% of Sprouts’ product sales, are also performing well. 

Inflation is beginning to stabilize, according to Sinclair and Sprouts CFO Curtis Valentine, who was also part of the Q&A at the Goldman Sachs event, and a big reason is because the supply chain issues which were inflamed during the pandemic have begun to subside. Sinclair and Valentine believe inflation will remain in the low single digits for the remainder of the year. Long-term commitments with growers are also helping Sprouts take control of pricing. 

“We manage [pricing] through elasticity and we let the customer kind of dictate where the price needs to be,” said Valentine. “It’s serving us well at the moment.”

The pandemic dampened immediate plans for store growth, but now Sprouts is expanding at a steady pace. The retailer opened 30 stores last year and plans to power up 35 locations this year. Sprouts’ real estate pipeline includes 70 signed leases and more than 100 future sites, executives said.

Sprouts is looking to expand in California, Florida, Texas, Arizona, and Colorado, and growth in the Midwest is also on the horizon.

With Sprouts banking its business on fresh, organic produce, the proximity of distribution centers is critical. The Midwest lacks one currently, but Sinclair envisions a distribution center near Chicago when the opportunity hits.