Natural Foods Merchandiser

Distributor Battle: Tree of Life Tops UNFI

Wild Oats Markets Inc. crossed longtime partner United Natural Foods Inc. off of its distributor dance card, saying it got a better offer from Tree of Life North America.

Tree of Life, based in St. Augustine, Fla., valued its new contract at $148.6 million annually. Tree of Life is a subsidiary of the Dutch food conglomerate Koninklijke Wessanen.

UNFI's agreement with the Boulder, Colo.-based, 102-store chain expires at the end of September. Wild Oats was the Dayville, Conn.-based distributor's second best customer, accounting for about 13.5 percent of sales.

Chief Executive Officer Michael Funk said although UNFI is disappointed that the contract was not renewed, "we believe that the terms Wild Oats sought would not have been in the best interests of United Natural Foods, our shareholders and our other customers."

RBC Capital Markets analyst Carole Buyers said the contract cancellation is a financial blow in the near term. "But that said, I have seen UNFI overcome a lot worse than this," she said. "My sense is that this is a temporary setback for the company. They are teamed up with the stronger player, which is Whole Foods [Market Inc.]"

UNFI hit rocky financial waters in the first half of fiscal year 2000, when it consolidated its East Coast distribution operations and watched its operating margins tumble into negative territory for two quarters, from about 4 percent. The distributor has since recovered, reporting more than $1 billion in sales in the fiscal year that ended July 31, 2001.

In its third-quarter 2002 earnings statement, UNFI reported net sales of $300.4 million, up 16.2 percent from third quarter of 2001. After Wild Oats announced the contract would not be renewed, UNFI reported that without Wild Oats on the balance sheet, its sales would have grown 18 percent for the quarter.

UNFI will use capital freed up from the Wild Oats contract to continue its plans to expand in the Midwest and Southwest, according to a prepared statement.

Natural Foods Merchandiser volume XXIII/number 8/p. 11

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