Q&A: UNFI President Chris Testa wants to help grocers find ‘the sweet spot’

Chris Testa (photo below) has served as president of United Natural Foods Inc. (UNFI) since July 2018 and also as chief marketing officer since April 2019. Last month, the company veteran saw his role expanded to include responsibility for UNFI’s professional services, supplier services, customer care and Canadian division. With UNFI and Supervalu completing their merger in October 2018 and operating as one company since June 2019, Testa see lots of growth potential for the distributor’s natural and conventional grocery offerings and portfolio of retailer services. He also sees a company well-positioned for e-commerce and the emerging omnichannel business model. Supermarket News Senior Editor Russell Redman met with Testa in the UNFI booth at the recent 2020 NGA Show in San Diego. Here are excerpts of the discussion.

SUPERMARKET NEWS: What is UNFI doing to support independent grocers and draw more independent grocery business?

CHRIS TESTA: Well, by far it's our largest segment, the independent grocer. We have the natural side, which has quite a big independent base as well, and the Supervalu side. It's a challenging environment right now, and we want our customers to be viable and have sustainable business.

The way we approach it is, we're going to find the sweet spot or come up with a custom set of solutions for every customer, depending on their needs. So, for example, if you're a conventional customer and you haven't introduced kombucha or any natural products, or we will help you do that. We'll do category management. We'll fix the mix. We'll bring in the right products. We have a professional services organization that can come in and take money out of your back of the house. Operations like payroll services. And we can leverage our buying power, for example, so they can use us for credit card processing. We just signed on a natural customer, and we're going to save him $200,000 a year in credit card processing, which is a pretty significant P&L boost.

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And we do that type of stuff all day, every day. Store merchandising, coupon processing and on down the line. We can put in Amazon lockers. We can put Bass Pro Shops in front of it. That’s just some of the tools that we have to help the independent stay viable. What makes you special is finding custom solutions for the customers. And that's our way to approach them.

SN: This is something that UNFI offered before the merger with Supervalu, or they augmented what you had?

TESTA: Augmented. We both offered it separately. Natural never had professional services before. We had category management. But together, that's the beauty. That's the thing that nobody else has, this unique set of solutions. The hard part is figuring out exactly what each store needs. We have 5,000 SKUs in our private brands business. If you were take our private brands group and look at our retail sales, it would be the 40th- to 42nd-largest CPG in the food and beverage industry. We do over $2 billion in retail sales with our brands.

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So we can bring those to the customers and say, ‘Here are the right products and the right mix for you.’ They want e-commerce, click-and-collect. It’s a big deal right now, right? We have a national relationship with Instacart, and we have an e-comm department. We could set up the customer’s website so they can do click-and-collect or delivery to home. We help them participate in this. Yes, we have awesome products. Yes, we're closer to the customer. Yes, we can do it cheaper than everybody else. Sixty distribution centers, you know, all of those things. But those are table stakes. We can find solutions.

One of the smartest things we did, six months ago, is move to four distinct regions, each with a region president. We're $23 billion company. The worst thing we can do is act like a $23 billion company. So we have these region presidents — these amazing people that have been in this industry for 20 to 30 years — and they can find that sweet spot for the customer. We have anywhere from 30,000 to 40,000 customers, and the region presidents can help us act small and customize our approach.

SN: What does Supervalu bring that UNFI needed to compete that it didn't have before?

TESTA: There are several things. One, knowledge and people who really knew the conventional [grocery retail] trade. People who understood how to sell conventional [grocery] on the natural side of the business. We had no idea. No. 2, if you looked at what's happening in the industry, natural was selling more conventional, and conventional was selling more natural. Neither of us could do it alone. So when we acquired Supervalu, it gave us an ability to sell conventional. Trying to do it on our own, we didn't have the supplier relationships. We had the customer relationships, but we didn't have the route to market. We go to market differently. The suppliers are handled differently. So, obviously, it got us into conventional brands.

I mentioned [private] brands earlier. The brands portfolio on the natural side of the business was about $150 million. The brand side on the conventional side of the business was about $1 billion. So now a very robust, big brands business. And professional services. We were growing with natural, and it was fun when natural was growing 12% to 15% and new stores are opening up all over the place. But that growth is not there anymore. And we didn't have a way to bridge that trend we saw, this blending of conventional and natural. But Supervalu allowed us to.

UNFI generates more than $2 billion in retail sales with its private brands.

SN: Where do things stand now with the integration of UNFI and Supervalu since the acquisition?

TESTA: We closed two Octobers ago [October 2018]. So we're about 16 months in right now. Leading up to that close, we quickly realized that keeping these companies separate was not the way to go, that we had to bring them together. Today, I can tell you that the vast majority of the integration is behind us. There was a cadence behind it. Phase one, all the back-of-the-house, non-customer-facing functions. All that stuff happened first. The next thing we did, about a year ago, was integrate our operations team — 60 warehouses is a lot to manage. So it's the same regional structure. Four regions, and each region has a VP of operations that reports to it, an SVP that reports. So we’ve nationalized our operations system.

Then last August, we integrated our sales team so there's no natural team and no conventional team but one sales team. What’s next down the road is one [core IT] system. We're still operating on two systems. Down the road, we'll integrate the system, That's really the last piece. But culture has been integrated, our people have been integrated, our operations have been integrated and our sales have been integrated. We don't look at things as natural and conventional anymore.

SN: When UNFI announced the acquisition, Supervalu was already divesting its retail grocery chains. Where do things stand now with Shoppers and Cub Foods?

TESTA: When we came out with the acquisition, we announced that we wanted to divest retail. I don't know if you know this, but at one point the natural side of our business had a retail chain called Earth Origins. We got out of it. So they [Shoppers and Cub] are both in the sale process right now. It's very important for us, specifically with Cub, to have a distribution agreement. We have a warehouse in Hopkins, Minn., that supports the Cub franchise as well as all of our other customers there.

SN: You talked about the convergence of conventional and natural grocery. What other industry trends led UNFI to transform itself? In the grocery business, they seem to be coming in all directions.

TESTA: They are. Look, store bankruptcies are a real deal. There are less stores today than two years ago in grocery — never mind the rest of retail. Twelve thousand retail stores closed in 2019. Twelve thousand. Now that goes beyond just grocery, but still there are less stores to sell to. Merging these two things [natural and conventional grocery] allows us to ride the waves, right?

So all those consumers from Lucky's and Earth Fare have to go shop somewhere, and we're seeing them come and shop at our other customers, which is a good thing. So that's No. 1. A more diversified customer base has really helped us with the trend of shrinking [retail stores]. Two is building out the store, and that means selling more to the same customer. As the pie gets smaller, we can still grow because we're adding more and more products to our truck. For example, natural never sold conventional meat before. We never sold conventional produce. We never sold the conventional brands, and conventional never had this portfolio of natural. We call it building out the store. It's one of our core strategic pillars.

And No. 3, I’d say, is we're seeing tremendous growth in e-commerce. But it's actually been good for our customers, because most of that growth is coming through click-and-collect and deliver to home. Those are products that are running through the register. Now it might be a third-party shopper, but what we do is help our customers participate with that turnkey e-comm solution that I was talking about earlier.

If you look at the trends, private brands is growing — check, we got that. E-comm is growing; we have a solution there. Store closures are happening; we can ride that wave. So even with all these things happening, we actually feel like we're in a pretty good position.

SN: In one of the NGA Show sessions I went to, they talked about being able to put conventional and natural/organic products on the same truck for distribution to stores. So are things like that going on at UNFI?

TESTA: Yeah. It's small scale right now, what we’re doing. We can do cross-docking. We just launched two weeks ago. We're putting our top 2,000 to 3,000 natural SKUs into the conventional system. So one system, one invoice, one pricing, one promotional schedule, everything that our conventional customers are used to. Now they have access to 3,000 natural products that they never had before. And those products are curated by ZIP code. We aren't just throwing in the top SPINS product. We're doing it by region to make sure that those are the right products. Then our salespeople going out and saying, ‘Here's what natural on training wheels looks like. Here are the first 250 SKUs you should take, and here are the next 250 you should take. And we'll help you put promos against it.’ All that product is riding on the same truck. We are doing lots of cross-docking so, with our systems, we are figuring out how to get this small pallet married with these five pallets and out to the customer.

UNFI has begun shipping a mix of natural and conventional grocery products to retail customers on the same truck.

SN: Whole Foods Market has been UNFI’s largest single customer. How its ownership by Amazon affected its relationship with UNFI — or has it?

TESTA: The sales have been outstanding. We continue to grow with Amazon, double digits, and we have since Amazon officially made that acquisition. So the relationship is great. It's a very mutual, beneficial relationship. If you look where our warehouses are, it's not a coincidence that they’re positioned near Whole Foods regions. They respect what we do and need us, and we obviously respect them. They are a great operator. And since Amazon has come on, I think they've taken some risks. They've made a lot of investments in price. They've added some new SKUs to their stores, they continue to open up new stores and we've been growing with them. So it's been a very healthy relationship.

SN: You probably can't answer this, but I'll ask it anyway.

TESTA: Go ahead.

SN: You see all of these reports about Amazon planning a new grocery chain. Is UNFI in the mix for supplying it?

TESTA: I can't comment on that. But I will tell you that there are stores opening up in Southern California. We service both Amazon and Whole Foods today. We have a brand-new, 1.1 million-square-foot facility in Southern California that's selling conventional and natural food. So we are positioned to service Amazon for that store and any other store that they're ready to open up.

SN: Does UNFI serve any of the Amazon Go stores?

TESTA: We do. Amazon has been a customer for a long time. Another thing they’ve done is remove the fee for AmazonFresh.

SN: That is a big deal.

TESTA: It is a big deal. They're doing a lot of volume through that.

SN: Essentially now, if you're a Prime member, you get free delivery of groceries if you order $35 worth.

TESTA: That's right. And in some regions, it's interchangeable with the Whole Foods deliveries as well. Amazon is making it very easy for consumers not to leave their living room. They do a very good job with that. We love the partnership. We're always thinking about the next five years, and I think they're like-minded in that way. It's a good partnership.

Providence, R.I.-based UNFI topped $21 billion in sales for 2019.

SN: How is UNFI had to adapt the way it serves customers with rise of e-commerce and an omnichannel retail model?

TESTA: Well, we've certainly done that. I think omnichannel is the only way that any retailer or wholesaler can survive. The way we've adapted is that we just look at food and customers and solutions, not necessarily natural food or conventional. That's No. 1. I think No. 2 is that we look at the whole store now, all four walls — floral, produce, deli meats, center store, perishables, Amazon lockers in the front, the back-of-the-house operation. We look at the whole store as an opportunity, and that's been a change for both companies.

One of the things we're looking at very closely is same-store sales, because what we want to do is take those costs out for the customer, aggregate their purchases, and then also take the cost out for us by putting more on the trucks. So that's the way we're looking at it.

SN: Is fulfillment for online orders coming from the stores or from you guys?

TESTA: E-comm is growing, but it's not in brown boxes showing up at people's doorsteps. E-comm is growing through click-and-collect and deliver to home. We own a retailer, Cub Foods, that is the top market share in Minneapolis, and our growth with click-and-collect and deliver to home is unbelievable. The basket size is unbelievable. So we're reaping the benefits of that. Yes, it costs more money, but we're participating in that.

I think humans are going to walk into stores. They’re going to go get their groceries. Ordering Kashi cereal in a brown box delivered to my home, I don't think that's where the volume is going to go in the next 10 years. I think where it is going to go is deliver to home and click-and-collect. You're going to see more dark stores open up. That's already happening. Stores that may have a small footprint in front for perishable, but everything else is in back and it's all through automation. You order on your phone and you swing around and you pick it up. Or no storefront at all; it's just going to be click-and-collect. You're going to see more of those open up, which is good. We can service those as well. We do.

SN: I don’t see people going to stores any less, even with online ordering. I think they’re just buying more.

TESTA: They are. I think what’s missing are the impulse purchases [in-store]. I think you're seeing that contract a little bit. But it's just too easy to press a button. I don't know where you do your clothes shopping. I hate clothes shopping. I haven't been into a clothing store in five years. At least. It's just too easy to get it and send it back if I don't like it. Food is different. Amazon is opening brick-and-mortar stores for a reason. This is the No. 1 dot-com company in the world, and they're opening up a brick-and-mortar store. So that tells you something. To be in this game, you’ve got to have a store, in my opinion.