Tuesday, May 13, 2008

Small Format Food Retailing Special Report: Sprout's Farmers Market Gets $22 Million in New Financing; Will 'Sprout' 100 New Stores Over Next 5 Years

Somebody like the U.S. Federal Trade Commission (FTC) forgot to tell the owners of Sprouts Farmers Market that any ideas of expansion and growth are crazy since Whole Foods Market, Inc. acquired Wild Oats Markets last year and has since become the "monopolistic" natural foods grocer in the U.S.

We doubt if Sprouts' owners and management would have listened to the FTC though even if they bothered to offer the retailer this little gem of information between it's continual efforts to waste taxpayers' money by filing yet again another appeal to overturn the Whole Foods-Wild Oats deal like it did once again earlier this year.

Why? Because it's not true of course. And, secondly, good retail entrepreneurs like Sprouts Farmers Market see opportunity in such industry consolidations rather than despair.

That's why the natural foods retailer, which operates small-format natural foods stores in the 15,000 -to- 25,000 square foot range, just closed on a deal which will bring it $22 million in new investment funding, allowing the natural grocer to open 100 new stores in the next five years.

That's 20 stores each year, at least, for the next five years. Not bad when faced with a "monopolist" like Whole Foods in the market.

And that's not the half of it. Sprouts is taking some of its new stores right into the heart of Whole Foods country, Texas, where the chain was born and has its corporate headquarters, and into Colorado, Whole Foods' adopted hometown due to the fact that's where Wild Oats was founded and headquartered, as well as now home to many more Whole Foods stores because of the acquisition and merging of the two chains' stores.

Phoenix, Arizona-based Sprouts, which currently operates 25 natural foods stores which are one-third the size of the new mega-stores Whole Foods is building but pack a powerful punch with a focus on natural food and grocery items in all categories offered at affordable prices, will open its first three stores in Colorado early next year in the cities of Parker, Westminster and Fort Collins respectively.

Sprouts Farmers Market likes to bill itself as a slightly smaller but much more affordable version of Whole Foods. Sort of a fighting natural products retailing tiger.

In addition to currently operating stores in Arizona, Southern California and Texas, Sprouts plans to add additional stores in all three states, especially in Texas which is Whole Foods country, as part of its five year, 100 new store expansion plan.

Sprouts also has plans to expand into a few other western U.S. states as part of its 100 store expansion program. However, the main focus will be on Arizona, California, Texas and Colorado.

Colorado will be an interesting market for Sprouts, as its perhaps the most competitive natural foods retailing market in the U.S. In addition to Whole Foods Market, there's Sunflower Farmers Markets, which is a format and retail operation similar to Sprouts, and Natural Grocers by Vitamin Cottage, which just opened a store in Denver and has plans to open another in the northern part of the city.

Sunflower Farmers Markets also is expanding it's number of stores in Colorado as part of its own five year expansion plan announced late last year. The natural grocery chain, which is owned primarily by Mike Gilliand who founded Wild Oats, plans to open about 75-100 new stores over the next five years, and has raised $30 million dollars in new funding to do so.

The natural grocery also is moving into Utah, which along with Texas will be new markets for Sunflower. The retailer currently has stores in Arizona, New Mexico, Colorado and Las Vegas, Nevada. Adding Utah and Texas will start to give Sunflower the beginning presence of a true Western U.S. regional natural foods chain.

The FTC also forgot to tell Sunflower about the Whole Foods Market monopoly it appears.

Sunflower Farmers Markets just opened a new store in Boulder, Colorado, Gilliand's home town and where he founded Wild Oats. He left Wild Oats way before the Whole Foods acquisition. Sunflower also has a new store opening soon in Arvada, Colorado.

Further, not to be outdone by Sprouts, Sunflower also is expanding into Texas as part of its five year growth plan.

Like Sprouts, Sunflower Farmers market operates small-format stores in the 15,000 -to 25,000 square foot range. The grocer also puts an emphasis on offering natural and organic foods and products at everyday prices below those of Whole Foods Market.

Both Sprouts and Sunflower are privately-owned chains.

Sunflower also puts a major emphasis on the fresh produce category. The produce departments are huge relative to the store format size and generally placed in the center of the store.

The grocer regularly checks Whole Foods store prices in its market region and says it is generally 10-20% cheaper in all categories across the board. Independent price comparisons have shown this to be the case most of the time.

Sprouts and Sunflower are showing how small-format food and grocery retailing in the natural foods retail space can be powerful. Despite both chains' stores are three times (and in some cases four times) smaller than today's version of Whole Foods markets' supernatural grocer stores, the grocers are not only surviving but thriving as well.

Both retailers also have the confidence of the investment community, which is what allowed each of them to raise millions for expansion--$30 million late last year for Sunflower Farmers Markets and $22 million just recently for Sprouts Farmers Market.

We wonder what the FTC has to say about that?

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