The tax reforms being considered by Congress — even those that would penalize companies for importing product from outside the U.S. — would likely benefit United Natural Foods Inc., the distributor’s CFO said on Tuesday.
“As we look at how this plays out, we think it is a benefit to us,” said Michael Zechmeister in a presentation at the ICR investment conference in Orlando, Fla.
Although he cautioned that it was still early in the tax-reform process, and it is not clear which proposals might be adopted, Zechmeister noted that UNFI delivers to retailers under “cost-plus” contracts that would allow it to pass along any new charges it incurs for importing product.
Legislative proposals to create a so-called “border adjustment” on corporate taxes would likely shift retail buying behavior toward more domestically produced product, he said. However, UNFI currently only imports about 2% of its inventory from outside the U.S., and the wholesaler could, with its broad assortment, benefit from a shift toward more U.S.-made goods.
Exactly what form such new import taxes might take is still a matter of debate, he explained. Lawmakers could create a value-added tax or tariff on imported goods, or they could also eliminate the ability for companies to deduct the cost of goods for imported items, which has been proposed by House Speaker Paul Ryan, R-Wis.
“That, while a possibility certainly because it is in one of the plans, in my judgment, seems a little less likely for a couple of reasons, one being that it is rather severe,” Zechmeister said. “Effectively the denial of deducibility on the cost of good for imports defaults it to an impact on your corporate tax rate, which seems rather punitive.”
Some analysts have projected that such a tax could cost retailers that rely heavily on imports — including Walmart Stores and Costco Wholesale Corp. — billions of dollars, according to a recent article in the Wall Street Journal.
Zechmeister also addressed the decline in promotional activity on the part of manufacturers in the natural, organic and specialty foods space where UNFI operates. The company has been citing these declines for more than a year.
He said that while it’s difficult to pinpoint exactly what’s causing the declines, one possibility is that as more and more smaller, niche manufacturers are expanding into traditional supermarkets, they are being confronted for the first time with hefty slotting allowances and other costs, such as display allowances, that are eating into their budgets.
That could be a short-lived phenomenon for these companies, Zechmeister said.
“As time plays out, and as these products turn on the shelf, they won’t have to support that slotting allowance anymore, and that money will come back to them and they can redeploy it in promotional activity,” he explained.
In addition, Zechmeister said many manufacturers appear to be doing promotional deals attached to actual scanner activity as opposed to “open buys,” which has the effect of reducing promotional funding.
He said he expects promotional activity in the space to pick up again, however.
“When you step back and look at trade merchandising activity over time — particularly in an attractive environment like natural/organic/specialty, where there is a lot of completion amongst suppliers — there is always someone looking to get more attention,” Zechmeister said. “One way to do that is to put some merchandising dollars on it, so you usually see these things cycle back over time.”