Natural Foods Merchandiser

UNFI expands, renews Whole Foods contract

Last year went out with a bang for United Natural Foods Inc.

UNFI, the largest natural and organic grocery distributor in the United States, closed 2004 by acquiring Select Nutrition Distributors Inc., which serves some 5,000 customers from warehouses in Philadelphia and Visalia, Calif.

Terms of the deal, announced Dec. 21, weren?t disclosed. But it was followed a week later by word that Dayville, Conn.-based UNFI had sealed a three-year renewal with its largest customer, Whole Foods Market Inc.

The Select Nutrition acquisition was UNFI?s first since it bought Northeast Cooperatives in 2002. ?We see it as a complement to our business,? says Steve Townsend, chairman, chief executive and president of the 3,800-employee wholesaler. ?It opens up channels we haven?t been in before.?

Like many companies in the supplements business, Select Nutrition expanded more rapidly than the market did during the late 1990s.The investor group that sold Select Nutrition to UNFI had bought the Uniondale, N.Y., distributor out of Chapter 11 bankruptcy in 2001.

But Select?s catalog of supplements and health and beauty products from 450 manufacturers—and its client base of practitioners, sports clubs and spas as well as health food stores and pharmacies—made the company an attractive target.

At just 7 percent of current sales, supplements are an area of potential growth for UNFI, Townsend says. Of the 14,000 SKUs stocked by Select, 8,000 overlap with UNFI?s assortment, leaving room for rationalization.

?The [vitamin, mineral and supplements] area has been pretty slow over the last five years,? Townsend says. ?[Health and beauty] has actually been a pretty good growth area. [Buying Select] gives us some of the expertise that we need in that area.?

Coming at the end of a year that began with UNFI regaining status as Wild Oats Market?s primary distributor, the twin announcements were holiday presents for UNFI. Being named one of the best-managed companies in the United States by Forbes was the bow atop the package.

?Our focus is to support our customers,? says Townsend. ?We have the widest selection of products. Our fill rates are the highest in the industry. We also have very aggressive marketing and service programs. ? We understand what sells and what doesn?t sell.?

UNFI?s sales rose more than 25 percent year-over-year to $477.5 million in the quarter ending Oct. 31, 2004. Earnings rose more than 50 percent, despite higher fuel prices, closure of a warehouse in Minnesota and four hurricanes, one of which ripped the roof off a UNFI-owned retailer in Port Charlotte, Fla.

Another area of potential growth—the supermarket and mass-market channel—has been less of a focus. Independent natural retailers make up 45 percent of UNFI?s sales; Whole Foods accounts for 26 percent and Wild Oats, 12 percent.

While UNFI has some large supermarket customers—Shaws Supermarkets, a large account in the Northeast, was recently acquired by Albertsons—the conventional grocery business accounts for just 13 percent of its sales. But Townsend told an analyst conference last year that UNFI?s sales to supermarkets are growing 20 percent to 38 percent annually.

On tap for 2005 is a new warehouse due to open midyear in Indianapolis, serving parts of the Midwest where both Wild Oats and Whole Foods are expanding. The integration of the last few years? worth of acquisitions has reached the stage where operations are running efficiently, and new technology is delivering both service improvements and cost savings, Townsend said.

While Townsend won?t criticize competitors, he points often to the standard of service that he says distinguishes his company from the other guys.

?We need to execute day in and day out,? he says. ?If we do a good job today, we get the order tomorrow.?

Natural Foods Merchandiser volume XXVI/number 3/p. 56

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