Fresh and differentiated produce is the core of Sprouts value proposition and sales have benefitted as shoppers perceive they can bolster their defenses against COVID-19 by eating healthier.
An eye-popping 500% increase in e-commerce sales at Sprouts Farmers Market helped fuel an overall 16% increase in second quarter sales at the 350 store chain.
The stunning digital growth rate was aided by the chainwide roll out of pick up service, but as CEO Jack Sinclair noted, the home delivery business is six times the size of the pick up business. Overall, he said e-commerce sales during the quarter accounted for 11% of total quarterly sales of $1.6 billion which benefitted from a 9.1% comp increase and the addition of six new stores. The e-commerce penetration rate was down slightly from 13% in the first quarter.
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 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 used to generate sales. 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.
Sprouts Take All Digital Approach With Marketing
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 purchasing the same quantity of an item 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, Sinclair said 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 for which it is best known, which is produce and healthy products, and stop engaging in deep discounts on commodity items that led to negative sales.
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, which allows the company to take advantage of opportunistic buys in the produce market. Another boost to that strategy will come next year when new distribution facilities open in Florida and Colorado ensuring that no Sprouts store is beyond the 250 miles radius of a distribution center.
The combination of topline sales growth, improved marketing effectiveness and reduced marketing expense aided the company's overall profitability, even though it incurred $47 million in incremental costs related to COVID-19. Operating profits increased 80.7% to $92.7 million and net income increased 90% to $67 million.
Sinclair and CFO Denise Paulonis shared a highly favorable view of the company's progress and expectations for future success, but those expectations weren't quantified beyond July. 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, according to a prepared statement. 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,” Paulonis said. “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.”