For more than a year after acquiring fellow distributor Supervalu, United Natural Foods, Inc. (UNFI) couldn’t get rid of its retail stores fast enough. In a matter of months, it sold off or closed dozens of Shop ‘n Save, Hornbacher's and Shoppers Food & Pharmacy stores it viewed as unwelcome baggage in its $2.9 billion deal announced in summer 2018.
After the pandemic hit the U.S. last year, UNFI paused the sale of its remaining Shoppers stores along with its Cub Foods chain in Minneapolis as supermarket sales ballooned with stock-up shopping. But the plan was still to sell off locations as soon as the market allowed.
"It’s just a question of when as opposed to if,” CEO Steven Spinner said during an investor conference last May.
More than a year and $2.4 billion in retail sales later, the company has changed its tune about owning stores in what’s yet another sign of food retail’s recent revival and the potential for further growth going forward.
Not only does UNFI plan to continue running the 53 Cub and 22 Shoppers locations it owns for the foreseeable future, but it’s also ramping up store remodels and expansion plans, company executives said during UNFI's investor day on Thursday.
Mike Stigers, CEO of Cub Foods, said that chain is updating stores to provide more grab-and-go meal options and improved e-commerce ordering. Cub recently began offering pickup and delivery from its wine and liquor stores in Minnesota, and has partnered with third-party delivery firm Capstone Logistics on fulfillment. It’s also “actively looking for new store sites,” Stigers said.
UNFI Chief Financial Officer John Howard said retail stores can generate meaningful cash flow for the company and also provide insights for its distribution business. Over the past four quarters, UNFI’s supermarkets have generated more than $100 million in adjusted earnings before income taxes, amortization and depreciation (EBITDA).
“Although multiple factors have resulted in our continuing to operate this part of our business, we now believe continuing to optimize retail is in the best interest of our shareholders and provides greater value,” Howard said.
At the same time, Spinner threw cold water on the notion of a retail revolution at UNFI by leaving the door open for a future sale and noting the company doesn’t plan on expanding stores beyond their existing markets.
“We’re a wholesaler first and a retailer second…. Will we own retail five years from now? I just don’t know,” Spinner said.
Fueling future growth
So important is retail to UNFI at this point that the company included it as one of six pillars that comprise its new corporate growth plan.
That plan, called “Fuel the Future,” includes a mixture of novel initiatives and enhancements to existing ones aimed at shaving costs and building out billions of dollars in business among new and existing customers. Altogether, the strategy aims to generate annual sales growth of 3% to 5% and 6% to 10% annual EBITDA growth through fiscal 2024, with a goal of hitting $30 billion in sales and $900 million in adjusted earnings by that year.
A central theme of the growth plan is fully leveraging its network of 58 distribution facilities through optimization efforts and services. UNFI executives said the company plans to maximize capacity and further standardize operations through the use of technology and new processes.
Next spring, it plans to pilot a distribution process called “One UNFI” that it aims to eventually roll out across the company. The program lets companies place orders through a single system and then receive everything on one truck with one invoice, said Eric Dorne, UNFI’s chief operating officer.
This builds on other efforts the distributor has established to streamline its business following the complex Supervalu acquisition, including a regional sales team structure established last year that provides a single point of contact for retail customers. UNFI also plans to continue the work of optimizing its distribution network by consolidating its facilities, separating its slow- and fast-moving products into separate warehouses and investing in warehouse automation.
For several years, UNFI has focused on a “build out the store” strategy centered on selling more specialty items to conventional grocers and selling a curated selection of conventional products to specialty retailers.
“We've made tremendous progress, but we still have an incredible opportunity ahead to simplify our business, optimize our network, improve the associate experience and stay at the forefront of the industry,” Dorne said.
Expanding its high-margin goods and services is another broad opportunity UNFI is pursuing. This includes getting more retailers to use its approximately 150 professional services like accounting and marketing.
Currently, UNFI’s conventional retail customers subscribe to an average of five to six services, but fewer than 10% of specialty retail customers utilize its services, said UNFI's Chief Marketing Officer Amanda Helming, indicating an opportunity to grow. UNFI is also rolling out processes to speed the supply of fresh products to shelves and aims to triple its e-commerce business over the next three years by building out categories through initiatives like its recently launched Community Marketplace, Helming said.
In addition, UNFI plans to significantly expand its private label assortment in step with retailer demand, rolling out around 200 new private label products annually under brands like Field Day, Woodstock and Essential Everyday. In the fall, the company will relaunch the Wild Harvest natural and organic brand introduced by Supervalu in 2008.
“In just two years across the food retail landscape, private brands have evolved from a pure profit play to a destination driver,” said Helming.
Questions remain over CEO succession
Altogether, UNFI plans to win $38 billion in additional business from its existing customers and over $70 billion in business from new customers. Chris Testa, the company’s president, said it sees multiple opportunities to claim additional share of the $1 trillion wholesale market, noting that most new volume would come from small and medium-sized deals rather than large, sweeping contracts.
“We don't have a single competitor,” he said. “We are sourcing volume from captive distribution, from local suppliers, from national wholesalers, even folks that are buying things from club stores that now want us to service them.”
“We've made tremendous progress, but we still have an incredible opportunity ahead to simplify our business, optimize our network, improve the associate experience and stay at the forefront of the industry."
Chief operating officer, UNFI
Through its growth plan, UNFI aims to become the dominant player in North American wholesaling and fully leverage the assets it gained in the Supervalu acquisition. The timing of that plan is awkward, however, given Spinner’s impending retirement, first announced last year and set for this summer. The company recently extended his contract as it searches for a successor.
A new CEO, which UNFI is set to name late this summer or early fall, according to Spinner, could amend or even wipe away the plan set forward by their successor. Addressing this concern, Spinner said the company board is prioritizing someone who is a culture fit and endorses its new strategy for the top role.
“We're going to find a candidate who's going to embrace the culture of the strategy that we've worked so hard to create,” he said.
In an investor note issued on Thursday, R5 Capital analyst Scott Mushkin expressed admiration for UNFI’s growth plan, but said the timing so close to Spinner’s departure creates uncertainty.
“Any strong outside leader will undoubtedly want to put their own stamp on both the company's strategy and personnel, which creates a cloud of uncertainty in our minds,” Mushkin noted. “The sooner that the search for the CEO can be completed, the better off both the company and shareholders could be. An internal candidate would seem to make the most sense to us at this stage."