Sprouts Farmers Market confidently manages inflation but watches foodservice competition heat up

By Elizabeth Crawford

- Last updated on GMT

Source: Getty/Irina Lev
Source: Getty/Irina Lev

Related tags Sprouts Farmers Market Inflation

As inflation continues to pick up across grocery categories, Sprouts Farmers Market is offsetting most of the impact by confidently passing cost to consumers through its selection of unique, attribute-led, hard-to-find products that appeal to those seeking a ‘treasure-hunt’ experience, according to company leaders.

They explained during the company’s first quarter earnings call late last week that new supply chain efficiencies and placing a greater emphasis on its high-quality produce selection also is helping to offset early declines in a few key categories negatively impacted economies reopening and increased competition from foodservice.

While these combined strategies are helping the retailer insulate its margins against inflation, CEO Jack Sinclair cautioned that if inflation-related costs and price increase “get too big, then we’ll have to watch and have dialogue with our vendor base on it.”

However, he added, for now the retailer is not too concerned about negative ramifications from inflation.

“By and large we’re feeling pretty confident given that we sell a pretty differentiated range of products that as inflation plays out … that we can’ pass on appropriately,”​ he said. “As long as those products that we’re selling are different, we’re able to price it based on elasticity.”

He added that the company’s produce selection also has been “a little bit”​ deflationary in the first quarter with strong mix and “pretty good yields,”​ which means there are “pretty strong opportunities for us to take advantage of price in the marketplace.”

That said, he recognized that higher transportation costs are putting pressure on manufacturers’ and producers’ and “we’re watching that closely.”

New distribution centers ease supply chain strains

One way the company is managing this is with the opening of a new fresh distribution center in Aurora, Colo., which will serve 45 stores and bring the retailers’ distribution centers to six across the country.

“This new DC along with the new Florida DC to open this quarter, we’ll create a faster supply chain and build in our goals of our DCs within a 250 mile radius o four stores,”​ which will help keep down transportation costs, reduce emissions, shrink and food waste and overall “unequivocally”​ benefit Sprouts’ customers, business and the planet, Sinclair said.

Meat, alcohol and vitamin sales slow

Despite these efforts to shore up the business as economies reopen, Sinclair acknowledge there are some areas of the store that are seeing negative pressure from increased food service competition.

Namely, the meat and alcohol departments, which saw huge increases early in the pandemic as consumers tried to recreate the restaurant experience at home, are starting to drop, he said.

Another unexpected segment to suffer due to shifting behaviors caused by the pandemic is the vitamin category, Sinclair noted. He explained that with people staying home, wearing masks and being more proactive about their health the cold and flu season was less extreme than in previous years and therefore consumers did not seek preventive medicines at the same level as prior years.

While Sinclair said that Sprouts will continue to watch these segments and for other negative impacts related to economies reopening, he remains optimistic that the retailers’ health focused consumer base will continue to gravitate to its mix of better-for-you and attribute-led products.

Indeed, he noted, “we have started 2021 on a good footing with a strong balance sheet, and I’m confident that the strategic changes we began last year, structurally changed our financial algorithm for the long-term.”

It certainly is helping in the current term with the retailer reporting net sales up 11% and comp sales up 2.2% in the first quarter compared to 2019, which executives argue is a more realistic comparable than 2020 when pantry loading spiked sales our of proportion. Compared to last year, net sales fell 4% to $1.6m.

Still, given the tough comparisons, Sinclair said he is pleased with how Sprouts continues to navigate the current unpredictable environment.

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