Buyer of Supervalu is a key player in fast-growing organic foods industry

The company that plans to buy Supervalu Inc. has long been a key player in the natural and organic foods market.

United Natural Foods Inc., (UNFI) created in a 1996 merger of two smaller companies, quickly grew into the largest North American distributor in that fast-growing foods segment. The Providence, R.I.-based company has been the primary wholesale supplier to Whole Foods Market for nearly 20 years — a contract that accounts for more than one-third of UNFI's revenue.

The $2.9 billion purchase of Supervalu that it announced Thursday marks its biggest step into distribution of conventional foods as it seeks to move beyond its dominant niche. With Amazon's purchase of Whole Foods last year, analysts believe the Supervalu acquisition may be a defensive move.

"[This] raise[s] the question from investors on whether or not UNFI felt pressured to offer a wide selection of conventional products to satisfy future needs of [Whole Foods] under Amazon," Kelly Bania, an analyst for BMO Capital Markets, wrote in a note.

UNFI's exposure to Whole Foods will drop from 37 percent to 14 percent of sales after the deal closes, Bania wrote.

The deal also expands United Natural's geographic reach, as Supervalu's wholesale business distributes goods to more than 3,300 groceries in about 40 states. Supervalu brings 29 distribution centers to the marriage while United Natural has 33, including one in Prescott, Wis., that serves the Twin Cities region.

This gives UNFI a "ubiquitous distribution center system across America," said Burt Flickinger III, managing director for Strategic Resource Group, a grocery consulting firm.

The company breaks down its business into three divisions: wholesale, retail and manufacturing/branded products. Its wholesale division supplies 43,000 stores, according to federal filings. Its retail division is small, composed of just 12 Earth Origins stores, primarily located in Florida.

Buying Supervalu would give UNFI room to grow without having to build costly new warehouses.

"This combination gives us some much-needed capacity, which effectively reduces some specific future [capital expenditures] pains that we were anticipating. So we do get a bit of a break there," said Michael Paul Zechmeister, chief financial officer of United Natural Foods, on a conference call.

Executives noted that the two companies provide private-label foods to different parts of a grocery store. United Natural Foods chiefly has private-label goods in fruits, vegetables, bakery and vitamins, while Supervalu produces private-label items in dairy, frozen foods, deli and butchery products.

"The combined UNFI-Supervalu private brand portfolio will be even stronger as we look to drive cost savings, expand variety and accelerate innovation," Supervalu Chief Executive Mark Gross said during the call.

UNFI's private-label products include Woodstock Farms, Blue Marble, Field Day, Harvest Bay, Asian Gourmet, Tumaro's and Rising Moon. Supervalu's house brands include Essential Everday, Wild Harvest, Culinary Circle and Market Centre.

Since 2007, UNFI's net sales have grown at a 12.9 percent compounded annual rate, according to company filings.

From 2014 to 2017, its revenue increased from $6.8 billion to $9.27 billion, more than 36 percent.

Its largest competitor is Illinois-based KeHE Distributors, which owns Tree of Life, a distributor that started consolidating the U.S. natural and organic foods supply chain in the 1990s.

Acquisitions have played a key role in the company's recent growth. Since 2000, UNFI has bought 19 distributors, manufacturers and suppliers, according to company filings.

But UNFI was reaching the end of its expansion opportunities in natural and organic foods, said Victor Martino, president of Third Wave Strategies, a food and grocery consultancy firm.

"There were a lot of retailers UNFI didn't have a relationship with, and this gets them into mainstream grocery, mostly independent [chains]," Martino said. "They can bundle their natural and organic products together with the conventional products, which could be a price advantage for retailers."

Kristen Leigh Painter • 612-673-4767