United Natural Foods, Inc. - Company Profile, Information, Business Description, History, Background Information on United Natural Foods, Inc.

260 Lake Road
Dayville, Connecticut 06241

Company Perspectives:

We believe that we are well positioned to provide value-added distribution services to our customers at attractive prices while also providing superior customer service. In addition to our volume purchasing power advantage, a critical component of our position as a low-cost provider is our management of warehouse and distribution costs, primarily as a result of utilizing larger distribution centers within each of our geographic regions and integrating our facilities through our nationwide interregional logistics network. In addition, we have made significant investments in transportation equipment and information technology to enable us to serve our customers.

History of United Natural Foods, Inc.

United Natural Foods, Inc. is the leader of only two nationwide distributors of natural foods and related products. Originally known as Cornucopia Natural Foods, Inc., the company has expanded through strong internal growth, acquisitions, and mergers; it is the only publicly traded distributor of natural and organic foods. United Natural has over 6,500 customers--including independent retailers, natural superchains, conventional supermarkets, and restaurants--located in 46 states. The company is the primary supplier to a majority of its customers, offering them a mix of more than 26,000 high-quality national, regional, and private-label natural products. These products include groceries and general merchandise, nutritional supplements, bulk and foodservice products, perishables and frozen foods, and personal care items. For over ten years United Natural has been the primary distributor to the two largest natural superchains: Whole Foods Markets, Inc. and Wild Oats Markets, Inc. To complement its distributorship, the company also owns and operates the National Retail Group (NRG), which consists of 11 retail stores selling natural products in the eastern United States. The company has organized its 12 distribution operations into four principal units: United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods, Inc. and Stow Mills, Inc.); Rainbow Natural Foods, Inc. in the Central Region; Mountain People's Warehouse Incorporated in the Western Region; and Albert's Organics, Inc., serving select markets throughout the United States. For the 1999 fiscal year ending July 31, 1999, United Natural generated net sales and operating income of $857 million and $26.8 million, respectively. Compared to the net sales and operating income of fiscal 1994, these numbers represent compound annual growth rates of 20 percent and 26.1 percent, respectively. On June 29, 1999 Standard & Poor's added United Natural Foods to the S & P SmallCap 600 Index.

The 1970s: Going Back to Nature for Business

The 1970s could be seen as a time of search for relevance between "the world that had been" and "the world that was becoming." Entrepreneurs made and sold tofu; they raised and marketed herbs as well as organic and natural foods. Yoga gained popularity as a calming form of exercise. According to Elaine Lipson's comment in the February 1999 issue of Natural Foods Merchandiser, in 1979 the editorial staff of that periodical used typewriters to chronicle the growth of the natural products world. There were no fax machines, web sites, or compact/digital-video discs and players. The period of transition between the rebellions of the 1960s and the excesses of the 1980s, Lipson wrote, was a "perfect breeding ground for natural products visionaries ready to blend alternative lifestyles with business potential."

One of these visionaries was Norman A. Cloutier, who founded Cornucopia Natural Foods, Inc. (Cornucopia) in Coventry, Rhode Island. From 1977 to 1978 he operated Cornucopia as a retail store for natural foods. In 1979, however, Cloutier changed his focus from retailing to the distribution of natural foods and related products. Although most natural products were food products--which included organic foods--the natural products industry encompassed a number of other categories, such as nutritional and herbal supplements, toiletries and personal care items, naturally based cosmetics, natural/homeopathic medicines, and naturally based cleaning agents.

As a matter of fact, by changing from retailing to distribution, Cloutier zeroed in on an emerging need in the rapidly expanding natural products industry. Suppliers of natural products found it difficult to meet the demands of an increasing number of retail outlets; they relied on distributors to reach a fragmented customer base and to provide information on consumer preferences at the retail level. Retailers wanted more frequent deliveries, greater product selection, higher fill rates, more information on product movement, and specialized programs--such as financing information, merchandising assistance, marketing support, and assistance in consumer education. Cloutier envisioned the possibility of meeting these needs through a national natural products distribution business that would provide the sourcing, purchasing, warehousing, marketing, and transportation of natural products from suppliers to retailers.

Launching a National Presence: 1980-95

At first, Cornucopia grew by acquiring other distributors of a variety of natural foods and related products. For example, in 1985 the company purchased two distributors to strengthen its position in the New England market and to establish distribution in the mid-Atlantic states: Harvest Provisions, Inc. of Boston, and Earthly Organics, Inc. of Philadelphia. Cornucopia also acquired two specialty suppliers of natural products. In 1987 the company bought Natural Food Systems, Inc.--a distributor of seafood and owner of the "Natural Sea" brand; in 1990, Cornucopia acquired certain assets of BGS Distributing, Inc.--a regional distributor and manufacturer of vitamins and the holder of distribution rights to several additional product lines. Furthermore, in 1991 the company made its way into the southeastern United States by opening a distribution center in Georgia.

Then, in 1993, Cornucopia added retailing to its distributor operations by forming the Natural Retail Group with the intention of acquiring retailers of natural products. The NRG strategy consisted of buying independent stores but keeping the former owners to run the stores. By April 1995 Cornucopia owned and operated eight natural food stores located in Connecticut, Florida, Maryland, Massachusetts, and New York. The company believed that these stores received a number of advantages: Cornucopia provided its financial strength and marketing expertise, economies of scale resulting from group purchases, and access to a wider selection of products. The NRG retail stores offered products in each of Cornucopia's six main distributor categories as well as produce, meat, poultry, fresh seafoods, baked goods, and other prepared foods. In addition, NRG provided consumer education through informational brochures, promotional flyers, seminars, workshops, cooking classes, and product samplings.

On the other hand, benefits also accrued to the parent company, which was both the owner of, and distributor to, its retail stores. Cornucopia controlled the purchases made by these stores; increased the distribution and marketing of its private label products; and stayed in touch with the retail marketplace. Furthermore, in these NRG stores, the company could test and evaluate consumer reaction to select products before offering them to a broader, national customer base.

Having established itself in the eastern United States, in May 1995 Cornucopia reached across the country to purchase Seattle, Washington-based Nutrasource, Inc.--a distributor of natural products in the Pacific Northwest region--and in July acquired Denver-based Rainbow Natural Foods, Inc. (Rainbow)--the largest distributor of natural products in the Rocky Mountains and the Plains areas.

1996-99: Stabilizing a National Presence

Cornucopia buttressed its entry into the West in 1996 when it completed a merger with Auburn, California-based Mountain People's Warehouse, Incorporated--the largest distributor of natural products in the western portion of the United States&mdashø form a new company: United Natural Foods, Inc. Cloutier had succeeded in crossing the country with his company. On the other hand, Michael S. Funk--founder and president of Mountain People's--thought the merger broadened 'Mountain People's buying power and enabled the company to offer more services and a wider selection of natural foods and products,' according to the April 20, 1996 issue of the Sacramento Bee. United now had five distribution centers strategically located in the states of California, Colorado, Connecticut, Georgia, and Washington as well as two satellite staging facilities in Florida and Pennsylvania. The company was well positioned to offer nationwide distribution services: namely, next-day delivery service to a majority of its active customers and multiple deliveries each week to its largest customers. Cornucopia now could better coordinate its inventory management with regional purchasing patterns and realize significant operating efficiencies. The company also was able to eliminate geographic overlaps in distribution; integrate administrative, finance, and accounting functions; expand marketing and customer-service programs; and upgrade information systems.

United Natural, however, did not centralize the making of decisions for the majority of its purchasing, pricing, sales, and marketing. These managerial activities remained at the regional level in order to expedite response to the preferences of regional and local customers. Each of the three 1996 regional operators (Cornucopia, Rainbow, and Mountain People's) were better suited to make these decisions because they had extensive knowledge of the local and regional taste preferences in their particular marketplace and could provide products to accommodate local trends. By the end of fiscal 1995, the company's net sales had risen to $283.32 million, compared to $124.37 million at the end of fiscal 1992. United Natural filed an Initial Public Offering on September 4, 1996 and began to trade its stock on the NASDAQ under the ticker symbol UNFI on November 1, 1996.

The company's private label products addressed the preferences of customers wanting products not offered by other suppliers. For instance, in 1997 United Natural launched an organic infant food product called Organic Baby. In the February 1997 issue of Natural Foods Merchandiser, Emily Esterson commented that sales in baby food were declining because 'baby boomers' children were past baby-food age.' In most natural products stores, the only available organic baby food was that of Earth's Best, owned by Pittsburgh-based H.J. Heinz. United Natural was interested in expanding to serve innovative, highly specialized niche markets. Other private label products included Clear Spring Waters, Farmer's Pride eggs, Guardian vitamins and supplements, Natural Sea fish products, and Gourmet Artisan pasta and oils. Each year United Natural studied both existing and anticipated consumer preferences in order to evaluate more than 10,000 new products in the natural, organic, ethnic, gourmet, and specialty areas. The company purchased products from approximately 1,800 suppliers and also sourced products from suppliers throughout Europe, Asia, South America, Africa, and Australia.

United Natural reached its goal of being the nation's largest distributor of natural foods and related products in November 1997 when it completed a merger with Chesterfield, New Hampshire-based Stow Mills, Inc., a distributor of natural foods and related products in New England, New York State, the mid-Atlantic states, and the Midwest. According to Emily Esterson's article 'United Adds Stow, Strengthens Midwest Region,' in the August 1997 issue of National Foods Merchandiser, Stow had sales of $208 million for fiscal 1996 and distributed 12,000 products to stores in the Northeast, the Midwest, and the mid-Atlantic regions. The merger 'filled gaps in United Natural's services by adding warehouses in New Hampshire and Pennsylvania, plus a Chicago facility that Stow Mills acquired when it bought Rainbow Distributing in 1996,' Esterson wrote.

Cloutier also pointed out that Stow brought additional natural products expertise to the company because 'Stow is a well-established, sophisticated operation with experienced and talented staff. There is no shortage of good ideas in the industry, but what separates the successful from the unsuccessful is organizations with the expertise to execute plans,' said Cloutier. Furthermore, he noted that 'despite the growth of the company and concerted efforts to reach conventional grocers, United remained loyal to independent retailers, which made up approximately 60 percent of the company's sales.' According to the June 30, 1997 issue of Sacramento Business Journal, United Natural President and Vice-Chairman Funk commented that by 1997 the natural foods industry was increasing by 15 percent a year and that conventional supermarkets were selling more and more natural foods products. 'More people are aware of diet and how it affects our health and are into self-healing,' Funk said, and added that an aging population would fuel continued growth of the industry.

In February 1998 United Natural acquired Hershey Import Co., Inc., a business specializing in the international trading, roasting, and packaging of nuts, seeds, dried fruits, and snack items. In September of the same year United Natural bought Albert's Organics Inc., a company specializing in the purchase, sale, and distribution of produce and other perishable items. Albert's was the country's largest organic produce wholesaler, according to the March 17, 1997 issue of Business News New Jersey. Since 1985 United Natural had successfully completed 20 acquisitions and/or mergers of distributors, suppliers, and retail stores. The company's net sales increased to $728.9 million for fiscal 1998, compared to $634.8 million for fiscal 1997.

1999-2000: Reorganizing for a New Millennium

United Natural became a primary source of supply to a diverse base of customers having significantly varied needs. To meet these needs the company distributed over 26,000 products consisting of national brands, regional brands, and private label brands. The company held distribution rights to more than 1,000 nationally known products. Over 800 regional brand products were distributed to consumers in specific geographic regions. United Natural's decentralized purchasing practices enabled regional buyers familiar with consumer demands in their respective regions to offer products of special appeal to these regional consumers.

During fiscal 1999, after an operations and logistics study, United Natural found that $3.4 million could be saved in the northeast region if the company operated two warehouses instead of three in that area. Consequently, the business of the Chesterfield, New Hampshire-based warehouse of Stow Mills was integrated into the Dayville, Connecticut facility and into the expanded New Oxford, Pennsylvania warehouse. Continuing problems and expenses related to the consolidation resulted in lower sales, lower gross margins, and higher operating expenses in the East for the first quarter of fiscal 2000. Furthermore, Chairman and CEO Norman Cloutier resigned for personal reasons, and top management had to be restructured. Michael S. Funk, United's vice-chairman and president, was elected to succeed Cloutier as CEO. Thomas B. Simone was elected chairman of the board, where he had served since 1996; he was president and CEO of Simone & Associates, a consulting company for healthcare and natural products investment.

The change of management came at a time when sales of natural foods were still spiraling upward. According to industry analyst David Wanetick--who chaired the 1999 Natural Foods Industry Conference--sales of natural products continued to grow because of increased accessibility. 'While there were fewer than 90 natural products stores in 1990 with more than 5,000 square feet,' Wanetick told Natural Food Merchandiser, he expected 'the number of these stores to reach 1,000 by the year 2000.' Wanetick commented that another factor propelling sales of natural foods was Americans' increased health consciousness: 'Millions of American adults are now watching their fat intake and monitoring their dietary cholesterol,' he explained. Among other trends beneficial to the natural foods industry, Wanetick noted, were the fact that rising costs of healthcare led more people to take better care of their health and that gourmet cooks advocated the use of natural products to ensure better taste. Yet, 'despite all these growth drivers, natural foods have barely penetrated their markets. Since natural foods account for only 2.5 percent of the total food market, natural goods still have a great deal of potential,' Wanetick emphasized.

Indeed, as the 20th century drew to a close, mainstream customers 'were moving in unprecedented numbers into the natural products channel,' according to trends in the natural marketplace reported in the December 1999 issue of Natural Foods Merchandiser. Uppermost in the minds of these consumers was 'the concept of `whole health'--an aggregation of many different lifestyle and shopping choices into a self-directed program of healthful living.' From its earliest days of operation under predecessor Cornucopia Natural Foods, United Natural had seen the business potential of a focus on natural foods and related products. Because of the company's remarkable past performance and of growing consumer awareness of 'whole health,' it was possible to assume that the difficulties United Natural experienced during the first quarter of fiscal 2000 were a temporary setback and that the company would continue to prosper.

Principal Subsidiaries: Albert's Organics, Inc.; GEM Acquisition Corporation; The Health Hut, Inc.; Hershey Imports, Inc.; Mother Earth, Inc.; Mountain People's Warehouse Incorporated; Natural Retail Group, Inc.; Nature's Finest, Inc.; Nutrasource, Inc.; Rainbow Natural Foods, Inc.; Stow Mills, Inc.

Principal Competitors: Tree of Life Distribution, Inc.; Blooming Prairie Cooperative Warehouse; Nature's Best, Inc.; Northeast Cooperative.


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Further Reference

'Creating Healthy Business,' Sacramento Bee (California), April 20, 1996.Esterson, Emily, 'United Adds Stow, Strengthens Midwest Region,' Natural Foods Merchandiser, August 1997.Granato, Heather, 'The Changing Distribution of Natural Foods,' Organic and Natural News, November 1999.'Healthy Deals,' Business News New Jersey, September 28, 1998, p. 3.Johnson, Kelly, 'Merger Propels Food Firm to Top,' Sacramento Business Journal, June 30, 1997, pp. 1-2.Lipson, Elaine, 'Humble Beginnings Become Big Business,' Natural Foods Merchandiser, February 1999.Plank, Dave, 'Healthy Food Viewed As Key Lifestyle Choice,' Natural Foods Merchandiser, December 1999.Wanetick, David, [Speech at Natural Foods Industry Conference], November 15, 1999.Wells, Danny, '20 Years ... and Still Going,' Natural Foods Merchandiser, February 1999.

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