Q&A: Nick Konat, President & COO, Sprouts Farmers Market

Morning, Wayne. Appreciate you having me.

You bet. Thank you very much. Well, there's a lot in that question. But maybe for the group, and actually it's funny, we a week ago we did have 402 stores. We opened a new store in Vacaville, California on Friday. We're now at 403. Wow. So the growth plan continues. But listen, the performance we had in Q3 is first and foremost driven by our outstanding teams. We have over 31,000 people across 23 states, as I mentioned, 403 stores, that serve our customers and take care of those customers. I think that's really where this starts, Wayne. We serve two specific customers: we have a Health Enthusiast and an Innovation Seeker. That's our name for our core customer. The Health Enthusiast is a little bit what you think: they're looking for something better for their lifestyle to help them live and eat better. They're looking for organic offerings, clean ingredient decks, certain lifestyle needs. They might be vegan, maybe paleo, gluten-free. So that's who we serve. That customer base is growing; people are continuing to be more interested in eating and living better. We cater our entire offering and experience around that Health Enthusiast as well as the Innovation Seeker. These are people who will make that extra drive to find something unique, delicious, health-forward, different than what they might see from their traditional grocery store. So our success is rooted in really great people who serve these amazing customers who are discerning in what they eat and what they feed themselves and their families. So that's really what's driving us. You can imagine it's a growing segment, and our growth has been driven by a couple of things. One, we're growing stores. We're going to put 30 stores in the ground this year, expanding our footprint to offer access to more people. You've seen us, we really differentiate on our offerings. We're not trying to compete selling the same things that others in the grocery space are selling. We're offering really unique, innovative, curated offerings that cater to these customers I've talked about, and that drives people to us for those unique needs and helps with both traffic and loyalty as they see what we have to offer. In addition to that, you're seeing us invest in things like freshness in our supply chain. Super important for us; produce is a big piece of our business, and we're investing in fresh because our customers know us for amazing, fresh, local, and unique produce overall. Lastly, strategically for us, it's how do we tailor our approach to our core customer through our marketing, through our store experience. We've doubled down on service, we've doubled down on sampling, and we've doubled down on making sure we get our brand in front of our unique customer base. That's been a big piece of what's driving our success so far.

Well, thank you. I appreciate that, and the credit goes to the teams here. To be clear, it is a pillar of our merchandising strategy to offer really innovative, unique products, both with core national brands and in our Sprouts brand program. So it's core to who we are, as I mentioned, in serving our customers, the Health Enthusiast and the Innovation Seeker. If you look at our approach, I mentioned at the beginning we're all about differentiation, and really I call it distinction in what we offer. So we're not looking to sell the same things as everybody else, and we're also looking to serve the customer needs. It's generally either really unique, innovative products or attribute- and health-driven products, and sometimes those are one and the same. So we know where we want to play, and that helps us, I think, with the supplier community, make it clear on where we're trying to win and where we can partner with them. And then we're really committed, honestly, Wayne. We really commit to how do we find and identify really unique, innovative small brands that are emerging in the space and help them grow. That's really important to us. Our customers look for that in our stores and online from us. So we're very, very focused on taking that customer need in these unique small brands and how do we bring them to life. As an example of that, we created a Foraging Program last year. That Foraging Program is built to identify and find unique, innovative, emerging brands and then honestly kind of guide them through the entire process of inception of an idea through launching on shelf. So what does that mean? We do a kind of soup-to-nuts boot camp with these manufacturers, helping them understand how to work with someone of our size and scale. We do test and learn with our Innovation Center. We have a space in our store where we know things are going to fail, and we're okay with that, and where we create a very low barrier to entry for suppliers. We say, let's test and learn and see what happens before we take you to the inline set or the 52-week program, so that you get your operations right in supply side, we see how the customer responds, and we learn. That's been enormously successful on both sides. And we're willing to kind of white-glove the treatment of our suppliers through that process so that, especially some of the maybe emerging players, they've got a partner in the process to do it.

Sure. So, as I mentioned, we offer very kind of distinctive and unique health-focused assortment. What's been great about our omnichannel program, and really where our strategy lies, is how do we create access for people to get what we need? Full disclosure, we're for the most part often a secondary shop, right? Because we don't carry all of the same things a grocer might. We're oftentimes a secondary shop, and we actually kind of embrace that, because where people go for their better-for-you, healthy alternatives and products. So we extend our e-commerce strategy in that same vein, where people can very quickly get convenience and say, there's a handful of items I want that, you know, for the holidays, want that premium Angus USDA rib roast, or I want the fresh organic turkey from Sprouts. So we use online to be able to give those people access if perhaps they live 20 or 30 miles away, or they're busy and they can't make that secondary trip. So we look at it as a way to provide reach of our unique and differentiated offering to customers through our partnership with Instacart and with DoorDash. We've seen tremendous growth because the customers love what we have, and often times e-commerce and delivery in particular is a really convenient option for them. So that's one big piece of it. The other piece is we've continued to evolve our app experience so that we tailor it to lifestyle needs. So if you're gluten-free, or if you're someone who's vegan, we tailor our offering to you so you can get help with recipes, meal plans, product ideas, new products that are personalized for you. It makes it easier to find what's important to you online or in store.

You bet. I actually think our Sprouts brand program actually creates more room to play in the supplier side space because of our strategy. So you're right, we've grown Sprouts brand to be 20% and growing a part of our business. But the strategy there for us is maybe a little different than some of our other peers in the space. We look at Sprouts brand as a tool to really cater and design product specifically to our core customer and continue to drive the innovation and differentiation in the market. Said another way, we don't create our Sprouts brand program to be national brand equivalents of something else and just replace something else. We look at how do we add health-forward attributes, cleaner ingredients, unique flavors that you can't find anywhere, because our customer is looking for exploration and well-being, and that's how we tailor the program. So to your question, how do players play? We don't just work with the big private label manufacturers. We actually work a lot with smaller, more niche or specialty manufacturers who can create unique products only for us that meet our customer need. That's what's driven our growth. When you have avocado fries or croquettes from Italy, or brown sugar whipped cream topping that we have for the holidays, that's what's resonating with our customer. These unique items. So people who are really innovative and looking to create new items and fill customer needs is where our Sprouts brand is placed and where it's growing, and opportunities for partnership.

Yeah, you bet. So there's a handful of things we're doing in that space. As we look at it, it starts with what we in the research we've done with our customer. We're in a really fortunate place. Customers love shopping us, Wayne. They love the open format, they love the unique products, they love the health-forward positioning we have. In general, they have a really, really good shopping experience. I've been at retailers where that's not always the case. So we have this real great benefit of a great experience in our stores that people love shopping. As I mentioned, we're a secondary shop, so we're not always the most convenient because you might be going to a conventional grocery for some of your core commodity items. As such, there's a really big opportunity. We have an amazing deli. Our meat program is world-class; I'd put it up against anybody. It's a phenomenal program. We obviously have great produce, and then bulk, a very differentiated offering for us. When you think about the offerings we bring to bear in the market, there's a huge opportunity for people who again want to eat better and don't always know exactly how. We can start to fill that need and in turn create more share of wallet with our customers. That doesn't have to come at the expense of our conventional grocery competitors. It actually can be how do we expand the basket for a customer to say, hey, I'm getting new things in my routines and in my diet and in my snacking, for example, that make my life better, I enjoy eating. So to your question of how do we do it, we are in the process of developing a loyalty and personalization program and capability. We're taking our time with that. It's important that we make that impactful and differentiated to who we are. We tailor our messaging, our marketing, and our communication efforts to customers based on needs we see from them that can grow that share of wallet. Again, you see somebody who might be gluten-free that might not be exploring our grocery set, we can target those spaces there. We do a ton of sampling. When people try the unique things that we offer, they keep coming back, and it creates more share of wallet because they explore and they find new items that they haven't seen before. Lastly, what I'm really proud of, Wayne, is we have really great service in our store. I always tell people, when you look at people in Sprouts, they're always looking at labels, seeing what's in something, is it good for me, does it have the attributes I need. Our store partners are there to support. When they get that help in finding something that makes eating or living better, they keep coming back, and in turn you get loyalty and share of wallet. We've doubled down on our service initiative in store to help people find what they need and also get out the door quickly to manage their busy life. That's helping us with both traffic but also getting people to give us more of their share.

Yeah, you think about the customers, customers really like the fact that it's easy to shop our store. Making it easier to come to, making it easier to spend and also find what they need for their meals or their snacks or what have you. The other benefit of the smaller store is as we grow, we're putting 30 stores into the market this year, and we're going to grow even more than that next year. A smaller store is effective for us from a cost and capital standpoint, so we can reinvest the dollars we save with a smaller format into the rest of the business and still offer the same experience, the same sales, and get more stores to more people so that we can serve our customers. So it's been really successful. In fact, we just got through a research project on the new formats. We're getting really, really good marks on experience, ease of shopping, enjoyment, able to find what they need, explore, and discover new items. So we're happy with how it's going.

I hope so. That's the idea.

Yeah, well, I can tell you paid attention to earnings. That was certainly a key message, Wayne. Bringing those functions together and executing well as a team, that is in essence my group and my team here, and they've worked really, really hard to bring those functions together to go to market in a really strong way. But to your question, I think, listen, from a supplier side standpoint, what I would say is, we talked already about kind of innovation and the type of items we're looking for, so I think from a merchandising standpoint you've got a sense. The supply chain side, while tactical, is super important, Wayne. We have a number of distribution centers, we have 403 stores, so capability to manage supply and availability and support us or any partner, any retailer for that matter, is really, really important. I think making sure you have that distribution capability is sound, and what we look for is we want to help you understand what that is and help suppliers ensure they have the capability to support the growth that we hope to achieve together. The second piece, as I mentioned, our Innovation Center is sort of where this comes to life for emerging brands, Wayne. We can say, hey, we can put a test in a smaller market, a handful of stores, or in our full chain, and it's a lower cost opportunity. There's not as much risk for the 52-week program. We help you understand how to get product into the DCs, get product to shelf. We put a marketing program behind it to support the growth of the brands. Obviously the merchants are at the center of it all. So that's how we bring the functions together to support our key brands. I think we make it pretty easy to do so and kind of handle through the process, whereas with other places that might be a lot more complicated or costly to do so.

Absolutely. I mean, we want people to grow brands. We really do. Hopefully people see that, and it's important to us. We love being different in what we offer and serving our customer. To do so, we want to find brands that have the same ethos, a really, really great product that's good for people. But also, I think, Wayne, I'd be remiss if I didn't suggest also how are their products better for the environment, the impact they have. That's important to our customer and also to who we look to partner with as well.

Yeah, you bet. I mean, Wayne, I think you and I have been working together in a couple different places, so thank you, and ECR and RangeMe for your partnership. As I mentioned, we have a Foraging Team whose job it is to go out and find really unique emerging brands with really great products that fit the needs of our customers and the trends we're looking for. We lean on you guys for the intake process in a lot of ways. It's a lot for a category manager on our business to handle, and I'm sure suppliers get frustrated trying to knock on doors and be one of many to get in front of one of our team. We've leveraged you guys a lot on Pitch Slams. Next year we'll do more Pitch Slams in certain categories. Your help in finding manufacturers who can meet our criteria, support us, have the innovation that we're looking for, that's certainly a big benefit to us. I think also to the supplier community, to make sure that we're finding the mutual fit. So the Pitch Slam opportunities are really, really great. As we look at Sprouts brand growth in the future, I think there's also discussions on how can we continue to lean on you guys for your support and help there. It makes our jobs a lot easier to ensure that we get really well-vetted candidates but also find people in the marketplace. I mean, I was just told, we get hundreds, and actually not tens, of thousands of intake requests each year. With using you guys, that helps us find the best of the best.

Yeah, I think one prediction is that it will be unpredictable. Okay. But no, I would tell you a couple of things that are maybe more relevant to how Sprouts and we are looking at next year. I think people will only continue to be more conscious of what they eat and how to stay healthy. That's a trend that's been around forever, and I think we see that continuing to grow. As people have come out of a pandemic and as people are introduced to more things that help them live and eat better, that space will continue to grow. I think you're going to see clean be a big grower there. Maybe shifting from, you know, like a good example, plant-based has been a big thing, but now clean is coming out. How do I just help me eat cleaner? That's going to be a big trend for us and I think for the industry. But health will continue to really be strong there as a prediction. I think people continue to look for ways that make it easy to live and eat better. I think that's very beneficial for us. So I think those are like big predictions. I would say that's going to continue to be. Grocery in the food space is going to continue to be a place of growth, and it's going to be a place where people are finding ways to eat better. I think it's a space where there's a lot of innovation that will still drive growth in the space and the industry. As economic challenges ebb and flow, people will still gravitate towards a place that helps them put a great meal on the table and helps them feel great about what they eat. I'm really excited about that for '24 and for us.

Thanks, Wayne. Appreciate the time. Good to talk to you, and looking forward to meeting with a lot of the new innovative suppliers out there and see what we can do together at Sprouts.