UNFI Wins Giant Eagle Business

JON SPRINGER

PROVIDENCE, R.I. — United Natural Foods last week said that it would begin servicing Giant Eagle with natural, organic and specialty products beginning early next year, continuing the distributor's rapid growth within the conventional supermarket channel.

UNFI made the announcement while reviewing financial results for the fiscal first quarter, which ended Oct. 30. Net profits of $17.4 million increased by 12% on a sales gain of 19% to $1.05 billion. Both figures met analyst expectations.

It was UNFI's first billion-dollar quarter, officials said, and came as a result of several new customers, including becoming Whole Foods' primary distributor in its Rocky Mountain and Southwest divisions and adding new business in Canada.

Steven Spinner, UNFI's chief executive officer, said he expected Giant Eagle's business to be fully integrated by the end of January or the start of February. He declined to specify the size of the business but noted that supermarkets were UNFI's fastest-growing sales channel during the quarter as a result of new customer additions. Pittsburgh-based Giant Eagle had total revenues of $8.2 billion last year, according to SN's Top 75 estimate.

UNFI's sales in the supermarket channel improved by 31% from the same period a year ago (19.1% excluding acquisitions) and now account for 20% of UNFI's total sales, Spinner said. The company currently is bidding for several additional supermarket contracts, he added.

“We are approaching the time of year [when] retailers communicate and begin to execute distributor changes, and we are optimistic about the potential for additional business wins,” Edward Aaron, an analyst for RBC Capital Markets, said in a research note.

The quarter was not without its challenges. UNFI experienced unanticipated costs in getting its new distribution center in Lancaster, Texas, up and running, which contributed to lower gross margins and higher expenses during the quarter. And rapid sales growth came with additional strain on freight costs, as the company consciously chose to keep service levels high rather than move product along the most cost-efficient routes, Spinner said.

Spinner said the company's troubles in Lancaster related not only to the new center but also to a new warehouse management system that launched there simultaneously. A voice-enabled product-selection system malfunctioned as a result of computer firewall issues that have since been fixed, Spinner explained.

Spinner last week said the Lancaster facility was “producing the results we had desired and we're very pleased at this point. But it was tough getting there.”

UNFI will be rolling out the warehouse management system across its various sites over the next two years — a process that could affect the company's abilities to pare costs at a rate that would exceed a decline in gross margins that comes with an expanded product and customer base, Spinner said.

Ajay Jain, an analyst with Hapoalim Securities, in a research note last week said he still had some concern about additional cost pressures as UNFI continues the system rollout and integration of acquired companies. “Based on the scale of integration work related to new customer wins and ongoing supply chain initiatives, the shares appear to be trading ahead of fundamentals and do not appropriately discount the potential for additional operational missteps.”

In other news, UNFI said it had completed a new website, wowzaville.com, designed to help its independent retailers better compete with larger counterparts.