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Sprouts Gains Merger Expertise: Interview With Doug Sanders

Sprouts Gains Merger Expertise: Interview With Doug Sanders

PHOENIX — Sprouts Farmers Markets here believes the experience of integrating 43 Henry’s and Sun Harvest stores last year is likely to make the anticipated integration of 35 Sunflower units easier, Doug Sanders, president, told SN.

“With Sunflower, we won’t have quite the same learning curve,” he pointed out. “Sunflower has a good business and we don’t want to lose that by going through the integration process too fast.”

He said he anticipates having the integration completed by October.

The proposed merger is still undergoing regulatory review, with federal approval expected by mid-May. The deal will expand Sprouts from Arizona, California, Colorado and Texas into Nevada, New Mexico, Oklahoma and Utah, giving it a total of 141 units with sales of $1.8 billion.

“We’re still trying to determine what our personnel needs will be — to figure out what the structure of the new company will look like,” Sanders said. “It was different with Henry’s because they were a subsidiary of Smart & Final, with a corporate staff of only 40 people, 30 of whom we re tained. But Sunflower is a standalone company with more duplication of positions.”

Sanders said he believes Sprouts’ existing supply chain infrastructure will serve it well, with existing distribution facilities in Arizona, California and Texas. Though no final decisions have been made, he said the Arizona facility, which already services Colorado, could also service New Mexico and Utah, while the California warehouse could service Nevada and the Texas distribution center could handle Oklahoma.

The merger makes Sprouts “much stronger,” he noted, “and positions us for growth in the future. It expands our geographic reach to four additional states, and with a larger geographic footprint, Sprouts can expand to other states.

“Sunflower built a solid business, and just adding more profitable stores to Sprouts will help stabilize the company further as we expand.

“There are also economies of scale that should be extremely impactful with the addition of the Sunflower stores. After the Henry’s deal we were able to renegotiate quite a few contracts with suppliers and to take advantage of the new size of the company, and we expect to do that again after this merger is completed.

“With greater size comes greater leverage, so we intend to go back and work with our existing suppliers and with companies new to Sprouts to get new items and better terms.”

Combining the Sprouts and Henry’s private-label programs was one of the biggest processes in last year’s integration, Sanders said, and he anticipates a similar undertaking with Sunflower.

“Sunflower has a strong private-label program that we believe will enable us to increase our selection and item count,” he explained, “and we’re excited to start working with the Sunflower team to find additional best practices for both of us. Sprouts worked for years developing a private-label program, and so did Henry’s. But there were a lot of great items Henry’s had in its line that we didn’t have in our line, and vice-versa.

“So we went category by category to determine how we could enhance the Sprouts line to increase sales. We also looked at the overlap and decided which formulas to keep. We still carry both lines in our stores, but over the next few months, as we work through our inventory, we will cycle everything under the Sprouts label. We look forward to going through the same process with Sunflower.”

With the Henry’s integration, Sprouts started with one conversion a week, but by the end of the process the company was converting six stores a week in each of the last two weeks.

Looking back on last year’s experience, Sanders said, “Henry’s had a different approach than Sprouts in some categories. For example, they had a larger focus on fine wines, and we’re integrating that approach at Sprouts. Henry’s also put more emphasis on bulk foods, and we’re adding that at the Sprouts stores.

“Sprouts also offers home meals and a made-to-order sandwich program through our delis, and we’ve integrated those into the former Henry’s stores.”

The integration of the Henry’s stores has already resulted in better sales, Sanders said.

“As with any merger, you expect sales to suffer during the integration. But even during the rebranding process, comps at those stores went up, and that trend has continued into 2012.

“We’re probably seeing sales increases [at the former Henry’s stores] of 3% to 4% through the rebranding period and beyond.”

Sprouts and Sunflower are very similar, Sanders said, with stores in 27,000 to 30,000 square-foot range.

“The layouts, the assortments and the sales per store are basically identical, as is the look and feel of the two companies,” Sanders said. “So if someone were dropped into one store without knowing whose it was, I’m not sure he could tell the difference.”

One of the few differences, he pointed out, is that as Sprouts grew, it “took a more clustered approach — going into an area with 15 stores or more — whereas Sunflower was more interested in scattering a few stores over a wider area.”

Executives at Sprouts and Sunflower had informal talks about a possible merger over the last few years “because both sides always felt it was a good match.

“With the success of our merger with Henry’s last year and with both companies committed to growth, this move just seemed right — it certainly made sense to join forces and continue to grow.”

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