A Porter’s Five Forces Analysis of Sprouts Farmers Market

Porter’s Five Forces Model is used to assess the nature of competition and attractiveness of an industry. According to the model, the attractiveness of any industry can be gauged by evaluating the impact of the following five forces on the company:

1. degree of rivalry within the industry
2. threat of substitutes
3. threat of new entrants
4. bargaining power of buyers
5. bargaining power of suppliers

The current US organic food industry is extremely competitive, with players constantly trying to increase their market shares by introducing new products and formats. Organic and natural food products are no longer available at just the specialty organic retailers like Whole Foods Market (WFM) and Sprouts Farmers Market (SFM) but also at supermarket chains like Kroger Company (KR) and mass merchandisers like Costco Wholesale Corporation (COST) and Wal-Mart Stores (WMT), who have successfully introduced a range of natural products to win over customers.

Sprouts Farmers Market’s customers are free to choose any organic food retailer based on better products or lower prices without incurring any additional costs. Sprouts sources its products from over 850 domestic and international suppliers. However, Nature’s Best is the company’s primary supplier, accounting for approximately 23% of its total purchases in fiscal 2014. United Natural Foods (UNFI) is also another important supplier, which accounted for another 4% of the total purchases in fiscal 2014. Although Sprouts purchases from a large number of suppliers, thus, it is still dependent on these suppliers for a large part of their purchases.

The main substitute for an organic food product would be the low-priced regular grocery items. Customers, in general, have become health conscious in recent years, and there has been an increasing shift toward organic and natural food products rather than away from it.

Since the demand for organic food items has increased, new entrants have increased as well. These entrants are not just small grocery retailers but also bigger companies such as Kroger (KR) and Costco (COST). In general, there are not many barriers to entry in the organic grocery space, and small players can enter easily because of relatively low capital requirements.

Sprouts Farmers Market (SFM) and competitors Kroger (KR), Costco (COST), and Wal-Mart (WMT) are included in the holdings of the Vanguard Consumer Staples ETF (VDC). Together, these companies account for approximately 10.2% of the fund’s total holdings.

Now let’s look at Sprouts’ strategies.