As UNFI increasingly moves outside of its comfort zone dealing with natural channel grocers, it faces growing competition from mainstream distributors who have added natural and organic offerings to their product lines. Those competitors have the advantage of an already loaded-up distribution channel, but suffer in comparison to UNFI when the actual natural and organic lines they carry are closely examined, CEO Steve Spinner said.
Increased competition
“Given the growth in our space, competition has also increased. Conventional food distributors and continued movement to direct distribution by supermarkets for fast moving products will pressure our growth as the industry expands,” Spinner said during a Q3 2014 earnings call with analysts.
“They don’t have a differentiated product line it’s a pretty narrow group of products that they coming to market with. Their distribution programs and to be less than ours because they are coming to the store with a full truck or virtually a full truck with conventional product,” Spinner said in a transcript from Seeking Alpha. “I think it was just an important commentary to make that, we’re not the only one it’s out there. There are other people that are coming into the space to compete on the fast moving items.”
UNFI announced the deal to buy Tony’s in late May for $196 million. Tony’s Fine Foods is a leading distributor of perishable food products including a wide array of specialty protein, cheese, deli, food service and bakery goods throughout the Western United States, as well as Alaska and Hawaii. Founded in 1934 by the Ingoglia family, Tony’s products are sold primarily to retail and specialty grocers, food service customers and other distribution companies.
For its fiscal year ended September 30, 2013, Tony’s generated approximately $714 million in net sales. UNFI expects to close the Tony’s deal in July, Spinner said. The addition of Tony’s will allow UNFI to offer an array of “perimeter products” in the main UNFI distribution networks, he said.
Sales growth disproprionately benefits natural channel
In addition to the Tony’s deal, Spinner said the company has invested in the last quarter in a 450,000 square foot distribtuion facility in Wisconsin. The additional footprint was necessary to keep up with soaring demand, he said.
“Our sales growth, almost 14% ahead versus prior year, continues to prove the natural organic and specialty products are not a passing trend for the fast growing permanent part of consumer purchases,” Spinner said.
Spinner said UNFI has seen how the strong demand for natural and organics works to bolster the prospects for the company’s core list of customers, namely the natural channel grocers.
“Over the last five years UNFI has diversified its customer base, based on our philosophy of working hard to bring our products to the mainstream consumer,” he said.
“This drive will continue to benefit our industry as more and more consumers come into these categories and become what we call crossovers. History and data has proved that once a consumer arrives in our space over time they will demand more and more of our products and ultimately migrate towards our core customer, the natural and organic retailer,” Spinner said.
Earnings details
UNFI reported net sales for the third quarter of fiscal 2014 of $1.78 billion, which represents growth of 13.8% or approximately $216 million over the prior year’s third quarter net sales of $1.57 billion. Year-to-date net sales came in at $5 billion, yielding sales growth of $608 million or 13.7% over the comparable period of fiscal 2013.