Dive Brief:

• Sprouts Farmers Market is stepping up efforts to sell products that aren't available at other retailers, CEO Jack Sinclair said Wednesday during BMO Capital Markets' virtual Farm to Market Conference.
• The health-focused specialty grocer also said it's making money with its e-commerce business, in part because it focuses on selling attribute-based products that yield higher margins than other goods, Chief Financial Officer Denise Paulonis said during the conference.
• ​Sprouts is looking to convince investors that it can thrive by focusing on the relatively small segment of the market that is drawn to the wellness-oriented products it sells instead of going after shoppers looking for bargains.

Dive Insight:

Sinclair said he wants customers to think of Sprouts as a place to buy products they can't find elsewhere, and is positioning the chain as a beacon for small suppliers that escape notice by larger retailers.

"We're really trying to be at the front end of all the innovations," Sinclair said. "[There are] a lot of interesting entrepreneur innovators in the food industry that just wouldn't get to Walmart and Kroger and Costco ... not because they don't want them. It's just they're not big enough in sales or big enough in volume to justify their space."

Sprouts has used that strategy to develop a unique assortment that it is using to expand its share of the relatively small portion of grocery shoppers that are what the company calls "health enthusiasts."

"It's not that they only buy natural and organic, but they gravitate to what's new and different and healthy," Paulonis said.

Approximately 90% of the frozen items Sprouts carries and about 80% of its dairy offerings are uncommon at other retailers, as are two-thirds of the dry grocery items it stocks, Sinclair said. In addition, about 35% of Sprouts' produce is organic.

"If it's being sold in a conventional supermarket or in a mass-market merchant, I would be disappointed that we're selling it at all," Sinclair said.

In addition, Sprouts plans to relaunch its meat category for Memorial Day, a change that will mean it sells only 100% Angus and grass-fed beef, according to Sinclair.

Sinclair also made it clear that Sprouts is not looking to compete head-on with other grocery chains, particularly those that are focused on attracting and retaining customers by offering them low prices.

"I think the message to investors for me is, think about us as a specialty food business, not a grocer. And if you do that, you'll be less worried about what's your price gap with Walmart or Kroger or anyone else. Because I just don't think it's relevant to us," he said.

Sprouts' decision to limit its selection has paid off in the grocer's ability to make money with its online business even as other retailers grapple with e-commerce costs. Beyond the relatively high margins it gets from many of the products it sells, Sprouts has kept its costs down by depending on its own employees to pick orders because they are familiar with its store layouts, Paulonis said. 

Sprouts saw its e-commerce penetration hit 12% of its business at the end of the first quarter, up from 4% before the pandemic began, she said.

Sinclair added that Whole Foods' tilt away from its former heavy focus on health-focused items, especially since the retailer's 2017 purchase by Amazon, has helped Sprouts.

"I've been surprised by the number of what they term conventional products that are appearing in Whole Foods, which maybe is creating a little bit of an opportunity for us to be what they were 10 years ago, which was the destination place for people with interesting new things that are very kind of attribute-based," he said.

At the same time, Sprouts views Trader Joe's as complementary to its business because that retailer sells its own unique array of products without overlapping with Sprouts' selection. 

"I think customers actually quite liked the idea of going into Trader Joe's and then going into Sprouts." he said. "I think we've got a point of difference and advantage on our fresh produce business and a lot of aspects of our fresh business and some aspects of our vitamins and supplements business," he said.