Private label integration after Henry’s, Sunflower acquisitions bring business into competition with Whole Foods, Trader Joe’s.
The story of Sprouts is a story of family, of separation and of reuniting.
And today, it is a story of growth.
In the past year, the Boney family, which started the predecessor to the Sprouts natural foods supermarket chain in the 1940s in California, has reunited two separate supermarket chains that it launched. And this year, it is buying Sunflower Farmers Market, adding 35 retail stores to make it the second largest natural and organic foods retailer in the country, behind Austin, Texas-based Whole Foods Market.
Following the path from their first fruit stand, opened in 1943 by patriarchs Henry and Jessie Boney, through grocery store chains that have included Boney’s, Bradshaw’s, Superama, Windmill Farms, Henry’s and Sprouts, can be dizzying at times.
In the end, though, the family has brought its house back together.
Sprouts is owned by private-equity firm Apollo Global Management LLC, but minority owners Stan Boney and Shon Boney have run the operations since Sprouts’ merger last year with Henry’s Farmers Market.
Stan Boney is the son of founder Henry Boney and is the chairman of Sprouts, while Shon is Stan’s son and the company CEO.
President Doug Sanders and Chief Operating Officer Jim Nielsen — the former president of Henry’s — round out the leadership team.
Stan Boney said in a release announcing the buyout of Sunflower that the company was excited to be moving forward.
“Andy [Jhawar, senior partner at Apollo] and the team at Apollo have been very supportive in helping us to continue to grow our company,” Boney said. “Sprouts is now making a meaningful contribution to the lives of almost 10,000 employees and millions of customers, who appreciate the value offered in our stores.”
Some of the value that the company has brought to its customers has come, and will continue to come, in its private label offerings.
In a recent interview with Supermarket News, Sanders said private label strategies were one of the most important parts of the company’s 2011 merger with Henry’s.
“One of the most significant things we did with Henry’s was to integrate its private label program with ours,” he told the publication. “Sprouts worked for years developing a private label program, and so did Henry’s. But there were a lot of great items Henry’s had in its Sun Harvest line that we didn’t in our Sprouts line, and vice-versa. So we went category by category to determine how we could enhance the Sprouts line to increase sales.”
Retail analyst Scott Van Winkle, managing director for Boston, Mass.-based investment firm Canaccord Genuity, says he believes that private label integration would be a slow process during the Sprouts-Sunflower integration.
“That’s obviously one of those things that doesn’t come quickly, and it probably comes over the next year or two,” says Van Winkle. “It’s certainly one of the benefits of scale. Now, unless there are categories that weren’t covered under each category. But those won’t be among the first things that get integrated, I believe.”
Sanders says the process of integration with Henry’s still was under way, even as the company would begin to turn its thoughts to Sunflower’s private label offerings.
“We still carry both (Sprouts and Henry’s) lines in our stores, but over the next few months, as we work through our inventory, we will cycle everything under the Sprouts label,” he told Supermarket News. “We look forward to going through the same process with Sunflower.”
Sunflower Farmers Markets reworked its own private label offerings just over a year ago, once it bought the rights to the Sunflower private label name in its own markets from Supervalu. It created new packaging for its more than 1,000 private label offerings with the Sunflower name last year.
Previously, it used an image of a sunflower with a different slogan, but the Supervalu deal last year allowed the company to design new labels with the Sunflower Farmers Market name.
Those lines now will be brought together with Sprouts’ private label products going forward, a strategy that Kevin Coupe, retail analyst with MorningNewsBeat.com, says could pay big dividends.
“Private label’s always a smart idea, as long as you do a good job at it,” says Coupe. “If you can have a product that nobody else has, that’s always going to put you in good stead and that’s going to give you a competitive edge.”
Sanders said the company was impressed with the offerings Sunflower had in its private label stable.
“We’re still doing due diligence on Sunflower, but it has a strong private label program that we believe will enable us to increase our selection and item count,” he said in the interview with Supermarket News. “And we’re excited to start working with the Sunflower team to find additional best practices for both of us.”
In a part of the retail supermarket industry that competes with Whole Foods and Trader Joe’s, Coupe says those private label practices could set Sprouts apart after the Sunflower deal closes.
“(Private label) becomes a differential advantage, if it becomes a good product and it’s marketed and merchandised well,” he says. “That’s what Trader Joe’s is built on, having virtually no national brands. And clearly Whole Foods is trying to compete with private label, especially on the more budget side of things.”
With 45 new stores added under the Henry’s acquisition, and 35 more from Sunflower slated to join the fold when the buyout closes this spring, Sprouts Farmers Market will have more than doubled in size in the past 18 months. It will have more than 140 stores in eight states.
But Sanders told Supermarket News that the company learned plenty in the past year as it integrated Henry’s with Sprouts, lessons that will benefit the company as it prepares to merge Sunflower’s stores into Sprouts.
“Henry’s had a different approach than Sprouts in some categories,” Sanders said. “For example, they had a larger focus on fine wines, and we’re integrating that approach at Sprouts. Henry’s also put more emphasis on bulk foods, and we’re adding that at the Sprouts stores.
“As with any merger, you expect sales to suffer during the integration. But even during the rebranding process, comps at those (Henry’s) stores went up, and that trend has continued into 2012.”
The size of Sprouts, and its expansion into four new states with the Sunflower deal, puts it squarely in a position to compete against Whole Foods and Trader Joe’s in the natural and organic foods retailer industry nationwide.
“I’d say they are going to be third [in the industry], I’d put Trader Joe’s in that list, as well,” Van Winkle says. “I certainly think there’s going to be some economies of scale. Generally, they seem to have a pretty good business and some pretty good stores, especially with the Sunflower deal.”
Coupe says he thought that Sprouts was able to set itself apart from its two major competitors by the kinds of products it focused on.
“They’re a very different offering compared to Trader Joe’s,” he says. “I never thought of Trader Joe’s strong suit as fresh foods. I think that’s a much stronger space for Sprouts.”
Because of that, Coupe says, Sprouts becomes a more natural competitor to a market such as Whole Foods.
“They’re much closer to what we think of as a traditional natural foods grocer, and I think it can compete pretty effectively on price against Whole Foods, which is trying not to be known as Whole Paycheck itself,” he says.
With its strong private label base, Coupe says he believes that Sprouts could position itself as the economical alternative to Whole Foods, while drawing natural and organic customers who might need more options than Trader Joe’s provides.
“Perhaps for consumers who are more price-sensitive and conscious about how much they’re going to drop when they walk in the door at Whole Foods, Sprouts can be a strong and viable alternative,” he says.
The idea of Sprouts as an economical alternative is unusual given the deep pockets of its majority owner, Apollo. Van Winkle says that the ability for the Boney family to draw on its parent company’s deep reserves could be a major factor in its near future.
“(It’s) access to capital. It has an impact on your ability to open new units and fund expansion,” he says. “You’re probably talking about a year to bolt the company together in an effective manner.”
In that year, though, Van Winkle says he expects Sprouts to find savings and economies continuing with its Henry’s acquisition, and more to come in the Sunflower deal.
“The only thing (the deals) would mean is scale,” he says. “You have two existing businesses, and there’s benefits to putting the companies together. Probably the biggest benefit is real estate at the end of the day.
“It is a scale game, and if you’re going to be owned by a financial sponsor like Apollo, it creates a more attractive asset.”