Sunflower Farmers Market, Sprouts and Private Equity: The Art of a Soon to Be Announced Deal

The Insider - Heard On the Street

In December 2007 Boulder, Colorado-based Sunflower Farmers Market announced it had raised $30 million in equity financing from La Jolla, California-based private equity firm PCG Capital Partners.

At the time, Sunflower Farmers Market, which was headed up by co-founder and CEO Michael Gilliland, who resigned in February 2011 after being charged by the Maricopa County, Arizona Grand Jury with one count of  felony child prostitution, operated just 13 stores in Colorado, Arizona, New Mexico, and Nevada, and had sales in the $100-$150 million range.

Today, Sunflower Farmers Market, which I've reported has agreed to a merger-acquisition deal with Phoenix, Arizona-based Sprouts Farmers Market, which is majority-owned by private equity firm Apollo Global Management, has 35 stores and about three times the annual revenues it had in December 2007, when PCG Capital Partners made its $30 million equity investment in the grocery chain.

According to my sources, in return for the $30 million equity investment it made in Sunflower Farmers Market over four years ago, PCG Capital Partners, who's managing director Timothy Kelleher is a member of the grocery chain's board of directors, received an approximately one-third ownership stake in Sunflower, the other about two-thirds being held by the founders, corporate officers and other private investors.

In 2007 PCG Capital Partners launched its Corporate Partners Fund, the vehicle it used to invest in Sunflower Farmers Market.

The fund is designed to provide equity growth capital for established businesses, which Sunflower was.

It's also a non-control fund, meaning the private equity firm takes a substantial equity interest in the companies it invests in - and in the case of Sunflower Farmers Market received a board seat for Kelleher as part of the deal -but allows the company's senior management to continue to call the shots on a day-to-day basis.

Back in December 2007 when the private equity firm made its $30 million investment in then 13-store Sunflower Farmers Market, co-founder and then CEO Michael Gilliland and Kelleher said the strategic goal of both parties was to build Sunflower into a chain of 50 stores over a five-year period.

Here's what Sunflower's then CEO Gilliland and Kelleher said (italics below) in a joint-statement on December 17, 2007:

Sunflower Farmers Markets, a Boulder, Colorado-based grocery chain founded and led by Wild Oats founder Mike Gilliland, announced today it has raised $30 million in equity financing from PCG Capital Partners, a private equity firm based in La Jolla, CA.

The funding comes in advance of a major expansion of the Company’s retail locations in both existing and new geographic markets.  Plans include doubling the number of stores by the end of 2009.  Sunflower will launch new locations at a rate of up to eight stores per year, creating a company portfolio of 50 stores throughout the west within five years.    

Sunflower, founded in 2002, currently operates 13 stores in Colorado, Arizona, New Mexico, and Nevada.  The Company’s increasingly popular format offers consumers a full-service farmers’ market-style grocery store featuring the highest quality natural and organic products at the lowest possible prices.

Mike Gilliland, Sunflower’s Founder and CEO, said, "Our value driven approach to the natural foods retailing sector has clearly resonated with consumers.  There is tremendous demand for an alternative to the high price format that has predominated in natural foods for so many years. PCG Capital Partners’ investment will enable us to make this differentiated retailing approach available to millions of consumers throughout the Western United States, including new markets in Utah and Texas.”

Tim Kelleher, Managing Director of PCG Capital Partners, said, "We are excited to partner with a proven entrepreneur like Mike Gilliland.  We believe that Mike and his team have built a model that uniquely combines value with quality in the natural and organic foods segment.  The concept has proven itself over 13 stores in four states.  We anticipate our capital will enable Sunflower to capitalize on its success by replicating the model across many additional markets."

As noted earlier, Sunflower Farmers Market has 35 stores. Current plans - before the talks with Sprouts started in earnest last fall - call for Sunflower to open 6-8 new stores this year, which means it would fall short of that five year, 50-stores goal by nine to seven or so units, making it difficult to hit the financial target set by PCG Capital Partners, Gilliland and Sunflower's board in the fall of 2007, when the private equity firm made its $30 million investment. The chain is well on the way to that goal though.

Why: Because 41-43 stores - give or take a couple either way - rather than 50 units are to be open by December 2012 (five years from December 2007). That many less stores opened can make a big difference in terms of revenue and profits for a grocery chain on the growth fast-track, which is what the plan has been for Sunflower Farmers Market since 2007.

PCG Capital Partners has an up to seven-year time horizon, in terms of getting a return on equity, in its $30 million investment in Sunflower Farmers Market. As of today, its about four years and four months into that up to seven-year time horizon. Five years is often a magic number when it comes to private equity investments in a company.

The deal with Sprouts, which will be announced soon, will change all that, however. I don't know all the specifics at present, but the private equity firm will either get paid-out fully in the deal with Sprouts or will take some equity in a combined Sprouts Farmers Market-Sunflower Farmers Market, to be controlled by Sprouts, making it whole either way.

Sunflower Farmers Market's equity partners have been angry at Gilliland since his arrest in February 2011, when he was charged with one count of felony child prostitution.

The grocery chain's board moved quickly to get the co-founder to resign, which he did, along with taking various measures, such as removing any references to Gilliland from the company's website and other media, as well as putting out a statement following his resignation saying he would no longer be involved in the company and that he is only a minor investor in the chain.

But the reality is that Gilliland was the driving force behind and public face of Sunflower Farmers Market since it was founded in 2002. Just look at the December 17, 2007 statement I quoted above if you either aren't aware of that fact or doubt it. It was a personality-driven retailer until February 2011 - and Michael Gilliland was that person and personality.

Overall, I think Sunflower has been much better off over the last year as a non-personality-driven grocery chain, just as I would suggest Whole Foods Market has become a much better operation since the company convinced John Mackey to be a bit more zen-like and a lot less the face of Whole Foods'-like.

There has been talk in the past of a possible acquisition of Sunflower by Sprouts or a merger of the two food retailing companies. But Gilliland's being charged with one count of felony child prostitution a year ago this month  - he has yet to go to trial, having asked for and received multiple postponements (current trial date is March 15, 2012) from the Maricopa County, Arizona Superior Court where the case is pending; his lawyer has also appealed the Grand Jury's decision to the Arizona State Court of Appeals (see here) - served as the catalyst for the talks and negotiations between the boards of Sprouts and Sunflower.

All that's left now is the announcement of the deal. And it's a deal that has as much to do with private equity firms - Apollo Global Management being the majority owner of Sprouts Farmers Market and PCG Capital Partners holding considerable equity in Sunflower - as it does about a merging of two grocery chains with similar farmers market-style formats.

- The Insider

[Read 'The Insider's' past columns here, including his scoop on the yet to be announced Sprouts-Sunflower deal and news-breaking reporting and analysis on the Sprouts Farmers Market-Henry Farmers Market acquisition-merger in January 2011.]

Related Stories

February 7, 2012: Deal Announcement From Grocers Sprouts and Sunflower Farmers Market on Tap

January 25, 201: Sprouts Farmers Market and Sunflower Farmers Market Ink Acquisition-Merger Deal

November 6, 2011: Roll Up Times Two? Sprouts Farmers Market In Talks With Sunflower Farmers Market About Possible Acquisition

January 5, 2011: Will 2011 See Sprouts Farmers Market Acquiring Henry's Farmers Market? 'The Insider' Says it Could Be in The Cards

January 7, 2011: Sprouts Farmers Market-Henry's Farmers Market Deal Negotiations Continue; End-Game Could Be Near

January 8, 2011: Smart & Final-Henry's Tell Employees About Deal Discussions With Sprouts Farmers Market; Confirming 'The Insider's' Reports

February 16, 2011: Breaking: Smart & Final Enters Into Agreement to Sell Henry's to Sprouts Farmers Market

Also see: The Insider,  Sprouts Farmers Market, Sprouts-Henry's Deal and Sunflower Farmers Market.

Grocer-Entrepreneur, Sunflower Farmers Market Founder & CEO Mike Gilliland Honored By Hometown Chamber of Commerce

Mike Gilliland poses in the produce department of a Sunflower Farmers Market store. Fresh produce is front and center and featured in the stores - and Gilliland likes it that way. In fact, don't be surprised if you run into the founder and CEO pictured above while shopping in one of the 30 Sunflower stores. The stores, especially the big produce departments, are one of his favorite places to be, along with his 40-acre farm in Colorado, where much of the produce raised is sold in those very produce departments, at the Colorado stores.

As he prepares to take his fast-growing, fresh produce-focused, combination natural/organic and conventional grocery chain into Northern California, Sunflower Farmers Market founder, CEO and chairman Mike Gilliland has just received an honor from his hometown Chamber of Commerce in Boulder, Colorado, which recognizes the retailer's 24-years as a food and grocery industry entrepreneur, much of it spent in Boulder. Gilliland founded Sunflower Farmers Market in Boulder in 2002.

Gilliland has been selected as a 2010 Entrepreneur of Distinction by the Boulder Chamber of Commerce Esprit Awards committee. The award recognizes and celebrates the outstanding spirit of entrepreneurship in Boulder County, the Chamber said today.

Gilliland will receive his award at the 26th Annual Esprit Entrepreneur Banquet on Thursday, October 7, 2010, from 5:30 to 9:00pm in the University of Colorado’s University Memorial Center Glenn Miller Ballroom.

In addition to Gilliland's award, the Boulder Chamber of Commerce is honoring three other local entrepreneurs at the October 7 event.

"I am honored to have been chosen for this distinction," Gilliland says. "It’s terrific that the Boulder Chamber of Commerce recognizes and acknowledges the hard work and dedication of local entrepreneurs, as well as the unique challenges and opportunities that entrepreneurs face. I’m proud to be included in an event that recognizes some impressive local leaders and their indomitable spirit."

The city of Boulder, Colorado and Boulder County is a pioneering American region when it comes to the natural/organic food and grocery industry. Along with Northern California, the city of Boulder and the surrounding region has arguably spawned more industry start ups and successful natural and organic foods' companies than anywhere else in the U.S. And Gilliland, having founded and headquartered two retail chains - Sunflower Farmers Market and Wild Oats Markets - in Boulder, is a major contributor to that developement.

Sunflower Farmers Market, which Gilliland founded in 2002, remains headquartered in Boulder, as well as having some of its corporate functions in Arizona.

Gilliland also co-founded Wild Oats Markets in Boulder in 1987. He served as Wild Oats' CEO from 1987-2001, growing it from a single store to a publicly-held chain of 115 stores and about $1 billion in annual sales, when he left. Wild Oats' board, its investors, and Gilliland were all ready for a change in 2001.

In 2007, Wild Oats Markets was acquired by its chief competitor, Whole Foods Market, Inc. for $565 million, following a number of years of serious struggle, which saw Wild Oats' sales and profits plunge and its stock share price drop considerably.

When Whole Foods Market, Inc. acquired Wild Oats Markets, Inc., Wild Oats' had annual sales of about $1.2 billion and operated 110 stores in 24 U.S. states and British Columbia, Canada under the following banners: Wild Oats Marketplace, Henry's Farmers Market, Sun Harvest, and Capers Community.

Shortly after acquiring Wild Oats, Whole Foods Market sold the Henry's Farmers Market and Sun Harvest stores, which were operated as a separate chain by Wild Oats and headquartered in Irvine, California, to Southern California-based Smart & Final, which has been growing Henry's ever since. Smart & Final has kept the same independent structure for Henry's, with some centralization in areas like private brands, as well as its headquarters in Irvine, where it remains based.

Gilliland, who attended the US Air Force Academy, the University of Grenoble in France, and received a Bachelor of Arts degree in history from the University of Colorado, didn't waste any time after leaving Wild Oats in 2001. He started Sunflower Farmers Market in 2002 and has grown the chain to 29 stores in six states - Colorado (10 stores), Arizona (7), Utah (2), New Mexico (6), Texas (3) and Las Vegas, Nevada (2) - since then.

In addition to opening numerous new stores in the six states over the next few years, Gilliland is looking to enter new markets, starting with Northern California, where he plans to open the first Sunflower Farmers Market store in early-to-mid 2011. He's also looking to Southern California and a couple other western states as new market regions in which he can open his stores, which use the slogan: Sunflower Farmers Market: 'Serious Food...Silly Prices!

[Read this related story: Sunflower Makes Three: Sunflower Farmers Market's First Northern California Store Will Be in Roseville.]

Food and grocery retailing in the U.S. is interesting and dynamic thanks in large part to entrepreneurs like Mike Gilliland and many others like him.

There's John Mackey, the co-founder and co-CEO of Whole Foods Market; the Wegman's and the Butts, two entrepreneurial families who've build (and still run) what pound-for-pound are arguably the two best grocery chains in America, Wegmans on the east coast and H-E-B in Texas; Bob Piccinini, majority-owner, CEO and entrepreneur-in-chief of Modesto, California-based Save Mart Supermarkets, who since taking over as president and majority-owner from his father in 1981, of what was then a 40-store local grocery chain, has built it into a regional chain of 250 stores and about $5 billion in annual sales, all the while creating thousands of good jobs and donating millions of dollars to community organizations.

Gilliland and the others noted above are just a few of the many food and grocery retailing entrepreneurs and entrepreneurial families making their respective mark in the business - and making it much more interesting, dynamic and far better for consumers and the industry itself than would be the case if it was a strictly publicly-held, big chain industry, like is the case in many developed countries.

Congratulations to Mike Gilliland. And may those grocer-entrepreneurs who've done well, like Mike Gilliland and the many others, find, nurture, motivate and support a new generation of budding grocer-entrepreneurs, so the entrepreneurial tradition in U.S. food retailing will remain alive for generations to come.