The Insider - Heard on the Street
If my sources are correct - and they're right far more often than they are wrong - one of the first, if not the first, major U.S. food and grocery retailing industry acquisitions to happen in 2011 could be the purchase of the Henry's Farmers Market chain, which is owned by Smart & Final, which is in-turn owned by private equity firm Apollo Management, by privately-held competitor Sprouts Farmers Market.
Smart & Final is based in City of Commerce, (Southern) California. Its Henry's Farmers Market chain has a separate corporate headquarters, in the nearby Orange County city of Irvine. Sprouts Farmers Market is based in Phoenix, Arizona.
My sources, who've asked to remain anonymous for occupational and other related reasons, tell me the deal, which is in discussion between the parties, could happen soon, although it hasn't been finalized and therefore isn't a "done deal."
Behind the potential sale are two key recent motivators, as well as a basic private equity strategy, for Apollo Management, which owns Smart & Final and thus Henry's Farmers Market.
The first recent motivator is that the private equity firm lost at least $40-$50 million (and possibly more), according to my sources, on Smart & Final's SmartCo Foods venture in the Denver, Colorado market in 2010.
Smart & Final opened five SmartCo Foods stores in metro Denver over a three month period, starting in June 2010. In November, less than five months later, it announced it was closing all five stores and pulling out of the market. The five stores are all now closed. [You can read Fresh & Easy Buzz's reports on the move here.]
Second, Apollo plans to launch some sort of public stock offering later this year, and as a result has been evaluating its portfolio of owned companies more closely than it normally would over the last few months.
Additionally, private equity firms like Apollo Management buy companies and entities like Henry's Farmers Market for the express purpose of adding value and eventually selling them. That's how the firms make money for their investors. Apollo has followed that path with Henry's, investing a considerable amount of money in Henry's since acquiring it in October 2007, for the purpose of improving and growing the chain, with the hope doing so will add value and thus result in a profit when it sells it.
Lastly, but far from least, my sources say Sprouts Farmers Market is interested in buying Henry's as a way to grow it business, as well as gaining the secondary bonus of taking one of its three similar format competitors off the market. Sprouts, Henry's and Sunflower Farmers Market all operate very similar formats and stores in the Western U.S.
According to my sources, Apollo Management doesn't currently have Smart & Final up for sale.
The Sprouts Farmers Market and Henry's Farmers Market formats are nearly identical - kissing cousins if you will - and not by accident.
The Boney family, members of which also founded Sprouts Farmers Market in 2002, created the Henry's Farmers Market format, a combination natural-organic-conventional food and grocery store, with a focus on fresh produce merchandised farmers market-style in departments that comprise about a third of a store's total square-footage, decades ago in Southern California.
The first "Henry's" (in terms of the format's inspirational origins) was a fresh produce stand operated under the name "Boney's," which was started on a street corner in San Diego by Henry Boney, in 1943.
Henry Boney's plans didn't include just owning a fruit stand. In the 1950's he branched out, owning and operating three grocery stores in Southern California: Boney's, Bradshaw's and Superama.
In 1956, the Boney family sold the grocery stores and switched formats, opening and building a chain of convenience stores called Speedee Mart, which it sold eight years later, in 1964, to Southland Corp/7- Eleven.
A little over a decade later, in 1976, the entrepreneurial Boney family started a health-food chain, Windmill Farms, which it later sold.
Shortly after selling Windmill Farms, the family started the Boney's Marketplace natural foods' store chain in Southern California, which it renamed Henry's Marketplace in 1997, after Henry Boney's first name, replacing the family's last name as the banner for the stores.
Wild Oats Markets Inc. purchased Henry's Marketplace in 1999, and renamed it Henry's Farmers Market.
Whole Foods Market, Inc. acquired Wild Oats in 2007. One of the first things Whole Foods did after the deal was to sell the Henry's chain, which consisted at the time of 35 Henry's Farmers Market (in Southern California) and Sun Harvest banner stores, to Apollo Management -owned Smart & Final for $166 million. The deal, which was completed in October 2007, also included a distribution center in Riverside County, California.
In 2002, two members of the very same Boney family founded the Sprouts Farmers Market chain in Arizona, along with Scott Wing and Kevin Easler. Stan Boney, the senior member of the family, is the chairman of the board, and Shon Boney is the CEO of Sprouts. Wing and Easler serve on the board. Doug Sanders runs the day-to-day operations of Sprouts, as its president and chief operator officer, reporting to Shon Boney. The first Sprouts Farmers Market store opened in Chandler, Arizona in 2002.
Like the Henry's Farmers Market format and stores, the Sprouts format and stores offer mostly natural and organic products, along with some conventional, and put a major focus on fresh produce, which is merchandised "farmers market-style" in departments that comprise about a third of the stores' total square-footage. A third "farmers market-style retailer is fast-growing Sunflower Farmers Market, which shares a history with both Sprouts and Henry's.
Since acquiring Henry's in October 2007, Smart & Final has added numerous stores, remodeled many existing units, and last year opened the first Henry's Farmers Market store in Northern California, in Elk Grove near Sacramento. A second Henry's store is planned for Walnut Creek, which is in the East Bay Area, about 35 miles from San Francisco. Plans for the store are currently being reviewed by the city.
Additionally, Smart & Final created a new natural and organic private brand for the Henry's stores, called Sun Harvest, which is the name of the stores the chain operates in Texas. The Sun Harvest brand, which has won a number of awards, replaced the former "Henry's" brand, which was the grocer's previous store brand of natural and organic food and grocery products.
Interestingly, Smart & Final has had plans since early-to-mid 2010 to expand the Henry's Farmers Market chain into Idaho, opening the first store in downtown Boise in late 2011 or early 2012. But in late December 2010 the retailer pulled out of the deal, deciding not to sign the lease for the Boise location, where it planned to put the first Idaho store, which it had been negotiating terms on for months. A Smart & Final spokesperson told a Boise television station in late December the retailer decided instead to focus on opportunities closer to home, meaning California and Texas, rather than entering Idaho. But my sources say the decision, which came on the heels of the SmartCo Foods store closures in Denver, has more to do with the possible sale of the Henry's Farmers Market chain to Sprouts Farmers Market, rather than a decision not to open stores in Idaho.
Sprouts Farmers Market, the larger of the two (but not by much) "farmers market-style" format chains in terms of total number of stores, currently has 54 stores in four states: Arizona, California (southern and northern), Colorado and Texas. The stores range in size from 23,000-37,000 square-feet. Annual sales at fast-growing Sprouts Farmers Market are approaching $1 billion, according to my sources.
Like Henry's, Sprouts opened its first store in Northern California, in the Bay Area city of Sunnyvale, in 2010. It has plans to open numerous additional stores in its newest market over the next couple years, including a store in Roseville, near Sacramento, this year, and in Dublin, which is in the Bay Area, in 2011 or 2012.
Sprouts is also making a major push in Texas, its second-newest market after Northern California. So far it plans to open three new stores in Texas this year.
Apollo Management-Smart & Final-owned Henry's Farmers Market currently operates 46 stores in two states - 37 units under the Henry's Farmers Market banner in California and nine stores under the Sun Harvest banner in Texas. The size of the Henry's and Sun Harvest banner stores are very close to Sprouts in terms of square-footage, averaging about 21,000 square-foot at the smaller end, to about 33,000 square-foot at the larger-end.
I estimate Henry's current annual sales to be in the $550 million-$650 million range, based on a variety of source information. The sales information isn't publicly released by the company.
If the deal to acquire Henry's Farmers Market goes through, Sprouts Farmers Market will nearly double both its store count - from 54 to 100 (not counting the new stores both chains plan to open this year) - and annual sales, which will make it not only a much bigger player in the natural-organic retailing sector, but also overall in the Western U.S. food and grocery retailing industry.
Some of the Henry's and Sprouts stores in Southern California are located fairly close together, so I suspect Sprouts Farmers Market would need to sell or close around a half dozen-to 10 or so units - it could be a Henry's store or an existing Sprouts unit, depending on a few variables - in the region if the acquisition becomes a reality.
I see the store duplications or redundancies to be of lessor concern in Texas, where Sprouts has only opened a handful of stores thus far. Sprouts would probably keep all or nearly all of the nine Sun Harvest stores and re-brand them under the Sprouts Farmers Market name.
I'm less sure Sprouts would re-brand the 37 Henry's Farmers Market stores "Sprouts Farmers Market," particularly right away, although eventually doing so makes more sense than it does to not do so. Most likely, if the acquisition does become reality, Sprouts will keep the Henry's Farmers Market name for a while at least, perhaps even considering using it as a second banner. However, based on information from my sources, I doubt if the grocer has even made that decision yet.
As of today, sources tell me the deal is being discussed but hasn't been finalized, which is important to note, as the devil is always in the details, particularly when it comes to acquisitions.
I'll have more on the potential Sprouts-Henry's deal if and as new information warrants.
- 'The Insider'
[Editor's Note: 'The Insider' column appears regularly in Fresh & Easy Buzz. The opinions in the columns are those of 'The Insider,' and not necessarily shared by Fresh & Easy Buzz. This is 'The Insider's' first column for 2011. Below are links to 'The Insider's' 2010 columns, published in Fresh & Easy Buzz.]
~December 30, 2010: Seven Predictions For Tesco's Fresh & Easy Neighborhood Market For 2011
~October 27, 2010: Save Mart CEO Bob Piccinini Poised to Make it to the 'Bigs' as Member of Golden State Warriors' Ownership Group
~October 8, 2010: Incoming Tesco CEO Philip Clarke Needs to 'Imagine' When it Comes to Fresh & Easy Neighborhood Market USA
~September 13, 2010: Reading Philip Clarke's Tea Leaves: Might A Mixed Corporate/Franchise Model Be in Fresh & Easy Neighborhood Market's Future?
~September 3, 2010: How the California Grocers Association and its Members Can Snatch Victory From the Jaws of the Defeat of California's Plastic Bag Ban
~August 22, 2010: Challenges & Opportunities: Tesco's Fresh & Easy Neighborhood Market Will Supply its Northern CA Stores From its Riverside County DC in Southern CA
~July 18, 2010: When it Comes to Northern California - its Competitors are Rome Burning and Tesco's Fresh & Easy Neighborhood Market is Nero Playing the Fiddle
~July 13, 2010: A Few Words on The Life and Death of Veteran Southern California Grocer Roger K. Hughes
~June 27, 2010: The Insider: Will Tesco Acquire Supervalu, Inc. and Change its 'Fresh & Easy' Game in America?
~June 12, 2010: Will Phil Clarke Shake Things up at Fresh & Easy Neighborhood Market USA When He Becomes Tesco CEO in 2011?
~May 20, 2010: Welcome to Discountopia USA