Sprouts Farmers Market 2015 Annual Report Download - page 29

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21
Market and Other External Risks
Competition in our industry is intense, and our failure to compete successfully may adversely
affect our revenues and profitability.
We operate in the highly competitive retail food industry. Our competitors include supermarkets,
natural food stores, mass or discount retailers, warehouse membership clubs, online retailers and
specialty stores. These retailers compete with us for products, customers and locations. We compete on
a combination of factors, primarily product selection and quality, customer engagement, store format,
location and price. Our success depends on our ability to offer products that appeal to our customers’
preferences, and our failure to offer such products could lead to a decrease in our sales. To the extent
that our competitors lower prices, our ability to maintain profit margins and sales levels may be negatively
impacted. In addition, some competitors are aggressively expanding their number of stores or their
product offerings or increasing the space allocated to perishable and specialty foods, including fresh,
natural and organic foods. Some of these competitors may have been in business longer or may have
greater financial or marketing resources than we do and may be able to devote greater resources to
sourcing, promoting and selling their products. As competition in certain areas intensifies or competitors
open stores within close proximity to our stores, our results of operations may be negatively impacted
through a loss of sales, decrease in market share, reduction in margin from competitive price changes or
greater operating costs.
We rely heavily on sales of fresh produce and quality natural and organic products, and product
supply disruptions may have an adverse effect on our profitability and operating results.
We have a significant focus on perishable products, including fresh produce and natural and organic
products. Sales of produce accounted for approximately 25% and 26% of our net sales in fiscal 2015 and
2014, respectively. Although we have not experienced difficulty to date in maintaining the supply of our
produce and fresh, natural and organic products that meet our quality standards, there is no assurance that
these products will be available to meet our needs in the future. The availability of such products at competitive
prices depends on many factors beyond our control, including the number and size of farms that grow natural
or organic crops or raise livestock that meet our quality, welfare and production standards and the ability of our
vendors to maintain organic, non-genetically modified or other applicable third-party certifications for such
products. Produce is also vulnerable to adverse weather conditions and natural disasters, such as floods,
droughts, storms, frosts, earthquakes, hurricanes and pestilences. Adverse weather conditions and natural
disasters can lower crop yields and reduce crop size and quality, which in turn could reduce the available
supply of, or increase the price of, fresh produce, which may adversely impact sales of our fresh produce and
our other products that rely on produce as a key ingredient.
In addition, we and our suppliers compete with other food retailers in the procurement of fresh,
natural and organic products, which are often less available than conventional products. If our
competitors significantly increase their fresh, natural and organic product offerings due to increases in
consumer demand or otherwise, we and our suppliers may not be able to obtain a sufficient supply of
such products on favorable terms, or at all, and our sales may decrease, which could have a material
adverse effect on our business, financial condition and results of operations. We could also suffer
significant inventory losses in the event of disruption of our distribution network or extended power
outages in our distribution centers. If we are unable to maintain inventory levels suitable for our business
needs, it would materially adversely affect our financial condition and results of operations.
General economic conditions that impact consumer spending could adversely affect our
business.
The retail food business is sensitive to changes in general economic conditions. Recessionary
economic cycles, increases in interest rates, higher prices for commodities, fuel and other energy,
inflation, high levels of unemployment and consumer debt, depressed home values, high tax rates and
other economic factors that affect consumer spending and confidence or buying habits may materially
adversely affect the demand for products we sell in our stores. In recent years, the U.S. economy has