Sprouts Farmers Market boosts sales with expanded private label assortment & ecommerce options

By Elizabeth Crawford

- Last updated on GMT

Sprouts Farmers Market boosts sales with expanded private label assortment & ecommerce options

Related tags Sprouts Farmers Market ecommerce Meat

For the third straight quarter, the natural and organic retailer Sprouts Farmers Market beat its earning estimates – allowing it to increase its guidance for the year – thanks in part to investments in new technology, more emphasis on ecommerce, expanded private label assortment and efforts to become a destination for more than just produce.

The retailer’s net sales for the first quarter of 2019 increased 10% over the same period last year to $1.4 billion, driven by a 1.4% increase in comparable stores sales and strong performance in new stores, Sprouts Farmers Market executives told financial analysts May 2.

The positive report helped drive up the price of SFM shares 5.4% in same day trading and spurred the management to boost its earnings expectations for the year to $1.18-$1.24 – up from the $1.15 to $1.24 previously projected.

A primary driver behind the company’s success is a deliberate move to become a “full shop healthy grocery store”​ versus a destination primarily for produce, said Brad Lukow, interim co-chief executive officer and chief financial officer.

He reiterated other factors include the company’s focus on enhancing its in-store and out-of-store customer experience and investments in process and technology advancements.

Becoming a destination for more than just produce

While SFM may have attracted consumers initially by offering more affordable but still fresh and organic produce, it has been testing new prototype stores, “which are performing very strongly driven by enhanced consumer experience in deli and meat and seafood,”​ and which will continue to serve as a template for new stores opening in the second quarter, Lukow said.

He explained that the new store prototypes aim to better align with consumer trends for solutions that are both convenient and healthy.

“We regards to the deli area of the business, we’ve introduced a lot of newer items that are on trend and healthy. And that’s a real point of differentiation for us,”​ he said. “You can go to any supermarket and get something that you can pick up and eat that’s convenient, but there’s a huge difference between what many other retailers offer and what Sprouts offers. And we’re all about natural, organic, healthy ingredients at very good prices.”

As for frozen and dairy, which he said is approaching 20% penetration, SFM’s go-to-market strategy is focused on taste, clean ingredients, non-GMO, organic and better-for-you options

Speaking more broadly about the new prototype stores, Lukow added, “It’s more of a theater with all the services from with a rectangular island within the store and production have been moved to back of house.”

The consumer feedback on these changes “has been fantastic,”​ he added.

In addition, the retailer is expanding its private label offerings, which Lukow said now account for nearly 14% of the retailer’s revenue “and continues to significantly outpace our overall company net sales and comp growth.”

As such, he added, “we will continue to introduce new stable, trending and unique products this year along with increased in-store, digital and social media messaging to drive further trial, engagement and loyalty among our customers.”

Ecommerce is growing

In addition to improving the in-store experience, Lukow said, SFM is focused on improving and expanding the online shopping experience.

“We are expanding our digital channels and increasing our reach in customer impact,”​ in part by offering delivery in every market where SFM has a physical store, he said.

“Home delivery continues to grow, up over 60% in the first quarter as consumers look to Sprouts as a trusted, reliable partner for added convenience in their busy lives,”​ he said. “We have expanded our testing of click and collect and are now offering this service in a number of stores in six markets. We will continue to test and learn to ensure we are seamlessly engaging with our customers regardless of how they choose to shop.”

Lukow attributed SFM “tremendous success rolling out home delivery”​ on the quality of the product and the consistency of ensuring orders are correct.

He also noted that offering home delivery is not only convenient for shoppers, but also results in basket sizes that are, on average, 2.5 times that of the store and has a stronger margin mix – making the expansion a smart business decision even though only about 2% of sales come from online orders.

“Even though we have the same prices online as we do in the store and some of our competitors do not, the ad penetration on the home delivery orders is meaningfully below that of the store because it’s really about the convenience factor from a consumer standpoint,”​ Lukow added.

Technological investments and advancements

On the technology said, Lukow said SFM continues to rollout a fresh item management and is on track to complete implementation of production planning by the end of the third quarter.

The new system allows SFM to “optimize production of the right items at the right time, resulting in better in-stock position and driving incremental sales.”

Lukow acknowledged that the roll out has not been seamless with the biggest challenge being convincing long-standing team members to trust the system.

“That was the biggest challenge because everyone is in the habit of how to order and how to determine production quantities. But the biggest learning and aha is, well, when I rely on the system, it actually works,”​ he said.

Beyond the fresh item system, SFM also recently streamlined its finance process with an operational system that provides “timely, actionable financial information throughout the store network,”​ Lukow said.

Reflecting on all the recent changes and SFM advances, Lukow concluded, “We are pleased with our financial performance and are confident that the investments we are making this year with continue strengthen our business. Our strong free cash flow and healthy new store productivity positions us well for continued growth and long-term shareholder value creation.”

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