Dive Brief:
- Sprouts Farmers Market may be the last remaining takeover candidate among publicly traded grocery chains, JPMorgan predicts, with stock rising 3.3% over the past three months, according to CNBC.
- Sprouts' strong relationships with farmers allows it to buy their excess produce at below-market prices and quickly get it to their stores — a retail model that's difficult for competition to emulate. JPMorgan analyst Ken Goldman said it would be a better deal for a strategic acquirer to take over the discount natural and organic chain than a financial one.
- "Sprouts is large enough to move the needle for most large retailers but not so large as to generate huge integration or balance sheet risk," Goldman said in a note to investors. "Many of the issues SFM has faced over the past year — deflation, heightened labor investments, and abnormally intense competition — are beginning to abate."
Dive Insight:
Sprouts reported strong top-line growth for its second quarter of fiscal 2017 thanks to successful product innovation, online shopper engagement, new store productivity and growing customer loyalty. The natural and organic chain posted net sales of $1.2 billion, a 15% jump from the year-ago period, and net income rose 10% to $41 million.
Sprouts raised its guidance for the year and will roll out 32 new stores, expanding its retail footprint to nearly 300 locations. The grocer also will be entering competitive markets such as Florida and North Carolina, where it could further disrupt the retail landscape for struggling conventional chains.
It will be interesting to see if one of these legacy grocers will try to snap up the growing chain before it steals more market share, rather than try to beat it at its own game. Since Amazon's $13.7 billion offer for Whole Foods in June, analysts have speculated about Sprouts as a takeover target. It's rumored that Albertsons tried to make a deal to buy the grocer earlier this year, but the two retailers couldn't reach an agreement. It's possible that Sprouts' success has raised its price beyond the reach of potential bidders.
Still, the chain could help an acquirer undercut Amazon-Whole Foods' growing power, especially as new East Coast stores complement its existing West Coast turf. A large legacy grocer would give Sprouts the resources it needs to accelerate its development and gain efficiencies.
An acquisition of the young grocer, which only went public four years ago, isn't without risk, however. If Amazon is able to successfully lower Whole Foods' prices, Sprouts will lose one of its main competitive advantages. This could spur conventional grocers to invest in bolstering their own natural and organic offerings, rather than risk a costly acquisition on a brand that could wilt in Whole Foods' shadow.
It's uncertain what will happen to Amazon's online partnership with Sprouts moving forward. Amin Maredia, Sprouts' CEO, recently said the Amazon Prime Now partnership could expand to as many as half of the chain's stores. The grocer plans to bump up the number of stores offering the delivery service from 10 to 20 this year.
Still, it's possible the partnership could dissolve in the coming year, as it isn't in Amazon's best interest to offer an online platform to a grocery competitor. It appears both companies are aware of this possibility, as they inserted a clause in their contract that stipulates that ample notice be given before this occurs.