Maybe “those coupon clippers” weren’t so bad for business after all.
Sprouts Farmers Market has been hit with a one-two-three punch after expressing confidence that its customers would happily pay higher prices for its premium products. First, its latest earnings report showed that’s not necessarily the case anymore. Second, its stock price plummeted in reaction to that news. And now third, an investor has filed a proposed class action lawsuit, accusing the grocer of fraudulently painting a rosier picture about its business than reality would suggest.
The natural and organic grocer “provided overwhelmingly positive statements to investors” while “concealing material adverse facts concerning the true state of Sprouts’ growth potential; notably, that a more cautious consumer could result in significant slowdown in sales growth,” the attorneys for plaintiff Singh Family Revocable Trust said in announcing the lawsuit.
Until its most recent earnings report, Sprouts had insisted upon the resilience of its business model, even as all indications are that grocery shoppers are cutting back and looking to save money. Many grocers have responded by lowering prices on staple items, or emphasizing their weekly promotions.
A confident Sprouts took the opposite tack. Several years ago, it embarked on a plan to raise the quality – and the average income level – of its core customer by discouraging “those coupon clippers” from showing up for deals. The goal, CEO Jack Sinclair said, was “getting away from those types of customers” who “tend to be very promiscuous customers who will go to wherever the lowest price of chicken breast is.”
What remained, in theory, was a more loyal, discerning customer who was willing to pay for the quality items that Sprouts offers, without expecting coupons and deals.
But as grocery inflation became an increasing concern, and more shoppers traded down to store brands and discount grocers, investors pressed Sprouts on whether its strategy was sustainable.
“People have got to eat,” Sinclair reassured investors this past spring. And “if you’re a vegan, you stay being a vegan. So we’re pretty confident that the offer we’ve got in front of people is going to be important even in difficult circumstances.”
As for concerns that increasingly cautious consumers were watching their spending, “the way we look at pricing,” Sinclair said a couple of months later, “if we put a product out there that’s got a fair value for the customer,” then “the customer will buy it.”
Then in late October, Sprouts acknowledged that consumer concerns about the economy and rising grocery prices were starting to have an impact. The retailer reported weaker-than-expected earnings, its stock price sank, and investors like the Singh Family Revocable Trust said they lost a lot of money.
“In truth, Sprouts’ optimistic reports of growth and stability in the face of macroeconomic instability fell short of reality,” the lawsuit states. “The company’s consumer base was not as resilient to macroeconomic pressures as defendants contended.”
In conjunction with that latest earnings report, Sprouts announced the completed national rollout of its new Sprouts Rewards loyalty program, which includes points, perks, personalized offers – and “member-only digital coupons.”
“We’re very comfortable with promoting going forward,” Sinclair said in response to investor concerns about the retailer’s pricing and promotional strategy. “We’ll do what we need to do.”
The plaintiffs’ attorneys are inviting any other investors who’ve lost money on Sprouts stock to join the lawsuit, as it pledges to ensure that “investors receive full compensation for losses caused by corporate misrepresentations.”
So Sprouts’ strategy of turning away coupon clippers, and then offering its remaining shoppers more coupons to clip, all while insisting its customers aren’t so concerned about saving money at all, may not have paid off. And now unhappy investors are trying to make sure their decision to invest in Sprouts pays off – one way or another.
Image source: Sprouts Farmers Market
