Tuesday, February 12, 2008

Distribution Memo: UNFI: North America's Quiet But Hugely Successful Natural Products' Middle-Man

Between its 2003 and 2007 fiscal years, both sales and income have doubled for publicly-held Natural Products' Distributor United Natural Foods, Inc. (UNFI). Along with that impressive performance, over the last five years the stock of the Daytonville, Connecticut-based distributor has returned a whopping 125%.

To put that achievement in some perspective, super-successful supernatural retailer Whole Foods Market, Inc., which happens to be United Natural Foods' number one retail customer accounting for about 31% of its overall sales, had an 86% return over those same five years. Whole Foods' five year return is considered phenomenal by Wall Street. Since UNFI's return is 39% higher than Whole Foods' same-period return, you can pick your own adjective to describe it.

Towards the end of 2007, UNFI also made a major acquistion in the specialty foods distribution segment of the industry. The leading natural products' distributor in the U.S. bought one of the leading specialty foods and general merchandise distributors in the country, Millbrook Distribution Services.

Massachusetts-based Millbrook distributes dry grocery and perishable specialty foods, confections, health, body and beauty care lines, and non-foods' general merchandise items, along with a few other categories. The distributor, which services numerous large supermarket chains and mass merchandisers including Wal-Mart, had sales in 2007 of about $300 million.

UNFI had sales of $3.3 billion this fiscal year (Millbrook is not counted in those sales). The company distributes over 40,000 items, and will add thousands more with the Millbrook acquisition. UNFI says it plans to operate Millbrook seperately but will fuse the two distribution companies together as much as possible in terms of allowing the company to capture synergies and new market opportunities.

Among those opportunities for UNFI is getting into the specialty, ethnic and gourmet foods' categories--all areas Milbrook is a national distribution leader in--as well as being able to expand its reach in the supermarket class of trade by virtue of the fact the overall company will inherit Millbrook's many large grocery chain accounts, as well as Wal-Mart.

Today, UNFI is clearly the leading Natural Products (and now specialty foods as well) distributor in North America. It's almost five-times the size of its closes competitor, Florida-based Tree of Life, Inc. Just a few years ago, Tree of Life was as big as UNFI. However, because of a number of serious major strategic and business mistakes by Tree of Life senior executives (they are all gone now), combined with UNFI's success and rapid growth, the distributor--led by CEO Michael Funk, a former hippy and the creater of UNFI's crunchy, hip, low-key yet aggressive culture--is head-over-shoulders the leader in natural products wholesaling in North America.

Today's Fortune Magazine has an article, "Health foods' hidden power broker," about United Natural Foods, Inc. and CEO Michael Funk. We recommend reading the entire piece. Read the full Fortune article here. You can also view a video about the company at the link.

The Fortune piece provides some good early history on UNFI (the old Mountain Peoples days), as well as talking about how the original Whole Foods Market connection was forged with Walter Robb, who was then running the supernatural grocer's Northern California operation. Robb is now the co-president and COO of Whole Foods Market, Inc. Lastly, the article offers some nice insight into Michael Funk, and what he's doing these days, in addition to running the distribution company.

We happen to know a little about how Walter Robb brought then Mountain People's Warehouse on as Whole Foods' Northern California primary distributor back in 1994. Fortune has it right, although they offer limited details. They should, since they interviewed and quoted Robb for the story.

Since UNFI also was the primary distributor for Wild Oats, it's safe to say the Whole Foods/UNFI relationship is getting even tighter and stronger. Of course, one never knows if Whole Foods' might decide one day soon to become a self-distributing retailer of say its fastest 20% or 30% of natural products items. We think the Millbrook acquisition was smart and will help UNFI diversify a bit more from that roughly 31% of the company's annual sales that comes from a single-source, Whole Foods. Diversity is good even in great marriages.

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