Commentary

United Natural Foods Looks To Grow With $2.9B Supervalu Acquisition

United Natural Foods (UNFI), which is Whole Foods Market’s primary supplier, is buying Supervalu Inc. for about $2.9 billion, including debt. Over time, it will sell off Supervalu’s retail operation — which includes the grocery chains Shop ’n Save, Cub Foods, Hornbacher’s and Shoppers — while expanding its wholesale distribution of “better for you” organic and natural products. 

With the deal, “UNFI lessens its reliance on Whole Foods, a relationship that has been shrouded in uncertainty ever since Amazon acquired the natural grocer. Whole Foods accounts for roughly 33% of UNFI's business and has a contract with the distributor that is set to expire in 2025,” writes CNBC’s Lauren Hirsch.

“It remains unclear whether Amazon will renew that contract or attempt distribution on its own. Loss of that contract could ‘materially and adversely’ impact UNFI's business, UNFI has warned in regulatory filings,” Hirsch continues.

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“This transaction accelerates UNFI's ‘Build out the Store’ growth strategy by immediately enhancing our product range, equipping us to bring an attractive, comprehensive product portfolio to an expanded universe of customers,” says UNFI CEO and chairman Steve Spinner in the release announcing the deal. “Combining our leading position in natural and organic foods with Supervalu’s presence in fast-turning products makes us the partner of choice for a broader range of customers.”

But those customers will not include consumers, Spinner told analysts on the call announcing the agreement. “We’re not going to be in the retail business, it’s just not what we do,” he said, writes Brian Feldt for the St. Louis Post-Dispatch.  

“Spinner will lead the combined entity. Sean Griffin, UNFI COO, will lead the SuperValu integration efforts, post-close, and lead an integration committee comprised of executives from both companies to drive the implementation of best practices from each company,” according to Whole Foods magazine’s coverage.

UNFI is based in Providence, R.I.; Supervalu in Minneapolis. The deal, which is subject to the approval of Supervalu shareholders, is expected to close before the end of the year. 

“With extremely thin margins at Supervalu and organic growth opportunities hard to come by due to the challenging business environment for its wholesale distribution customers, which are primarily independent food retailers or small retail grocery chains that are challenged the most in the current promotional environment,” Moody’s VP Mickey Chadha says in an AP story, “it makes sense to join forces with UNFI.…”

The end has been a long time coming, suggests Evan Ramstad in the hometown Minneapolis Star Tribune, writing that Supervalu has “at last succumbed to the 2008 recession.”

“In early 2006, a bit more than two years before recession hit, Supervalu spent $12 billion to buy more than 1,100 stores of Albertsons Inc., at the time the nation’s second-largest chain of grocery stores. When the economy collapsed, Supervalu still had more than $6 billion in debt and little room to maneuver financially as customers flocked to discounters,” Ramstad continues.

“If we didn't go through 2008-09, it's probably not that big a deal,” Rob Plaza, an analyst at Key Private Bank in Cleveland, who wrote critically of the deal when it was forming in 2005, tells him. “The recession, how deep it was, hurt everybody. People were pushed further to the discounters and away from traditional grocery stores. When you [borrow] to buy it, it puts pressure on the margins. It's a vicious cycle.”

That doesn’t always end well.

“Earlier this year, Supervalu sold 21 of its 38 Farm Fresh stores for about $43 million in cash to three different retailers: Kroger’s Harris Teeter brand, Kroger brand and Food Lion. Of the remaining stores, three — one each in Richmond’s Shockoe Bottom, Virginia Beach and Newport News — were sold to an independent operators. Eleven stores closed, and Supervalu was trying to find buyers for the three other Farm Fresh stores,” the Richmond Times-Dispatch reports.

“Blackwells Capital has pressured Supervalu for months to shake up its business, nominating an alternative slate of six board members and criticizing pay practices and executive use of the company plane. Shareholders were scheduled to vote on the competing board slate and other Blackwells proposals next month,” Heather Haddon reports for the Wall Street Journal.

“Supervalu had said it would shed the underperforming grocery stores. Supervalu also questioned the extent of Blackwells’s stake in the company, adds Haddon, who was not able to elicit a comment from Blackwells. 

Amazon, meanwhile, was otherwise occupied tallying up its “blowout” earnings for the second quarter, as Marketing Daily’s Sarah Mahoney reports in a story that contains an upbeat assessment of its Whole Foods acquisition. 

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