United Natural Foods FY 1Q16 Earnings Call Notes

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United Natural Foods’ (UNFI) CEO Steven Spinner on Q1 2016 Results

We’re operating in a rapidly evolving environment, with an increase in competition across every channel

“I believe we can all agree that we were — we are operating in a rapidly evolving environment. We all know that consumer preferences for healthier food option have been changing for the last several years. In fact, the acceleration that has taken place over the last 6 to 12 months has been spectacular and this is demonstrated by the significant and rather recent increase in the number of retail options for consumers to purchase natural organic products. As a result, we’ve seen an increase in competition across every retail channel and corresponding competition within wholesale distribution and supply chain. ”

There is no doubt that today we are mainstream

“Private label natural and organic products which we estimate at approximately 30% of the retail market is growing extremely quickly and center store is under pressure as consumers choose fresh and healthier option. Throughout the 90s and up until 2014, our industry was a niche. There is no doubt that today we are mainstream.”

M&A will play an accelerated role in consolidating manufacturers. Gross margins will continue to decline

“M&A will play an accelerated role in the consolidation of manufacturers and producers within natural, organic, and specialty. M&A will play an accelerated role in the consolidation of food retailers driven by cost reduction and differentiation. Gross margins will continue to decline as competition increases both at retail and wholesale, forcing a greater reliance on differentiation, efficiency, and scale.”

Acquisition pipeline strong

“The DPI would not have been on our list for a variety of reasons. But there are a ton of specialty, ethnic, gourmet, fresh, fresh across probably five or six or eight different channels. And so our pipeline is really strong. We got done making the Tony’s acquisition 16 months or so ago, we feel like we’re ready to do another one. We feel that the valuations for us are still realistic and so we — I’m extremely optimistic that we’re going to make some good progress there.”

Not seeing customers moving to self distribution

“On self distribution, I haven’t seen a lot of change in movement to self distribution. As a matter of fact we’ve had a great deal of success in moving some customers away from self distribution. I mean, if you take a look at the $785 million in contract expansion, a large percentage of those contracts have their self [ph] distribution option. And so, I think it’s something that we see as retailers having a tremendous confidence in the services that UNFI provides that they just can’t do themselves.”

There is increased competitive pressures across a wide berth. Our margin certainly isn’t going to go up

“I mean there is the increased competitive pressures across a pretty wide berth, right. So because so many more retailers carry the product, so the retailers themselves are competing with one another. On the supply chain side, many more wholesale distributors they’re direct et cetera, et cetera are carrying the product which is making it more competitive. And so, I think as you look at UNFI as I said earlier, our margin certainly isn’t going to go up as we renegotiate these contracts. So the challenge for us is to make the distribution system and the supply chain related to it more efficient.”

This is what happens when you go from niche to mainstream

“I think that because we’ve gone from a niche to something that’s very mainstream, I think the natural occurrence across whether it’s the retail level, or at the wholesale level, at the supply chain level it’s going to become more competitive whether it be for services or whether it be ultimately for the price of the consumer.”