As speculation of a tie-up between Albertsons and Sprouts Farmers Market continues to grow, we look at what the deal could mean for the two businesses.
Albertsons has successful track record in integrating businesses
As a serial acquirer of retailer businesses, Albertsons has grown to be the second largest supermarket operator in the US, with over 2,200 stores. With a decentralised model, and a preference for retaining the local banners which it acquires, Albertsons’ scale is not always obvious. However, the acquisition of Safeway in 2015 transformed the organisation into one with almost national reach. This business has since been successfully integrated, with Albertsons deploying its playbook to drive sales growth and take best practices from Safeway around private brands, ecommerce and loyalty to improve the overall organisation.
Sprouts enjoying success in an increasingly competitive segment
With sales growing by over 12% last year to $4.0bn, Sprouts outperformed many of its competitors as it tapped into the continued demand for health-focused shopping experiences and evolved its ‘healthy living for less’ model. This was achieved against a backdrop of increased competition in the segment, including the emergence of new retail concepts. Mainstream retailers, such as Walmart and Kroger, have also been expanding their natural and organic ranges.
Many initiatives in place to support further growth
With around 60% of space dedicated to fresh foods, Sprouts has been able to maintain its competitive position through considered pricing and customer focus. Its strategic initiatives include product and category innovation, and investments in the customer experience, people and infrastructure. Natural and organic private label ranges have been expanded to over 2,100 products, generating sales of $400m in 2016, representing 10% of total revenue. It has also been increasing its online presence, engaging with customers through email, mobile apps and social media platforms, as well as extending its Amazon Prime now delivery partnership to more stores. Having opened 36 new stores last year, it has solid expansion plans in place, with a similar number of new stores planned for 2017.
Opportunity for Albertsons to enhance existing formats
Beyond the benefit of further scale, Sprouts is an attractive potential acquisition for Albertsons. The retailer has developed a highly-differentiated retail concept centred on fresh foods, natural and organic products, and vitamins and supplements. Its format would complement Albertsons’ existing supermarket concepts, particularly the banners which sat within the former Safeway business. These could be further enhanced, along with many of the other banners where Albertsons has started to develop a stronger presence for these categories.
Take the Sprouts brand to a wider audience
With Albertsons' support, the Sprouts proposition could be expanded into new regions, building on its existing presence across 14 states. Florida is an area of focus for both retailers, with Sprouts recently opening its first stores in the state, while Safeway took its brand into the market for the first time, last year. Albertsons also operates the Haggen brand in the north west; this is also a complementary brand to the Sprouts proposition and an area where the latter doesn’t currently have a presence.
Expect to see further consolidation in the US market
However, the attributes which make Sprouts an attractive proposition for Albertsons, are also likely to spur the interest of other operators. Many US grocery retailers are seeking to build stronger health and wellness focused offers; an acquisition provides the opportunity to build scale and develop new capabilities quickly. While there is a high degree of uncertainty as to whether this deal will be undertaken, further consolidation in the US grocery market is expected, with the opportunity to move into new channels, formats or categories likely to be the key drivers of further activity.
Stewart Samuel, Program Director, IGD Canada
Based in Canada, Stewart heads up all of IGD's research and coverage on the US market. Contact Stewart at [email protected] for further insight on retailer strategies, channel developments and market trends in North America.