Sunflower Sprouts Fresh Stores and Consumers

(page 2 of 2)

But stores based on the Henry's Market format competed well because they were less intimidating to the casual natural-foods shopper and appealed to the demographic that didn't want to pay for the glitz of a natural-foods superstore.

Pricing is key to Sunflower's strategy and its drive to undersell Wal-Mart. Gilliland claims that at least 80% of the store's produce beats the giant's prices. He and his team have been rethinking myriad aspects of their business, trying to "squeeze pennies out of everything," he says. Sunflower buys its produce by the truckload directly from farmers; local trucking is done by Sunflower staff, using company vehicles. Construction, too, is managed in-house by Gilliland's brother, who outsources some jobs to skilled workers. This allows Sunflower to build a new store for less than $2 million, or $70 a square foot, compared to the $150-per-square-foot industry average for a new supermarket.

In terms of design, the stores are no-frills. "They're nice stores, but not works of art," says Gilliland. "Whole Foods is like a museum!" Of course, it's "silly prices," not sleek design, that he's going for.

A natural surge?

At least in the short run, analysts aren't convinced that Sunflower's market-bridging strategy will succeed, especially when it comes to wooing low-end consumers. "Let's get real," says David Livingston of DJL Research. "[Sunflower] simply does not have the economies of scale in terms of labor, rent, and purchasing power [to beat Wal-Mart]." Apart from produce, Sunflower's prices are higher than the giant's, although they're competitive. While consumers who are tired of the big-box shopping experience may be willing to pay a bit more at a friendly, smaller-format store, it's far from certain they will.

Considering the other ends of the market, Paul Weitzel, a managing partner at Willard Bishop, says: "I don't think people who shop organic are as price sensitive as some." But with the economy tightening, more consumers are going to focus on value.

It's too early to call Sunflower a resounding success, but its strategy seems to be working. Same store year-over-year sales are up by double digits, according to Gilliland. Looking forward, the company will benefit from consumers' continued focus on fresh produce and on healthy foods. According to Progressive Grocer's 2008 Annual Report on the industry, retailers expect produce to be the most-shopped food category this year, followed by private-label products—double good news for Sunflower.

"We expect a surge over the next five years as naturals go from niche to mainstream," says Willard Bishop's Weitzel. "Sunflower will be well-positioned for that."

Jessie Scanlon is the senior writer for Innovation & Design on BusinessWeek.com.