E-commerce sales at Sprouts Farmers Market increased 500% in the second quarter, fueling an overall sales increase of 16% at the retailer’s 350 locations.
The stunning digital growth rate was aided by the chainwide roll out of pickup service, but as CEO Jack Sinclair noted, the home delivery business is six times the size of the pickup business. Overall, he said e-commerce sales during the quarter accounted for 11% of total quarterly sales of $1.6 billion which benefited from a 9.1% comp increase and the addition of six new stores. Sprouts is on track to open 20 stores this year and is looking to reduce the size of stores going forward which is expected to improve profitability by minimizing operating costs and reducing shrink.
As has been the experience with other retailers during the pandemic, Sinclair said the company saw shoppers consolidate trips to avoid social contact, which negatively affected store traffic but meant transaction sizes were much larger.
“Our strong second quarter performance was driven by the strategic changes we have begun to implement across our business and the continued positive impact on demand from the COVID-19 pandemic,” Sinclair said. “As we head into the second half of the year, our early strategic wins give me confidence in our long-term direction, and our team members’ dedication assures me we will continue to provide our communities and customers healthy food for their families.”
The strategic changes Sinclair mentioned include a shift in how the company is thinking about its core customers, how it is marketing to those customers and overall promotional intensity. Sprouts is focused on two core customers segments Sinclair described as health enthusiasts and experience seekers that give the company a $200 billion addressable market opportunity.
Sprouts Goes All Digital
In a major shift in how the company targets its large shopper segments, Sprouts has modified its promotional intensity to focus on products where demand is elastic, meaning customers actually buy more of an item when it is promoted instead of the same amount at a lower, margin-eroding price.
“Gone are the days when our message was all about price,” Sinclair said.
Also gone is the retailer’s print advertisements that regularly filled mailboxes. In the second quarter, Sprouts went all digital and improved its advertising effectiveness in the process. In June 2019, Sinclair said the company distributed 110 million print flyers, but it discontinued the practice this year and in the second quarter its digital approach meant it had 125 million measured digital impressions. With the print ads, readers tended to only look at the front page, but with digital Sinclair said the company has higher readership across all pages. The digital approach means Sprouts can be smarter about promoting items is it known for, which is produce and healthy products, and stop engaging in deep promotions on commodity items that didn’t really have a desirable affect on shopper behavior throughout the store, according to Sinclair.
The other advantage of the company’s digital approach is the shorter lead time needed to get a message in market, which could be days, instead of weeks for print, thus allowing the company to take advantage of opportunistic buys in the produce supply chain.
The combination of topline sales growth, improved marketing effectiveness and reduced marketing expense aided overall profitability, even though the company incurred $47 million in incremental costs related to COVID-19. Second quarter operating profits increased 80.7% to $92.7 million and net income increased 90% to $67 million.
Looking ahead, Sprouts said customers continue to consume much of their food at home due to the COVID-19 pandemic, resulting in grocery spending and e-commerce penetration at elevated levels. For the month of July, comparable store sales are estimated to increase approximately 9% and e-commerce sales are estimated to represent approximately 11% of total sales.
“The trajectory of the COVID-19 situation remains uncertain, clouding the impact to the food retail industry over the coming quarters,” said CFO Denise Paulonis. “While our sales continue at elevated levels, so do additional costs associated with our team members and stores. Predicting specific outcomes remains difficult, and accordingly we are not stating a new outlook range. We remain confident in the financial strength of our business and our new long-term growth strategy presented last quarter.”
Phoenix-based Sprouts employs more than 30,000 associates and operates 340 stores in 23 states. The company is No. 22 on Progressive Grocer’s 2019 Super 50 list of the top grocers in the United States.