By Matt Valley
LAS VEGAS — Sprouts Farmers Market Inc., the publicly traded Phoenix-based specialty grocer with an ambitious growth plan, is coming to the Peach State. The first of four Sprouts stores in metro Atlanta will open June 18 in Snellville, followed by more openings later this summer in Dunwoody, Norcross and John’s Creek.
“We’re a chain of 172 units. We’ll be at 191 at the end of this year, but our long-term [goal] is 1,200 units,” said Ted Frumkin, the company’s senior vice president of business development. “We have our work cut out for us.”
Frumkin’s comment came Monday evening during “Retail Trends 2014,” a panel discussion moderated by Bill Rose, vice president and national director of the retail group at Marcus & Millichap. Hessam Nadji, senior vice president and chief strategy officer for Marcus & Millichap, provided a largely upbeat outlook for the U.S. economy and retail real estate.
The panel discussion took place at the Renaissance Hotel during RECon 2014, the International Council of Shopping Centers’ annual global trade show that attracts more than 33,000 industry professionals.
Sprouts (NASDAQ: SFM) provides high-quality natural and organic products at prices the everyday grocery shopper can afford, according to the company. The grocer offers fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, baked goods, dairy products, frozen foods, natural body care and household items catering to consumers' growing interest in health and wellness.
Sprouts currently operates in nine states (California, Nevada, Utah, Arizona, Colorado, New Mexico, Kansas, Oklahoma and Texas.) The company opened 19 stores in 2013 and will open another 19 stores this year. Sprouts wants to grow the number of stores by 14 percent annually for the next several years, said Frumkin.
Specialty grocer Sprouts is expanding into Georgia this year with four new stores (Los Angeles location pictured).
The typical Sprouts store ranges in size from 25,000 to 28,000 square feet and attracts between 12,000 and 15,000 customers a week. The goal is for each store to generate first-year sales between $10 million and $12 million.
Fernando De Leon, panelist and managing partner of the Leon Capital Group, a real estate investment and development firm with approximately $1.5 billion in assets under management, is bullish on specialty grocers. “We think it’s a sustainable long-term trend. Sprouts has a great runway ahead of it. It will be a 1,200-store concept in the next 10 years. We have no doubt about it,” said De Leon.
Conventional grocers need to create a market niche for themselves in order to compete in a consolidating business, De Leon emphasized.
One of the challenges for Sprouts in attempting to open up to 25 grocery stores a year is that a lender will sometimes require that a shopping center be 75 percent leased before the developer is allowed to put a shovel in the ground, said Frumkin. Lenders tend to look more favorably on redevelopment projects.
Michael Phillips, president and CEO of Phillips Edison & Co., the largest privately held owner and operator of grocery-anchored shopping centers in the country, believes that grocery store operators have generally proven to be the best retailers for a few reasons. Grocers operate on thinner profit margins than other retail segments and they have a large number of employees to manage. In addition, they have to cultivate many vendor relationships.
“We have a lot of confidence in the grocery sector. Having said that, with as many grocery stores we have in the portfolio — almost 230 — we’re always concerned. We are always looking at the trends. We’re not complacent,” said Phillips during the panel discussion.
A ‘Heeling’ Economy
Despite many positive trends occurring in the U.S. economy, the media tends to emphasize negative headlines such as “Walmart misses earnings,” according to Nadji.
“If you look at the data points, there is a theme of heeling, and much more than heeling, economic expansion. Total employment in the U.S. today stands just short of where it was at the prior peak in 2007 before the recession,” emphasizes Nadji. “If you were excluding government jobs, private sector jobs now exceed where we were at the beginning of this recession.”
Nonfarm payroll employment grew by 288,000 in April, easily surpassing economists’ expectations. It’s the breadth of the employment growth that impresses Nadji. Not only are job gains occurring in leading sectors such as professional services and trade transportation and utilities, but 200,000 construction jobs also were created during the past 12 months. Approximately 100,000 manufacturing jobs were added during the same period.
All totaled, the U.S. economy has added 2.4 million jobs during the last 12 months. “That’s below trend and it’s not as robust as it should be, or what we all want it to be, but nevertheless it’s pretty good,” said Nadji.
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Rahul Sehgal, chief investment officer for Inland Private Capital Corp. and panel member, said the company currently steers clear of investing in retail properties located in the Rust Belt, Michigan and Detroit in particular, because several of those markets present challenges. Instead, he prefers to invest in markets that feature a diverse employment base such as Houston, Dallas and Austin.
Meanwhile, household net worth in trillions of dollars now exceeds where it stood in 2007 by 14 percent, according to Nadji. “How often do we hear about that? Much of that came from the equities market.”
The real estate component of household wealth is still 11 percent below where it was prior to the recession, explains Nadji. “That’s significant for retail because what spurs retail sales is confidence, and confidence is very tied to net worth driven by value of households. We still have a ways to run.”
Consumption is 70 percent of our economy. Today, retail sales in the Unites States are 14 percent higher than they were at the peak in 2007.
Favorable Demographics
Approximately 10,000 Americans enter retirement age daily, and there are 80 million Baby Boomers today.
“What’s amazing about our country — unlike Western Europe where they are losing population or Japan where they are losing population — almost 10,000 people a day turn 21 in this country,” said Nadji. “The 20-to-34-year-old demographic group, which by 2015 will account for $2.5 trillion of sales, is an incredibly important driver of where we are and where we are headed.”
The 20-to-34-year-old group is projected to account for more retail sales in the United States by 2020 than their Baby Boomer parents. “It’s an incredibly important demographic to think about.”
E-Commerce Impact Grows
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Since the bottom of the recession, the fastest growing sector of retail has been non-store based retail, or online retail. The most successful retailers offer a strong combination of an online presence as well as brick-and-mortar stores, according to Nadji. E-commerce now accounts for 10 percent of all retail sales.
“But in terms of the change that it’s causing throughout the entire industry, it’s not just electronic sales anymore. It’s really affecting everything,” said Nadji. “It’s here to stay.”