Sprouts Farmers Market’s traffic lifts as ‘direct result’ of shift to product differentiation away from ‘unprofitable’ promotions

The retailer saw comparable store sales grow 3.1% and total sales growth of 6% to $1.7bn in its first quarter reported May 1 thanks in part to strategic decisions made pre-pandemic (and inflation) to discontinue what it considered “ineffective and unprofitable promotions”​ in favor of competitive produce pricing and product differentiation that targeted loyal shoppers.

The decision to become more of a specialist retailer versus a broad mass market retailer initially cost the retailer about 25% of its transactions in the second quarter of 2020, but now “our traffic trends are improving and our newer stores on average are exceeding our internal expectations,”​ CEO Jack Sinclair told investment analysts Monday during the company’s first quarter earnings call.

CFO Chip Molloy explained the “slightly better traffic in Q1” than anticipated contributed directly to the increase in comp sales, which one analyst noted reached their highest levels since 2020.

While the benefits from the increased traffic and positive comp transactions were partially offset by a slight decrease in basket items year-over-year, likely due to consumer adjustments for inflation, Sinclair said he is encouraged by the company’s most recent performance, which he says is “a direct result of the strategic changes we have made over the past few years to differentiate ourselves as a specialty, health and food retailer.”​

He explained that more than 60% of the business now comes from “high frequency customers,” which is a reflection of SFM’s goal “to drive our current customers to shop more often and to encourage trails from new customers who are also within our target audience.”​

The retailer is doing this by pursuing a three-prong plan.

‘Elevating the level of service in our stores’​

First, Sinclair said, SFM is “elevating the level of service in our stores to meet the needs of our customers and distinguish ourselves from the competition,”​ which includes revamping the sampling program, “increasing speed at checkout and proactively helping customers navigate the store, while finding products that align with their dietary needs.”

He added the retailer has “invested a lot of time and energy” creating innovation centers in stores where consumers can find rotating products they can’t find anywhere else.

In addition, SFM has improved and increased its selection of ready meals that target health and plant-based oriented consumers, as well as improving its frozen section in new stores.

An improved omnichannel shopping experience​

Second, he attributed the uptick in traffic to e-commerce growth, which is up double digits and represents 12.2% of the retailer’s total sales for the quarter.

“The flexibility of ordering online and picking up or having their Sprouts favorites delivered provides a much-desired option for our core audience,”​ and was further supported by an improved site design and digital experience to boost conversion and sales, as well as partnerships with DoorDash and Instacart.

Better targeted, personalized media​

“Our third area of customer engagement is targeting our core audience with data-driven media. We have improved the return on investment on our media spend with a more targeted driven approach to our media mix, leveraging our first-party data and consumer insights to identify our customers better,”​ Sinclair said.

He added that in markets where SFM is new, its media focuses on driving awareness with more storytelling about the brand, highlighting local producers and presenting offers per trial.

‘We brought in more value offerings’​

While the retailer appeared to take a hard line on promotions and pricing pre-pandemic, it has adjusted its stance to accommodate the unexpected impact of record-high inflation on consumers by increasing its private label offerings so that they now account for 20% of total sales.

“Amid the high inflationary environment, we brought in more value forward offerings, like multipack grocery items and value-sized meat and diary offerings, while continuing to offer great pricing in our produce department and on important items, such as Sprouts’ brand cage-free eggs at $3.99 and our healthy sandwiches at $4.99,”​ he said.

Looking forward, he said, Sprouts will focus on expanding its category leadership, further creating a unique assortment focused on product innovation, improving the supply chain and accelerating store unit growth as well as consumer engagement.

Based on this, the company expects full year sales growth of 5-6% and comp sales growth of 2-3% with margin flat to slightly up, said Molloy.