Competition from supermarkets and other retail channels seeking a share of growth in the natural foods business is pressuring sales and profits for United Natural Foods and its retail customers, the distributor said while reviewing third quarter earnings Monday.
The distributor, based in Providence, R.I., said independent natural food retailers have been particularly vulnerable to the new competition and the speed at which they’ve moved to carry items that at one time were exclusive to the natural channel. Stephen Spinner, UNFI’s president and CEO, in a conference call urged independent customers to accelerate their own reinvention, paying particular attention to expanding fresh and foodservice, as means of competing.
“Independents have to shift their business model. They have to be better at perimeter, they have to be better at being differentiated, because if they’re going to try to compete on a price-per-price basis on organic cereal, it’s not going to end well,” Spinner said. “It’s going to take them a little while to figure it out, but I do have a fairly high level of confidence that they will figure it out.”
Independent customers, which comprise nearly one-third of UNFI’s total business, saw sales improve by 16.6% in the quarter, while supernatural chains sales improved by 14.9% and supermarket sales by 22.1%. Growth in all three channels was below six-quarter averages as total sales improved 17% to $2.1 billion (sales grew by 6.7% excluding the effect of the acquisition of Tony’s Fine Foods). That was below company and analyst expectations.
“UNFI has a compelling customer proposition that combines high levels of service with significant scale in its product categories. However, UNFI’s organic sales continue to slow, and, in our view, have been negatively impacted by temporary saturation: retail supply has outpaced consumer demand, leading to increased availability of center store natural/organic SKUs at channels not served by UNFI,” Karen Short, an analyst for Deutsche Bank, said in a research note.
Net income was up 14.7% to $41.7 million in the quarter, which ended May 2. Earnings per share of 83 cents came in below analyst expectations of 85 cents, due mainly to the sales softness. As a result, UNFI downgraded sales and earnings forecasts for the year.
Spinner reiterated UNFI’s desire to gain additional fresh, specialty and ethnic capabilities through acquisitions. “We’re going to look at M&A across ethnic and gourmet, we’re going to look at M&A across fresh, and M&A in Canada, and we have a tremendous capacity to do it,” he said. “We’ve got a really strong pipeline. It’s just a question of waiting for the right time, and make sure that we can buy it at the price because we typically would not overpay for a company, even if it was the most strategic company on earth. We got to pay a fair price.”
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