Sprouts CEO Tries to Set Wall Street Expectations on Time Line of the Healthy Food Transformation in Retail
In today’s Sprout’s Farmer’s Market Q2 16 Earnings Release call, Sprouts highlighted its continued strength in top line, bottom line, and comp sales trends. It also fielded a question from a financial analyst that represented the short term view institutional firms take, the financial pummeling investors in public natural product stocks have taken, and the skepticism that the financial community has for how much runway exists for wellness in America.
The last 18+ months of competitive headwinds and deep investments to reinvent themselves in the new normal have taken their toll on stock prices at Whole Foods, UNFI, Hain, and others. True that stock price is a reflection of recent as well as predicted future performance, and aside from the “I’ll believe it when I see it” cautionary approach of sell side analysts, part of the pessimistic outlook within the financial community stems from three things:
1) They are skeptical about the principles of the natural products industry ability to capture more and more consumer spending and market share past a certain point (which it seems they think may be on the not too distant horizon), and 2) The financial success of mission based, purpose driven businesses are relatively new, not to mention they tend to behave differently from a financial perspective than the tried and true industrialized CPG food processors, brands and conventional retail models the vast majority of the business world and general public have grown up with understanding as “the way things work”.
The analyst question to Sprouts today was based on the premise that a) there is growing competition from traditional conventional retailers as these competitors convert their assortment to better for you products and employ their sophisticated business practices of category management, promotion execution, and consumer marketing; b) more new store openings from natural & specialty retailers don’t seem to be as productive generating a return on invested capital quickly enough; and c) implying there just isn’t enough consumer demand either in size or longevity of trend to justify the high levels and long investment cycle Sprouts, Whole Foods, Kroger and others are chasing related to healthier food. Keep in mind “long term” for the financial community means 12-18 months since its mantras are really more about living quarter to quarter.
In other words, the analyst asked when the frenzy of capital investment spending, and subsequent profitability reduction from this spending, will end or at least level to a more implied rational rate, considering the perceived limit of the market opportunity.
Sprouts CEO, Amin Maredia, responded perfectly. Amin highlighted that Sprouts is distinct in the market when it comes to a healthier offering proposition (which we from within the industry know well). He advised that the gains Sprouts is making are partially at the expense of “average retailers” who aren’t looking forward and are struggling to remain relevant. He indicated Sprouts makes regular visits to competing grocers to stay ahead of their pricing, assortment, and merchandising advances into the natural products space, and he disagreed with the sentiment that the rate of change, or extent of the changes being made by conventional retailers, has a material impact on Sprouts’ ability to navigate competition successfully. He confirmed there will continue to be challenges and headwinds, but advised the biggest negative impact will be on the lower tier retailers who will simply continue to get weaker and have a narrower opportunity. Lastly, and perhaps most importantly to those with a short term outlook, he emphasized that the time horizon for this shake out will be 5-10 years, not 18 months.
Exactly. The food system and all its parts are going through a transformation that will take many years if not a generation or two to be fully realized. How food is grown, processed and labeled; how companies target, reach and sell to consumers; eating occasion context and content, what people eat and where they shop, is being upended. It has taken us generations to get where we are and it’s not going to change in 18 months. Technology is quickening the rate of change in all businesses, but food is one of the largest and oldest industries around, with large players firmly rooted in ways of the past. Participants in the natural products industry have been living, working, and supporting the vision on the horizon for decades, and the movement continues to build momentum. Traditional business and traditional thinking is learning what this industry is about, and why the values, principles and philosophies of it are resonating for more and more consumers, especially for the burgeoning millennial and up and coming generation Z generations.
I think that was the point Amin was making – Sprouts (and all participants in the natural products trade) serve the market from core values that endure and transcend traditional business focus of profits for profit’s sake. The universe of businesses and consumers traditionally engaged in this space has been historically small relative to the total size of the food system, but the influence on the whole is disproportionately large and positive. As a result, those unwilling or unable to adapt and transform will fade into the background, while those at the forefront today are defining and building the new normal for everyone else. In this era of ‘speed boat attention spans’, turning around the ocean liner can feel like it takes an excruciatingly long time. The good news is the big ship is starting to turn and we’re on the right path, we simply need to keep at it.
About The Author...
Michael Movitz has more than 25 years natural/organic products industry experience across retail, manufacturer, broker and market research organizations...