Why Sprouts Farmers Market Offers Enormous Growth Potential

As of right now, people refer to it as Sprouts Farmers Market, which makes sense because that’s its name. However, five to 10 years from now, it might simply be referred to as Sprouts. Hint: this is a sign of the potential popularity for this growing brand.

Feb 3, 2014 at 10:00AM

Sprouts Farmers Market (NASDAQ:SFM) needs to be on your watchlist. It's possible that the company will fall flat on its face at some point in the future, but this isn't a likely scenario. And if you're looking to invest in companies with enormous growth potential prior to them becoming known names, then this is a risk you must be willing to take.

Sprouts Farmers Market has great potential for one simple reason: It offers differentiation by selling healthy foods for less. Actually, "Healthy Living for Less" is the company's tag line. The word "living" is used instead of "food" because Sprouts Farmers Market isn't just about selling natural and organic food but educating its customers on the benefits of certain foods. No, these employees won't hunt you down while you're in the store, but they will be available if you have a question. This is a nice twist on the Whole Foods Market (NASDAQ:WFM) concept.

While Whole Foods is known for offering quality customer service, Sprouts Farmers Market has trained professionals who can provide more detailed information on food items and other products like vitamins and supplements. 

Other features for Sprouts Farmers Market include low shelving, bright lights, wide aisles, wooden barrels filled with surprise healthy treats, and more. All stores are set up to mimic an open-air market. And instead of having to zigzag through the store to find produce, the produce is located right in the center of the store. 

Now that you know a little about Sprouts Farmers Market, how do you think it would perform if it expanded into new geographical areas? So far, Sprouts Farmers Market has been well received in every market it has entered. Therefore, the odds of success are high.

Southeastward expansion
In the middle of the second quarter, Sprouts Farmers Market will open new stores in the Atlanta area, including Snellville, Ga., Cumming, Ga., Dunwoody, Ga., John's Creek, Ga., and Norcross, Ga. All stores will be leased. Sprouts Farmers Market plans to establish regional supervision with an eventual plan of producing a distribution center in the southeast.

Sprouts Farmers Market isn't heading to the Atlanta area by accident. It wants to set itself up in densely populated suburban areas. The store sizes will average 22,000 to 28,000 square feet, which is about half the size of a traditional supermarket. This should help personalize the shopping experience.

Future industry trends
Sprouts Farmers Market is perceived as a supermarket that sells healthy, organic, fresh, and affordable food in a friendly atmosphere. By offering affordability, Sprouts Farmers Market differentiates itself from Whole Foods. And by offering friendly and personalized service, Sprouts Farmers Market differentiates itself from Wal-Mart Stores (NYSE:WMT).

Wal-Mart has had to deal with the rise of the dollar stores over the past several years. It's fighting back with its Walmart Express stores. However, the majority of Wal-Mart's revenue now comes from food, and it looks as though another rising threat in another category is approaching. Sprouts Farmers Market is likely seen as irrelevant by Wal-Mart right now, but while Wal-Mart doesn't have to worry about Whole Foods much due to price differential, Sprouts Farmers Market will eventually tread on Wal-Mart territory.

Growth and recognition
Sprouts Farmers Market won the 2013 Supermarket News Retail Excellence Award. That alone is telling. Sprouts Farmers Market is also three times larger than it was three years ago. What's the secret to its success? Sprouts Farmers Market establishes long-term relationships with growers and suppliers, which then leads to lower costs. These savings can be passed onto customers in the form of lower prices.

The Foolish bottom line
Sprouts Farmers Market is likely to see market share gains thanks to its proven business plan and geographic expansion. There are no guarantees, but if you're looking for a high-potential investment while the company is still in its very early stages, then you're not going to find many better opportunities. Please do your own research prior to making any investment decisions. 

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Whole Foods Market. The Motley Fool owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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