Sprouts, and Likely Henry's to Beat Fresh & Easy to Northern California Despite it's Big Head Start

Northern California Special Report: San Francisco Bay Area & Sacramento Metro-Markets: Analysis

Tesco may be debating whether or not to start opening some of its numerous Fresh & Easy Neighborhood Market store locations in Northern California's San Francisco Bay Area and Sacramento-Vacaville regions this year, but two of Fresh & Easy's competitors in Southern California and Arizona - Sprouts Farmers Market and Henry's Farmers Market - are moving forward full-steam ahead with their respective plans to enter the two metro-markets. Both of the hybrid natural-conventional grocery chains are set to open their first stores in Northern California very soon. [See - April 19, 2010: Tesco Debating Whether to Launch Fresh & Easy Into Northern California This Fiscal Year... or Wait]

Fast-growing, Arizona-based Sprouts Farmers Market, which currently operates 48 stores in Southern California, Arizona, Colorado and Texas, is set to open its first Northern California store in the San Francisco Bay Area city of Sunnyvale, near San Jose, in just three weeks, on June 2. The Sunnyvale store is at 111 E. El Camino Real, in the heart of the famed Silicon Valley.

The 30,865 square-foot Sunnyvale Sprouts store is in an old Circuit City store building, which Sprouts has renovated. Sprouts Farmers Market stores average 23,000 -to- 37,000 square-feet, according to the retailer.

The grocer held a job fair at the Sunnyvale location last weekend, and is currently hiring the 90-100 employees who will staff its first Northern California hybrid natural-conventional grocery store. We call the Sprouts' stores "hybrid" because, although the format and merchandising focus is on natural and organic products across all categories, the stores also carry a selection of conventional groceries.

For example, you're likely to see Best Foods Mayonnaise and Hunts ketchup on the shelf in the condiment aisle, right next to the various natural and organic brands of mayonnaise and Ketchup. In the beer cooler you're just as likely to see Budweiser and Miller next to the various micro-brew and organic brands of beer.

Not by coincidence, Henry's Farmers Market, which is owned by Southern California based grocer Smart & Final, is a hybrid natural-conventional grocer as well. Like Sprouts, its stores offer an assortment of conventional food and grocery items, along with the natural and organic versions.

We say not by coincidence because members of the Boney family, who own Sprouts Farmers Market, which is privately-held and was started in 2002, are the founders of Henry's.

The Boney family sold Henry's Farmers Market to Wild Oats Markets Inc. years ago. Wild Oats operated Henry's, along with its Wild Oats banner stores, for many years. In 2008, when Whole Foods Market, Inc. acquired Wild Oats, Whole Foods turned right around shortly after the deal went through and sold Henry's to Smart & Final, because it didn't fit into their merchandising philosophy and strategic plans.

Smart & Final's Henry's Farmers Market is opening its first store in Northern California this fall, likely in November. The store will be in Elk Grove (at 8211 Laguna Boulevard), which is near Sacramento. Henry's says it plans on hiring about 90-100 workers for its first Northern California store, which is set to open in just six months.

Like the Sprouts store, The Elk Grove Henry's, which is about 21,000 square-feet, is going into a vacant, former Circuit City store. Circuit City's going out of business last year resulted in numerous vacant retail buildings coming on line. In Northern California both Sprouts and Henry's have been able to obtain excellent lease terms on the buildings.

Since acquiring Henry's from Whole Foods in 2008, Smart & Final, which itself is owned by the private equity firm Apollo Management, has been growing the chain aggressively, along with remodeling numerous existing stores in Southern California.

There are currently 39 stores in the chain - 31 in Southern California under the Henry's Farmers Market banner and eight unit in Texas under the Sun Harvest Farmers Market banner. Sun Harvest is also the name of Henry's private brand natural-organic food, grocery, perishable and non-foods products. In addition to being sold in the Henry's and Sun Harvest banner markets, a variety of the Sun Harvest brand items are also offered in the numerous Smart & Final non-membership warehouse stores in the Western U.S., and in Smart & Final's EXTRA format grocery markets.

Henry's has numerous new stores planned for Southern California and Texas.

Smart & Final also has created a new discount supermarket banner called SmartCo. The first five SmartCo stores are set to open this summer, in Denver (2), Littleton, Centennial and Longmont, Colorado, in buildings Albertsons vacated over the past three years.

It's interesting that Sprouts and Henry's are starting out in separate metro-market regions in Northern California -the Bay Area for Sprouts and the Sacramento Metro area for Henry's - although its not earth shaking. This is a plus for both, since they can focus on going after, and responding to, the existing competition in those respective markets rather than starting off competing directly against each other in start up mode. There's plenty of time for that later.

The Bay Area and Sacramento area also just happen to be the two metro-market regions in Northern California where Tesco's Fresh & Easy has 37 publicly confirmed store sites (and a few more not confirmed), which have been sitting since early 2008 when the grocer made the announcement.

As we wrote in our piece on April 19 [Tesco Debating Whether to Launch Fresh & Easy Into Northern California This Fiscal Year... or Wait], and remains the situation, Tesco's Fresh & Easy has yet to say publicly when, or if, it plans to open its stores in Northern California.

Both Sprouts and Henry's Farmers Market are looking for (and may have already found some) numerous additional store locations in Northern California.

Additionally, Henry's and Sprouts Farmers Market, which both put a big emphasis on fresh produce merchandising, are setting up regional produce depots in Northern California. That equals: Numerous stores in the region over time.

Sprouts is supplied by grocery and natural foods wholesalers and Henry's is supplied directly by Smart & Final and by a natural foods wholesaler, which means neither of the chains need to invest in and construct a distribution facility in Northern California. Both chains' wholesalers already service Northern California, as does Smart & Final, which operates numerous Smart & Final banner non-membership warehouse stores throughout the region.

In contrast, Tesco's Fresh & Easy plans to open it's own distribution center in the Northern Central Valley city of Stockton, which is about 40 miles from Sacramento and about 70 miles from San Jose. As a result, the start up costs for entering Northern California are extremely higher for Fresh & Easy than they are for either Sprouts or Henry's.

Spouts and Henry's Farmers Market aren't going to make a significant competitive difference in the market regions until each has a half dozen or so stores open. But competition is competition. For example, a Sprouts store in Sunnyvale is going to take business away from other grocers in the city and nearby, by simple virtue of it being there. The stores are also rather popular.

Further, both Henry's and Sprouts Farmers Market tend to be competitors against not just natural foods retailers like Whole Foods Market and others, but also conventional supermarkets. This is do to the fact both chains offer a limited selection of conventional food and grocery products, along with their focus on natural-organic products.

An important note though is that in Northern California, particularly in the Bay Area, many food and grocery shoppers use natural-organic grocery stores as their primary shopping venues.

The Bay Area, for example, is one a Whole Foods Markets' top three performing regions in the U.S. And many of Whole Foods' stores in the region have higher sales per-square-foot than conventional competitors' stores - Safeway, Save Mart's Lucky, ect. - located nearby do.

An example: Whole Foods' 14,000-15,000 square-foot store in San Francisco's trendy Noe Valley neighborhood, which opened late last year and is one of its smallest in the region, is averaging at least $400,000 in weekly sales, according to a source in a position to know the numbers.

The building formerly housed one of Kroger's now out of business Bell Market supermarkets, a conventional grocery format but with lots of specialty and natural products to help up the average ring and the gross. That store did well, about $300,000 weekly in its prime (early 1990's -to- early 2000's), according to information provided by the store's manager during those years, but not as well as Whole Foods' is doing in the same spot. The Bell Market was, like the Whole Foods is now, the only major grocery store in the neighborhood,. So the ground rules are the same.

The primary shopping venue aspect is also one key reason there are so many natural-organic format foods stores in the Bay Area. It's also why Bay Area supermarkets, like those operated by Safeway and numerous others, have extensive assortments of natural and organic products.

The pile-it-high, sell it for a good price, big, farmers market-style produce departments Sprouts and Henry's have and focus on are also a big draw - arguably the major shopper-drawing card for both grocery chains.

Henry's and Sprouts both also sell fresh, prepared foods, and offer extensive selections of vitamins and nutritional supplements in their respective stores.

Based on our sources and research, we expect both of the hybrid chains to announce or confirm additional Northern California locations before the year is out. Sprouts could do so shortly after the Sunnyvale store opens in June.

Of additional importance: Both Sprouts Farmers Market and Henry's made their final decisions to launch into Northern California only last year, going from decision to opening first stores in Northern California in about one year.

In Tesco's case, it's now been over two years since it announced the 37 Northern California Fresh & Easy locations, which to date remain in limbo in terms of a public announcement as to when, or if, they will be opened. [Tesco has some Fresh & Easy stores in the Fresno area. However, Fresno is located in Central (Valley) California, rather than being in Northern California proper.]

Were we Tesco, we would remedy this.

Having the stores in limbo for so long is creating very negative public (and potential consumer) relations for Fresh & Easy in many of the San Francisco Bay Area and Sacramento-Vacaville market regions where the store sites sit; some in various stages of remodeling and construction; others untouched at all for over two years.

Limbo is not a good state for either a human or corporate organism to be in. And it's absolutely a bad state for a start up grocer like Tesco's Fresh & Easy to be in vis-a-vis potential customers, relative to an important potential market region like Northern California.

In our analysis, the longer Tesco stays mum about it plans for Fresh & Easy in Northern California, the more potential damage to its future entry into the market will be done, unless of course it decides not to enter the market at all. Even in that turns out to be the case, the overall damage to Fresh & Easy's reputation could be huge.

[Editor's Note: The San Francisco Bay Area and Sacramento regions in Northern California are shaping up to be two of the hottest food and grocery retailing metro-markets to watch this year, for a variety of reasons. We will be doing just that. Look for additional, upcoming news stories, analysis pieces and commentary on the markets and Northern California in general, in Fresh & Easy Buzz. Look for the 'Northern California Special Report' sub-head, like at the top of ths piece. ]