US: Sprouts taking long-term approach to pricing
“We don’t react to pricing the day someone changes a line item on a cost sheet,” James Nielsen, COO for the Phoenix-based chain, said. “We look at 1,300 items in the grocery department, and we have a strategy based on all those items and the influence they have on shoppers.”
Doug Sanders, president and CEO, said pricing at Sprouts “is about innovation, staying ahead of the curve and carrying not just the products that are leading trends today but also those that are coming to the forefront, along with a broad selection of natural and organic, branded and speciality items. “So it’s not solely about hanging our hat on price but about a lot of the value we bring in the depth of our offerings and in the service.”
Although gross margins in the quarter fell 50 basis points to 29.5%, Amin N. Maredia, CFO and treasurer, said that’s not a big concern. “What we’ve done the last several years is to think about the gross margin line as flat year-over-year,” he explained, “which gives us the flexibility to invest in price to drive sales, and that’s been very successful.”
He said Sprouts has 20 price zones, “so when we’re reinvesting in the business, we are typically focused on trying to drive sales within certain categories based on what’s happening in that marketplace, looking primarily at the conventionals and [staying] well below other speciality retailers.
“In focusing on the conventionals, where we can get more promotional or extend programs and see the traffic come to the stores or basket size increase, we view that as a positive.”
Writing about Sprouts following the call, analysts gave the company props for its business model.
“Sprouts remains one of the best growth stories in retailing,” John Heinbockel, managing director for Guggenheim Securities, New York, said, “with third-quarter results exhibiting broad-based strength.” He said he does not see the price investments being made by Whole Foods Market, Austin, as a threat to Sprouts.
“There is limited demographic overlap between the two, and Sprouts’ pricing advantage — 10% to 15% on a market basket — is sufficient enough that putting a noticeable dent in it will take time and be expensive. “Sprouts’ greater competition will come from conventional supermarkets, whose operating models in general constrict them from being competitive on price.”
Scott Mushkin, an analyst with Wolfe Research, New York, said Sprouts remains “one of the premier growth retailers with an advantaged format that is dead-centre of the consumer mega-trend of eating healthier foods but at reasonable prices.”
However, he said he expects the stock to come under pressure “as perfection was elusive in the quarter, with comps robust but in line with expectations and gross margin down a little more than expected.”
Kelly Bania, an analyst with BMO Capital Markets, New York, praised Sprouts’ differentiated business model and strong execution, adding, “We believe the company has significant opportunity to continue improving merchandising in areas such as local (following success in Atlanta), private label and deli and engaging customers with enhanced messaging that could continue to help differentiate Sprouts in a competitive food retail landscape.”
Source: supermarketnews.com
