It has not been necessarily the best of times for United Natural Foods Inc. (UNFI), but the distributor’s CEO said the company is on the verge of a breakthrough.
During its third quarter earnings call on June 5, UNFI delivered its third consecutive quarter of improved profitability.CEO Sandy Douglas said an updated strategy, including a three-year plan, is expected to generate free cash flow approaching $100 million in fiscal year 2025, as well as stable and dependable profit and cash flow growth.
UNFI also extended a contract with its largest customer, Whole Foods Market, in May and additionally launched its own retail media network — the UNFI Media Network — just 24 hours after the Whole Foods deal was announced.
The momentum is certainly there for UNFI, and Supermarket News recently spoke with Douglas about what he sees for the company moving forward.
Supermarket News: Your most recent earnings call saw the third quarter in a row where profit was basically going in the right direction. What caused that shift?
Sandy Douglas: We established this fiscal year, fiscal ’24, as a reset year from a profitability standpoint so we could continue to invest in capability. And that set a benchmark. And then as the first quarter and the second quarter and the third quarter happened, we’ve slowly improved our EBITDA margins. And what’s driven that is a combination of things, but mostly actions to get more efficient and more productive.
SN: When do you think you’re going to start producing strong consecutive earnings reports, meaning growth in net sales, profitability?
SD: If you did the analysis, you’d see … that the fourth quarter will be a strong quarter from a growth standpoint in sales and profitability versus last year. But I think that the bigger vision which we started to communicate is that we completed with our board the next three-year plan for UNFI that’s very focused on our customers and our suppliers, and importantly giving our shareholders a reliable improvement sequentially with a No. 1 metric being free cash flow.
SN: Would you care to go into any specifics about that plan and what really needs to happen?
SD: Our goal is to continue to try to grow and be an even bigger resource to [our customers], and by doing so, be an attractive partner for suppliers who want to activate their brands within the retail customer base of UNFI and create a virtuous cycle of investment. If you couple that sort of growth orientation with continued efforts to be more efficient and to use capital wisely and to optimize our distribution network, you’ve got all the parts of the plan.
SN: Talk about your retail media network that was announced a couple of weeks ago. What is the strategy behind it?
SD: Up until now, retail media has been largely the province of the largest retailers in the industry, and they created billions of dollars of new profitability that they’re able to invest back in their stores and in their pricing and bottom lines. And so, what we tried to build is a facility for independents to be able to participate in retail media investment.
SN: What would be the perfect retail media network in your mind?
SD: When I was at Coke, the thing we knew worldwide was that independents were the driver. The more diverse and vibrant the channel base, the more healthy the brands were and the more you could grow profitably. What we’re trying to do with retail media at UNFI is make it possible for that virtuous cycle to happen given a completely new stream of investment that’s coming in to drive growth. And we’re optimistic, it’s early, we’ll see how it goes, but it’s important that we do that in the independent market the way that the biggest retailers have done for the last couple of years.
SN: UNFI recently renewed its contract with Whole Foods. Tell me about the importance of that.
SD: We have a wonderful relationship with them as we do so many of our customers. And it’s built on the idea that if we work together, we can create more value than we did yesterday by working better together tomorrow. And that’s what this agreement represents.
SN: Talk to me about UNFI’s new supplier programs and how that plays into the current strategy.
SD: The wholesale market has been sort of a necessary evil to consumer products companies and we aren’t very popular with them because what they’re interested in is the sale that happens in the stores. I think the objective of our new supplier program is to shift from friction to support. What we’re trying to do is earn our way to getting their support in an incremental way and helping them accelerate growth, move from paying for slotting to free slotting so that our customers get new items faster, not slower. It’s a change in orientation to try to earn their resources through helping them grow and helping them see opportunity through data so that they can drive their programming more aggressively into independence and then have that benefit system fund what we need as opposed to friction.
SN: You hired a new president and CFO, Giorgio Matteo Tarditi, who does not come from a grocery retail background. What went into his hiring?
SD: Matteo’s background was that he was a senior finance executive at GE and was CFO of a multiple of their largest businesses as they’ve restructured and turned GE around. And when we were interviewing, we met him and realized the potential that he could bring to help us build Six Sigma lean capability to help us drive effectiveness and efficiency. He is a quick study and I think is going to bring a lot to a management team that is a mix of industry veterans and new talent and hopefully help us get better faster.
SN: Sources we’ve spoken with say that UNFI is getting ready to sell. Any comment?
SD: No. I think the important question underneath the question is what’s our outlook? We have just approved a three-year plan. The industry environment is expecting companies like UNFI to step up and be an incremental source of value for retailers around the country.
SN: We have also heard that the 2018 SuperValu acquisition has been a rocky one.. Do you want to comment on how optimizations, systems, and deliveries are performing?
SD: Fourteen months after the deal was signed, COVID started, and it’s been a bumpy, bumpy ride for the industry. And so it’s been a volatile period for the industry. There’s a whole lot of great components of SuperValu that are now part of UNFI. And I would say our process of integration and making the most of that investment is ongoing, but I like a lot of what we got in it and we’re working to create the most valuable company possible.
SN: Over the last several months, hundreds of UNFI truck drivers have joined unions. How do you feel about this and what is your strategy behind labor management?
SD: We’re in a very pro-union time and UNFI values our partnership with the unions. We ultimately support our associates. And having a very good workforce that’s skilled, that retention is going up with it is an important part of our productivity and our ability to provide good service to our customers. And so we work with unions as they are part of our system.