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Sprouts Farmers Market Inc (SFM): Could This Tiny “Farmers Market” Challenge Whole Foods Market, Inc. (WFM)?

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Source: Sprouts Farmers Market.

Over the past two decades, Whole Foods Market, Inc. (NASDAQ:WFM) has gone from a $550 million upstart organic grocer to a $20 billion undisputed leader of the organic-food revolution. Though others have attempted to follow in the company’s footsteps, Whole Foods has continued to grab market share of the quickly growing organic and local food movement.

But recently, Sprouts Farmers Market Inc (NASDAQ:SFM), whose very name suggests fresh, local food, has gone public with the goal of bringing a similar service — with an even larger footprint than Whole Foods Market, Inc. (NASDAQ:WFM) — to Americans.

Can Sprouts Farmers Market Inc (NASDAQ:SFM) succeed where others have failed? Let’s look at three key areas to evaluate the company’s chances.

Quality of operations
The grocery business can be brutal, with stores only banking two pennies of profit for every dollar spent. Because of that, it’s vitally important that a company is run efficiently. There are three different metrics we can look at to evaluate this efficiency. Look at how Sprouts Farmers Market Inc (NASDAQ:SFM) stacks up against Whole Foods Market, Inc. (NASDAQ:WFM) on these three measures.

Gross Margin Profit Margin Sales per Square Foot
Sprouts 29.5% 1.54% $471
Whole Foods 35.52% 3.98% $919

Source: SEC filings, most recent annual report or prospectus.

Admittedly, sales per square feet are a little difficult to evaluate for Sprouts Farmers Market Inc (NASDAQ:SFM), as the company doubled its footprint within the last year via acquisition. But taking all three metrics into consideration, it’s clear that Whole Foods Market, Inc. (NASDAQ:WFM) is head and shoulders above Sprouts.

Not only does Whole Foods Market, Inc. (NASDAQ:WFM) have a pricing advantage (gross margin) via its brand, but it is also a well-oiled machine with a profit margin that is the envy of the industry.

Leadership

Anyone familiar with the organic movement or conscious capitalism knows about Whole Foods founder and co-CEO John Mackey. He is one of the most celebrated CEOs in the country.

But Sprouts Farmers Market Inc (NASDAQ:SFM) has its own unique story. In 1943, Henry Boney started his Speedee Mart in California. The store grew into a chain, changed names, and in 1999 was sold by Boney’s family to Wild Oats. Soon after, Boney’s son Stan and grandson Steve started a new chain in Arizona called Sprouts. And in a crazy turn of events, Whole Foods — which had acquired Wild Oats — sold the Boney family’s original business back to Sprouts in 2007.

All of this is to say that Sprouts has more or less been a family-run business for three generations.

Unfortunately, that’s where the warm and fuzzy stories end; Sprouts’ current leadership leaves much to desire. According to Glassdoor, only 33% of employee respondents support the leadership of CEO Doug Sanders, and the average rating for the company is 2.7 out of five stars.

More specifically, employees complain of low salaries and raises too small to make a meaningful difference. Furthermore, they complain of being nickel-and-dimed at every corner — including having to pay for their own uniforms!

That is in stark contrast to Whole Foods, which — though it’s certainly not perfect — has much higher ratings (3.5 stars) and is known for its focus on employee development. Specifically, Whole Foods employees are organized in autonomous teams, and management pay is capped at a certain multiple of the average employee’s yearly wage.

Growth potential

It is in this area, and only in this area, where Sprouts might have an upper hand on Whole Foods. Sprouts currently has about 160 stores and sees potential for 1,200 nationwide. Whole Foods, on the other hand, has just more than 350 stores and has an end goal of 1,000 stores in North America.

Furthermore, Sprouts achieved a comparable-store sales increase of 9.7% in 2012, while Whole Foods’ sales rose by 7.5% in the most recent quarter. From a strictly business-oriented point of view, it appears that Sprouts has more potential for growth than Whole Foods.

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