Whole Foods vs. Sprouts: No Contest

Whole Foods vs. Sprouts: No Contest

Small regional supermarket company Sprouts Farmers Market has made its debut on the public market with a bang. Sprouts shares doubled on their very first trading day, making for an extremely hot IPO.

It could also be described as a clone of Whole Foods Market . Some investors jumping on this IPO food cart may be thinking of Sprouts as "the next Whole Foods Market." I say to them, "Good luck."

Sorry, Sprouts: Whole Foods is truly special
Whole Foods has been an incredibly successful stock over the course of its history. That's particularly masterful, because the grocery business is not a good one. Traditionally, profit margins are very thin. Without a solid competitive advantage, giving people good reasons to want to shop there, grocers often have to utilize the dreaded price war as a last resort.

Whole Foods was an early entrant into the then-small but now growing marketplace for organic and healthy merchandise. Its brand is well established. However, its veteran status has in no way formed a dinosaur like grocery megaliths Safeway and Kroger .

Whole Foods continues to change with the shifting times, innovate, and try radical new moves. My favorite recent example is mind-blowingly cool. Despite Detroit's desperate economic problems, Whole Foods is testing a smaller, more basic store in the beleaguered city. Traditional investors and analysts probably view this as having the potential for disaster. Possible naysaying would include the idea that a Whole Foods would never work in such areas, or that the idea of a less expensive Whole Foods might anger its upscale customers and tarnish the brand.

Many traditional grocers probably wouldn't have been willing to take that risk. Whole Foods is venturing into a marketplace where it can also address a real social concern. Many seriously economically challenged cities' citizens have few if any options to buy for fresh, healthy food, particularly produce. Thankfully, some community garden projects are cropping up in some such areas, but many people are still left with little to choose from beyond fast food and small, limited markets.

In a surprise to naysayers and an indication of the company's strength and vision, so far that store is doing double the sales it expected. The company plans a move into New Orleans next.

Does Sprouts fall short?
The "farmers market" in Sprouts' name already indicates that it's targeting the same general ecosystem that Whole Foods does. In another dig, the fresh-looking graphic logo in its final prospectus says, "Healthy Living for Less."

Compared with Whole Foods, Sprouts is a real newb. The first Sprouts opened in 2002. Although Sprouts sprang 20 years after Whole Foods, its growth may already be some combination of too much, too soon -- with too little thought as well.

Sprouts is still a relatively small player, with 160 stores clustered in just eight southwestern states. Safeway operates a whopping 1,600 stores, and Kroger, which recently agreed to acquire Harris Teeter to add a more upscale concept to its grocery portfolio, has 2,400 stores operating under many different names.

While that gives it major growth potential, let's ponder the Whole Foods comparison. Whole Foods has 355 stores nationwide, with a few sprinkled overseas. Over two decades it's been conservative and thoughtful about how and when it opens stores. This has actually been a very, very good thing, given its extremely high profit, sales, and margins that many other grocers envy.

Whole Foods targets opening 1,000 total stores over the long haul; Sprouts says that according to a customer analytics firm, there could be room for 1,200 of its own. That does sound like heady growth, but one might wonder whether Sprouts has been engaged in rash growth and may have a management that overestimates its own competitive strength in a cutthroat market.

The IPO filing shows similarities with Whole Foods and a theme of undercutting on price. Sprouts specifically name-drops products such as Doritos, Tide, and Lucky Charms as indicative of items it won't carry in its stores, because of its emphasis on produce, and natural and organic items.

Granted, Sprouts is profitable and growing sales. However, it comes with indebtedness right out of the gate. Meanwhile, from what I can glean from its IPO filing and its website, it either imitates Whole Foods or completely pales in comparison.

Although Sprouts drops the "triple bottom line" language about supporting people, planet, and profits, this sounds more "talk" than "walk." I can't see anything particularly novel in the way it treats its people, although it claims the amorphous "competitive pay," and it provides a long list of benefits that "could" [emphasis mine] be awarded to some workers.

Unlike Whole Foods, Sprouts also doesn't appear to have any really admirable sustainability programs built into its business. It does engage in some community giving, but such community plans are also fairly run of the mill compared with Whole Foods' expansive initiatives such as the Whole Trade Guarantee program, which returns more money to producers and insures quality and fair treatment.

No contest: Whole Foods wins
Sprouts looks like an opportunistic "poser" company trying to capitalize on the growing trend of healthy living and conscious consumerism. Should Whole Foods be afraid of this upstart? Heck, no. Its worst effects will probably be on conventional grocers such as Safeway, Kroger, and even Wal-Mart.

In fact, Whole Foods co-CEO'' response to competitive challenge is to "bring it on." That's hardly a novel response from Whole Foods. For ages, management's view is that competition keeps it nimble and improves its own business. So far, that attitude has worked incredibly well, and it has certainly rewarded long-term investors.

Forget Sprouts and its "hot" IPO. Whole Foods may be the predecessor by 20 years, but it's also the original and the tried-and-true best. Imitation is a form of flattery, and imitation of course is just a flimsy shadow compared with the real vision and innovation.

If you're going to buy into organic grocers and try to ride the growing trends that are furthering interest in healthy and conscious eating, go with Whole Foods: It's the real deal.

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The article Whole Foods vs. Sprouts: No Contest originally appeared on Fool.com.

Alyce Lomax owns shares of Whole Foods Market. The Motley Fool recommends and owns shares of Whole Foods Market. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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