United Natural Foods, Inc., is positioned for continued strong growth, especially as it expands the perishables offerings from Tony’s Fine Foods beyond the West Coast while simultaneously reducing warehouse and distribution costs, analysts said Wednesday, a day after UNFI’s annual analyst meeting.
UNFI, based in Providence, R.I., acquired Tony’s Fine Foods, West Sacramento, Calif., last May. The Tony’s offering encompasses specialty cheeses, baked goods, deli, packaged proteins, seafood and prepared foods.
Analysts said UNFI’s effort to expand Tony’s offerings is part of the company’s new “building out the store” strategy — aspiring to have the top share in each category it serves.
“This is a change from the past, where the focus was on acquiring new customers,” Karen Short, an analyst with Deutsche Bank, New York, pointed out. “There could be a significant opportunity if UNFI can convince existing customers of its natural and organic products [who purchase ethnic and gourmet products from other sources] to purchase these specialty categories from UNFI because it could lower the customers’ overall product costs [by consolidating purchases] without sacrificing service.”
The near-term strategy involves rolling out the Tony’s model to Denver; Racine, Wis., which serves Chicago; and UNFI’s Hudson Valley facility in Upstate New York, which serves New York City, with the goal of boosting the company’s 1.5% share of the ethnic/gourmet categories, Short said.
The three facilities, along with Tony’s West Coast operation, will serve as main freight consolidation points where the Tony’s merchandise can flow to the rest of the country, Short said.
According to Andrew Wolf, managing director for BB&T Capital Markets, Boston, rolling out the Tony’s products will require UNFI to secure a major new customer in each region — a process that should take one to five months, he added.
UNFI is also seeking to reduce costs, the analysts said. According to Kelly Bania, an analyst with BMO Capital Markets, New York, “UNFI is well positioned to deliver operating margin upside relative to expectations as investments in technology and efficiency initiatives gain critical mass in coming years.
“Importantly, UNFI’s savings from its warehouse management system implementation could accelerate in coming years as only three of its distribution centers are currently on WMS,” Bania said. The company expects WMS to be implemented at a total of nine facilities by next October, with the system operating at all 18 facilities by the end of fiscal 2017, she pointed out.
“While not all cost savings will fall to the bottom line and consolidated operating margin expansion will prove more difficult in coming years as UNFI integrates lower-margin Tony’s, an outlook for a more accelerated pace of implementation could result in more meaningful cost savings in coming years,” Bania added.
Wolf said UNFI “made a convincing case” for its cost-cutting prospects, including plans to lower its cost structure and increase its relevance with customers through use of technology — for example, backhauling to improve logistics and engineered labor standards to improve warehouse operations.
In addition, the company is implementing programs like iUNFI, a mobile order-entry system that has enabled customers to improve their fill rates by 0.7%; and “UNFI arrive,” which helps customers track deliveries more carefully to do a better job of planning in-store labor, Wolf pointed out.