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UNFI Inks 3-Year Safeway Pact

PROVIDENCE, R.I. United Natural Foods Inc. here last week said it secured a three-year supply agreement with Safeway, its largest traditional supermarket customer to date.

Analysts had previously said such a deal was being negotiated as UNFI, the primary supplier to Whole Foods Market and other natural and organic retailers, has been seeking to expand its distribution into more traditional supermarket chains. Earlier this year it began supplying Pittsburgh-based Giant Eagle, following a handful of other traditional accounts it added last year. The expansion of traditional-supermarket accounts followed UNFI's 2007 acquisition of Leicester, Mass.-based Millbrook Distribution Services, which gave it a broader offering in specialty and ethnic product.

“The Safeway deal is yet another strong victory for UNFI's new specialty and natural platform, as well as another validation of its enhanced management team and execution,” said Scott Van Winkle, a Boston-based equity analyst at Canaccord Genuity.

UNFI will assume distribution to all of Safeway's 1,700-plus stores under all banners in the U.S. for non-proprietary natural, organic and specialty products, effective this October. The incremental annual volume from the contract will increase United's annual revenues by approximately 4% in fiscal 2012, the company said.

UNFI said Safeway would wind down its supply agreements with its current supplier of natural and organic product, which include Kehe Food Distributors/Tree of Life and DPI Specialty Foods.

Van Winkle estimated the new agreement would add $190 million to UNFI's sales volume in the current fiscal year and “roughly $225 million to $250 million on a calendar year basis.”

“The size of the deal appears to be in line with expectations of investors who have long anticipated this deal, although probably not as long as UNFI has been working to secure it,” he quipped.

UNFI said it will incur approximately $1.5 million to $2.5 million in total start-up expenses during the fourth quarter of fiscal 2011 and the first quarter of fiscal 2012 to transition this business.

Safeway declined to comment on the transition of the business.