To rebuild foot traffic, sales and customer loyalty, Sprouts Farmers Market in the coming quarter and through 2022 will focus on “delivering a clear message that highlights our sharp produce pricing, innovative products and farmer’s market experience to drive additional transactions,” CEO Jack Sinclair told investment analysts during the company’s third quarter earnings call Nov. 4.
However, some investment analysts don’t believe this is enough and predict the retailer will continue to lose traffic due to discounters and other retailers as rising inflation continues to drive up prices.
Bank of America, for example, is holding the retailer at “underperforming” on the belief that “it diversion from historical loss leader pricing in produce (avoiding the ‘coupon clippers’ to promote sustainable margins) could restrain the level of traffic recovery.”
In a note, BoA added, “we think elevation inflation could further divert customer traffic to discount channels and challenger retailer pass through, implying additional sales and margin risk.”
Fewer shoppers but higher margins
While Sinclair acknowledged that Sprouts’ “initial marketing messages fell short” in recent periods, he said he still believes the retailer has “the right strategy and we are excited about moving it forward piece by piece, making great progress on our supply chain differentiated merchandise, new format and real estate’s selections.”
In the middle of 2019, Sprouts adopted a dramatically different marketing strategy than it previously employed – opting to discontinue the “onslaught of aggressive, ever-increasing promotions” that it previously relied on to drive traffic, because this strategy was eroding margins and brand equity, which Sinclair said, “was not in the best long-term interest of our stakeholders.”
While this shift sacrificed so-called “coupon clippers,” the belief was the bulk of Sprouts’ shoppers (who make up 75% of the banner’s transactions) would remain loyal and be drawn to the treasure hunt of discovering innovative, high quality products that Sprouts offers.
And while this held true as illustrated by loyal consumers putting more units in their baskets today than in 2019 and willingly paying a higher average price due to mix, fewer promotions and inflation, resulting in record profits in the third quarter of $540m and gross margins of 35.8%, the negative impact on foot traffic also was higher than expected, in part due to the pandemic, Sinclair said.
Higher than expected foot traffic losses
“In the second quarter of 2020, we lost approximately 25% of our transactions and to date they have not returned. Certainly, COVID played a significant role in changing the shopping patterns of our customers during the height of the pandemic,” but so too did the shift in promotional strategy, Sinclair acknowledged.
He explained that while the plan always budgeted for a slight drop in foot traffic, the initial expectation was to see a positive two-year stack in the back half of this year. However, the third quarter did not deliver.
Shifting strategies to attract consumers
With this in mind, he said, “we began to address this imbalance in the third quarter by trying new things. Some worked. Some didn’t.”
For example, special events in produce that focused on the retailer’s differentiation, such as offering tropical fruits or unique varieties of grapes, “drop more excitement in the store and were successful.”
In addition, Sinclair said, “we leveraged embedded call-to-action in our branding work, we highlighted our competitive advantage in produce, including attractive pricing, which is better than most and differentiated with more local, new varieties and organic produce.”
Likewise, the retailer has been “very deliberate making measured investments in this regard and utilizing more of our owned media to share these messages,” he said.
In response, foot traffic improved slightly each month of the third quarter.
“During the fourth quarter, we are continuing many of these tests on a broader scale, and we’re doing more mass media on Sprouts’ strengths, like promoting compelling, high perceived value items that are more relevant to our core customer,” he said. “As well, we continue to refine our broader brand message and campaign to attract those new customers still unaware of Sprouts’ differentiated store,” Sinclair said.
Finally, he noted, the retailer is reaching out to consumers with stepped up wellness messaging, including an interactive wellness livestream with industry experts to discuss natural remedies for anxiety, inflammation and immune health.