New Management’s Key Initiatives Could Improve Sprouts’ Profitability
Dec 26, 2019 by InvestorDestination Team
For the last few years, Sprouts Farmer Market’s (NASDAQ: SFM) profitability is on the decline. The company's new CEO has launched three key initiatives to improve profitability - reduce the cost of new stores, improve supply chain efficiency, and improve brand awareness.
A retail geographic expansion needs to be coordinated with distribution center expansion. In the past, Sprouts geographic expansion did not follow that strategy, but now the new CEO is emphasizing it. According to us, it is the right strategy that will improve its supply chain efficiency and profitability.
To open new stores, the company plans 2-3 years in advance. As it is working on its expansion strategy and optimal store size, it can’t halt its previously planned expansion. However, the company has renegotiated with landlords and reduced the unit growth for 2020.
According to the company; the majority of its marketing budget is spent on paper circulation and grand opening of new stores. Now it is focusing on diversifying its marketing channel and enhancing digital marketing. The company is planning on improving its brand awareness.
According to us, Sprouts' value proposition resonates with millennial consumers, and the company was a bit slow to recognize that. However, in recent years, it is targeting that segment with its deli expansion and prepared food offerings. The company’s digital marketing strategy and its focus on increasing brand awareness might help the company gain traction among millennials and increase traffic.
In recent years, Sprouts' store size and the cost of opening new stores have gone up. The new management is contemplating reducing the size of new stores to reduce costs. Recently, the company has mentioned that its smaller stores are more productive than larger ones.
We are a bit concerned about this. One of Sprouts’ strength is its store format and product assortments. As we mentioned earlier, its prepared food offerings are appealing to its consumers, especially to millennials. If it removes the deli to reduce store size, then it might experience a decline in traffic. However, it has repeatedly assured that its stores will have a deli and offer prepared foods. If a reduction in store size results in crowded stores, then it may not be appealing to consumers. That might result in a traffic decline. However, the company has repeatedly mentioned that it will try out this strategy before rolling it out in full scale.
We believe Sprouts' key initiatives will result in improved profitability if its effort to reduce the store size doesn’t negatively impact its traffic.
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