In February 2007, Whole Foods sent shock waves through the organic-food industry by taking over its closest competition, Wild Oats.
The $565-million buyout was not only unexpected by industry experts, but it also was deemed unlawful by the Federal Trade Commission, which unsuccessfully attempted to stop the deal, fearing the merger would create a monopoly on the natural- and organic-food market. And the commission had a point: In 2007, Whole Foods operated 191 stores while Wild Oats ran 110 stores. No other organic chain came close to these numbers.
Fast-forward five years to this past March, when a little chain called Sprouts struck a deal to merge with fellow independent organic retailer Sunflower Farmers Market. Together, the two companies have 139 locations, more than 10,000 employees and an expected $2 billion in annual sales for 2012, effectively giving Sprouts the No. 2 spot in the natural organic retail market—directly behind Whole Foods. Already operating locations in California, Arizona, Colorado and Texas, the addition of Sunflower’s stores expands Sprouts’ reach to Nevada, Utah, New Mexico and Oklahoma.
On the surface, it might not make sense. The first Sprouts location opened only 10 years ago. While Whole Foods’ newest stores average 36,000 square feet, Sprouts typically covers 28,000 square feet. How has this relative newcomer succeeded against a giant the FTC only a few years ago accused of having a monopoly on the industry?
Neil Stern, a grocery-store analyst and senior partner for Chicago research firm McMillan Doolittle LLP, has an idea.
“Sprouts stands up to Whole Foods because they’re more affordable, smaller, less intimidating and easier to get in and get out of,” Stern says. “Sprouts fills that need in the organic retail market.” (Sprouts declined to speak for this story.)
Affordable. Unintimidating. Convenient. Sound familiar? Although the average convenience store is quite different from a Sprouts Farmers Market, is there anything we can learn from Sprouts’ success? To answer this question, we’ve enlisted Stern and other industry experts to break down how and why the Sprouts model works.
Organic Growth
One of the most obvious keys of Sprouts’ success is the product they sell: organic food. According to the Organic Trade Association’s 2011 Organic Industry Survey, U.S. sales of organic food and beverages have grown from $1 billion in 1990 to $26.7 billion in 2010.
“The numbers work because the organic market is growing faster than the normal market,” says Stern. “You have to look at how much more people are willing to spend for organic products. So long as that differential is around 20%, there’s a big market.”
Even taking out mass-market grocery chains and Whole Foods, the industry is booming. SPINS, a market research and consulting firm for the natural-products industry, shows that sales for natural supermarkets excluding Whole Foods went up 9.1% between 2009 and 2010 and another 10.3% the following year, according to SPINSscan Natural.
These numbers are all the more impressive given the economic downturn. As consumers are buckling down on luxury items such as vacations, entertainment and dining out, what motivates them to spend the extra money to go organic?
According to Lonn Whitmill, division manager for the grocery channel of Oregon’s Pacific Natural Foods, the answer may lie in the mindset of consumers who typically purchase organics.
“People who buy organic have a tendency to be higher-educated, with higher average incomes,” Whitmill says. “They want to buy from real, organic or natural manufacturers, who believe in sustainability and organics and who will use the profit from their purchase to further the customer’s core beliefs.”
Some of those core beliefs include knowing what’s in their food, where their food is coming from and what the company who produces the food believes in.
“There’s an ongoing trend where people want to know what’s in their food,” says Whitmill. “If they don’t know who’s making their food, how can they trust them to actually have the ingredients in there?”
This has been a problem with many mass-market retailers, who in search of gross-profit margins tend to give preferential treatment to their own private-label organics over brand-named organics. Yet Sprouts has managed to grow its own private-label items without diminishing brand presence in its stores. Customers can then make the final decision.
Private label and brand variety is certainly important, but with Sprouts being based on farmers market and fruit-stand models, competitively priced quality fresh fruit and produce is what the chain is best known for. And it’s come up with an interesting model for keeping prices low enough to please consumers while still turning a profit.
“They don’t always have the best price on every item, but they do have the best price on key items any given week,” says one industry insider, who preferred to remain anonymous. “If strawberries are in season, you can pretty much rest assured that Sprouts is going to have equal to or the best price in the marketplace on that seasonal item.”
This industry insider believes this kind of seasonality pricing is a core strategy of Sprouts’ management: By offering lower prices and deals on strawberries or other seasonal items, Sprouts gets customers into the store, where they usually purchase other higher-margin items.
In other words, the Sprouts model succeeds because, as Stern says, “they offer high-quality foods at affordable prices.” Not the best price—but always affordable.
Big-Time Chain, Small-Town Feel
Affordable organics isn’t the only factor in the Sprouts sensation. Many retailers have tried and failed to get in on the organic market.
To appreciate Sprouts’ success, it’s important to look at the style of stores the company operates. The chain takes the farmers market model to heart. From the layout of the stores to the friendliness of the employees and the relationships forged with customers, Sprouts always strives to deliver that special community-market feel.
“Sprouts is becoming a chain, but doesn’t feel like it,” Stern says of the paradigm. “It feels very local, very mom-and-pop.”
That local mom-and-pop experience begins the moment one pulls into a Sprouts parking lot, which in the summer, often is the site of barbecues for hungry customers. Outside the store, seasonal fruits such as watermelons will often be stacked up in the back of an old-timey pickup truck, stirring the notion that produce has literally just come in from the farm.
Fresh produce continues to own the stage once a consumer walks into the store. While typical grocery stores keep the center reserved for processed and packaged goods, with produce relegated to the sides, Sprouts puts produce front and center. The stores also display products differently than most mass-market retailers, on customer-friendly shelves that never go above eye level.
“Their store layout, the fact that everything is low-profile, adds to this fruit-stand mentality or feel,” Whitmill says. “You can see everyone; there’s nobody in the next aisle you’re going to bump into because the shelves are stacked so high you can’t see over the aisle.”
Of course, it’s not just about appearances or produce, as Stern is quick to point out.
“It’s also about the people who are selling it,” he says. “Go into a Sprouts and the produce manager is going to know everything about not only what’s in season, but which particular products are exceptionally good that week. You’re not going to get that at a [traditional] chain grocery store.”
Both Stern and Whitmill commented on the exceptional friendliness and overall knowledge of the Sprouts staff, which goes out of its way to learn customers’ names and preferences. And if the customer isn’t exactly sure what to buy? Well, Sprouts encourages them to try a sample to help make up their minds. In fact, Sprouts has an open sampling policy on everything in the store, except for wine and eggs.
“Everything about the store gives you this feel of a locally owned, fun place to be and shop,” says Whitmill.
Still, with new locations sprouting up from California to Texas, Sprouts is decisively not a locally owned farmers market.
“The question is, can they keep that up now that they’re operating almost 140 stores?” asks Stern. “If they can economize to scale and keep that local feel, that’s the magic they want.”
C-Store Seedlings
What does the success of an organic grocer offer c-stores, an industry that has long shied away from fresh produce, much less the specialty niche of organics?
“Where c-stores could learn something is from the fresh appeal,” says Whitmill. “I do think that there are some c-stores who could become a crossover location, a place to stop and pick up some apples, a gallon of milk, etc., as opposed to just going in, paying for gas and buying some beef jerky. It’s already happening with the drug-store channel, which is turning more and more to grocery.” Stern agrees with Whitmill, saying, “The Sprouts model proves there’s definitely a market to be a convenient fresh-goods purveyor. And there’s certainly an opportunity for c-store retailers to make a statement in that area.”
As both analysts point out, fresh organics certainly aren’t for everyone—and certainly not for all c-stores. But there are other takeaways Sprouts can offer the industry.
“I think what most retailers have to understand today is that the average consumer shops at between five to seven different food channels any given week,” says Whitmill. “I don’t think any single retailer can be everything to everybody; what you have to do is find a niche that is yours and own that niche.”
This is certainly something Sprouts has done: Its niche is quality, affordable organics at convenient, fun locations.
“I think Sprouts has said, ‘My business model is X. I’m not necessarily going to try to compete with Whole Foods. I’ll do what I do very well,’ ” says Whitmill, who admits he has not confirmed this model with Sprouts. “But that’s how they act. You don’t hear them screaming and hollering about Whole Foods; they just do what they do very well.”
Knowing your niche is a concept c-store retailers have long understood. But the success of Sprouts is a reminder of just how important it is. Whether it’s car washes, inventive foodservice offerings or frozen fountain beverages, it’s important to understand what draws consumers to your store and constantly strive to improve that niche.
But perhaps the most important takeaway for c-store retailers is that there is always room for competition.
“Sprouts proves that retailing hates a vacuum,” Stern says. “When Whole Foods bought Wild Oats, the U.S. government was not happy; it bordered on a monopoly. But instead, Sprouts and other smaller-model markets are growing.”
In other words, regardless of the size or power of the competition, Stern believes, “Sprouts is proving there’s always room for others to succeed.
Sprouting Knowledge: What C-Stores Can Learn
- Design: Sprouts lowered shelving to create a more open environment.
- Sampling: As c-stores further embrace fresh foodservice, consider Sprouts’ liberal sampling program.
- Staff: Sprouts employees are encouraged to engage, to know customers’ names and tastes.
- Parking Lot: Sprouts is known for turning the lot into a farmers market or local barbecue in the summer.
- Produce: With improved distribution, will c-stores further invest in fresh produce to grow the morning and snacking occasions?
- Branding: Sprouts is not taking on Whole Foods directly. Rather, it has found its niche, where it can be best in the world. What is your niche?
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