Sprouts Farmers Market sees shoppers buy fewer items, but more premium options

09-Nov-2022 - Last updated on 09-Nov-2022 at 16:57 GMT

Source: Sprouts Farmers Market

Shoppers at Sprouts Farmers Market may be putting fewer items in their cart per visit to manage their budgets as inflation drives up prices but what they are buying tends to be higher margin grab-and-go items illustrating the need for convenience as on-the-go living returns after a pause during the pandemic, suggests recent sales data from the retailer.

During Sprouts Farmers Market’s third quarter ending Oct. 2, the retailer reported total sales were up 5% to $1.6b from the same time last year, driven by new stores and comparable store sales growth of 2.4%. However, the comp sales came primarily from higher prices due to inflation, not larger baskets.

CFO Chip Molloy told investment analysts during the company’s third quarter earning call last night that Sprouts tracked a “slight reduction of items in the basket,” which spurred the retailer to explore ways to encourage consumers to add one more item to their cart.

“We all know that we live in an inflationary environment, not seen for most of our lives. This environment is impacting the consumer and virtually all industries, including retail,” CEO Jack Sinclair said.

He explained that at Sprouts this is playing out as customers putting approximately one less item in their baskets.

“That one less item on average is essentially produce, our lowest price point category – the one with the most items in an average basket and one of our lower-margin categories,” he said.

He explained that “even though we are competitively priced every day in produce, we believe our customer is managing their overall basket spend by eliminating the extra produce item.”

For example, he said, customers may by one pint of strawberries instead of two, which is a trend the retailer has tracked for the past two or three quarters.

On the bright side, he added, Sprouts isn’t experiencing the “classic trade down” that often occurs during tight economic periods.

“In fact, many of our higher-priced categories are experiencing the most significant growth,” such as the deli, which “we curate with our unique meals and offerings that taste great and are good for you” and “had been our highest growth category this year,” Sinclair said.

Sprouts uses promotions, marketing to encourage consumers to buy one more item

Still, Sinclair said, Sprouts is exploring how to encourage consumers to return to their basket that one item that they have removed in recent quarters.

“We’re laser focused on in-stocks and our merchants and store operations teams are creating key item promotions that produce a buzz in the stores for our team members to support the drive for that extra item,” he said.

“Our merchants work diligently with our marketing team to develop and test promotions to drive incremental profit dollars. Our teams have done a phenomenal job managing margin dollars during this volatile period of cost increases,” he added.

Sprouts also is encouraging consumers to shop and buy more by improving out-of-stocks by adopting a perpetual inventory computer-assisted ordering system, that will go into effect next year, and reinforcing an environment of “ongoing discovery” with the addition of hundreds of new products, many of which are exclusive to Sprouts for a period of time, he said.

E-commerce continues to grow

Finally, Sinclair said, Sprouts is encouraging consumers by making it easier for them to shop remotely – a trend that the CEO originally thought would peter out as the pandemic eased, but which has grown for the retailer.

“Our e-commerce sales grew 19%, representing 11.1% of our total sales for the quarter,” said Molloy.

To further encourage this trend, Sinclair said Sprouts recently partnered with DoorDash, which will be available in all locations by the end of the year.

“By partnering with DoorDash, we enter a new marketplace where more customers can access our unique and healthy assortment. DoorDash, along with our long-standing Instacart partnership, should enable ongoing e-commerce growth. We're working now to get ahead of 2023,” he said.

An optimistic outlook

As the retailer looks ahead for the remainder of the year it is optimistic that both its initiatives to encourage shoppers as well as easing macro-trends around supply and inflation should bode well for the business.

As such, it expects full year sales to grow between 4.5% and 5% and comp sales of about 2%. For the fourth quarter, it expects earnings per share between 35 cents and 39 cents.

“Given the current uncertainty in the marketplace, it’s a bit early to guide for next year other than opening at least 30 new stores,” Sinclair said, but he added, “we are committed to controlling what we can control to drive meaningful results.”