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UNFI growth prospects looking good, analysts say

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.

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Analysts weigh in on Whole Foods’ new pricing program

Whole Foods Market has lowered pricing in the perishable sections of its five Austin, Texas, stores as part of an effort to improve its value image, industry observers told SN — though they said it could take up to two years to change consumer perceptions and impact sales if and when the program is rolled out chainwide.

According to Kate Wendt, senior analyst with Wells Fargo Securities, San Francisco, “Price is still a significant barrier in the way people look at Whole Foods, and it will take awhile to change the ‘Whole Paycheck’ perception the company has. But lowering prices in perishables — the category where people shop most frequently at Whole Foods — could help accelerate a change in that perception.” 

Jim Hertel, managing partner at Willard Bishop, Barrington, Ill., said changing consumer perceptions about Whole Foods could take awhile. “Depending on the level of the pricing changes in terms of depth and breadth, it will take at least six months before it starts to have any impact and 18 months to 24 months before it has much impact on total results overall,” he said. “For investors, there are likely to be some challenges from a profitability standpoint until that happens.”

The price-reduction program “will take at least six months before it starts to have any impact,” says Jim Hertel of consulting firm Willard Bishop.Published reports said Whole Foods is lowering prices on 400 produce items. Chain representatives could not be reached for comment.

According to Wendt, it’s important for Whole Foods to change consumer perceptions, “because other than price, there are not a lot of reasons for most people not to shop at Whole Foods — it offers a great shopping experience, transparency, a broad natural and organic selection and quality values on its 365 label. 

“But the company has not seen as big a benefit from lowering prices on non-perishables as it thought it would get, so it’s shifting lower pricing to perishables, its primary sales driver, which accounts for two-thirds of total sales,” Wendt added. “Consumers tend to shop for perishables several times a week at Whole Foods, so the thinking is, they might notice the price changes faster there than they would in non-perishables — and perishables is also the section of the store where competitors like Sprouts and Natural Grocers are priced more favorably, so it’s not a surprise that’s where Whole Foods would lower prices.

“At this point the average consumer is probably not aware of what Whole Foods is doing, so by investing more in perishables pricing, it’s drawing more attention to a category that can help change its image.”

Wendt said she believes Whole Foods shifted some pricing investments from non-perishables to perishables “by studying price elasticity and determining which grocery items shoppers will buy regardless of price.” To enable Whole Foods to make sure it can offer lower prices in perishables without lowering quality, Wendt added, “it’s seeking cost-reduction opportunities — similar to what Kroger has been doing — to enable it to make that investment in perishables pricing in a new way that won’t hurt operating margins.”

Another analyst, who declined to be named, told SN that Whole Foods may have made some cost cutbacks in its Austin stores “to make the lower perishables pricing work,” though he said he was unable to pinpoint where it made any cuts.

“One area it could tap for cost-cutting would involve seeking better deals from suppliers,” he said. “Or it could lower its buying standards, given that one reason Sprouts has lower produce prices is it has lower quality standards. But would Whole Foods go down in quality?

“It could also reduce costs by cutting store hours or eliminating positions at the store or regional headquarters level. Whole Foods has a regional structure where different people run categories or departments in every store, every region and every city. While that helps make Whole Foods’ stores unique, it also results in a lot of redundancy relative to the competition.”


Follow @SN_News for updates throughout the day.

Wendt said she believes the perishables pricing program in Austin, which is the company’s home market, is a test prior to a wider rollout “so Whole Foods can make sure it can get the return on price investment with higher unit sales,” she explained. Noting that the chain has said it plans to launch a national ad campaign later this year, Wendt said, “Initially that campaign is likely to emphasize the company’s quality standards versus other grocers, but it may also highlight its improved value offering as the lower perishables pricing program gets a wider rollout.”

In addition to lowering perishables pricing, Whole Foods is also offering more promotions in the Austin market, Wendt pointed out, “with better signage to do a better job of communicating in-store promotions.

“And looking ahead, the chain is likely to introduce more value items in produce — perhaps something like a $ 1 avocado — so it’s not lowering the quality but is offering an alternative to the larger, higher-priced sizes, to give customers more choices.”

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SN’s Analysts Roundtable, Part 3: Natural and organics, Sprouts, Wholesalers

Participants at SN’s 19th annual analysts roundtable predicted the natural and organics category will continue to gain wider consumer acceptance, with Sprouts posing a potential threat to Whole Foods. Participating analysts are: Chuck Cerankosky, managing director for Northcoast Research, Cleveland; Meredith Adler, managing director for Barclays Capital, New York; Andrew Wolf, managing director for BB&T Capital Investments, Boston; Karen Short, managing director for Deutsche Bank …

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Analysts Watching Sobeys’ ‘Magical’ Safeway Deal

STELLARTON, Nova Scotia — Analysts in Canada last week were still waiting for another shoe to drop in the wake of Empire Cos.’ sweeping announcement that it would acquire Safeway Canada. The $ 5.8 billion deal, announced earlier this month and expected to close this fall, could signal the beginning of a new round of food retail consolidation in Canada, some analysts said. Others thought the deal itself might still draw a challenging offer from competitors Loblaw and/or Metro …

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Analysts Positive on Safeway’s Chicago Exit

PLEASANTON, Calif. — The decision by Safeway to exit its Chicago division was met with positive reactions by several industry analysts after the chain said it would dispose of its 72 Dominick’s stores there by early next year, though most doubted it would be able to sell all the stores to other supermarket operators.

Concurrent with the announcement, Safeway said it had already sold four of the Chicago locations to New Albertsons Inc., the Cerberus division that operates Jewel-Osco there.


Follow @SN_News for updates throughout the day.

John Heinbockel, managing director for Guggenheim Securities, New York, said he expects Safeway to be able to sell up to 40 of the 72 stores, generating proceeds between $ 100 million and $ 150 million. He also said he sees the divestiture as a positive, since it will eliminate as much as $ 60 million in annual operating losses.

Chuck Cerankosky, managing director for Northcoast Research, Cleveland, also said he anticipates Safeway will be able to sell 40 or 50 of the stores — with perhaps one operator buying a large number and the rest split among a variety of buyers — at prices ranging from $ 1 million to $ 10 million per store. He said sales to multiple buyers is likely “because Dominick’s does not have positive cash flow — with EBITDA losses of $ 2.3 million in 2012 and $ 11 million for the year to date — which makes it a tougher sell.”

Read more: Safeway Cites ‘Significant Interest’ in Dominick’s

Meredith Adler, managing director for Barclays Capital, New York, said the Chicago exit makes sense, especially because it will enable Safeway to realize a cash tax benefit of $ 400 million to $ 450 million that will enable it to offset the cash tax expense from the pending sale of its Canada operations to Sobeys. However, exiting Chicago will also generate financial liabilities with the union’s multi-employer tax plan, though those liabilities will be amortized over many years, Adler noted.

Karen Short, managing director for Deutsche Bank Securities, New York, said the decision to exit Chicago is “another major step along the path to asset rationalization,” with further asset sales a possibility.

“We believe Texas, among other divisions, may be under close scrutiny,” she said. Rationalizing underperforming divisions will enable Safeway “to better focus on the markets and regions where it can compete more effectively, especially on the West Coast, which has greater barriers to entry.”

Analysts also suggested Safeway should consider selling off its 73% ownership in Blackhawk and selling Casa Ley, its Mexican venture.

Read more: Activist Investor Pushes for More Asset Sales at Safeway

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SN Analysts Roundtable, Part 2: Grocery Competition Increases in a ‘Middling’ Recovery

NEW YORK — The economic recovery is in mid-cycle — a good place for it to be for the conventional supermarket industry — though increasing competition from lower-priced alternatives still presents serious challenges, industry analysts said here during SN’s 18th annual Financial Analysts Roundtable. The participants also said Whole Foods Market continues to hold a unique place in consumers’ minds despite its price perception, and Wal-Mart Stores’ future …

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SN Analysts Roundtable: Rebuilding the Industry

NEW YORK — Wall Street analysts believe a new wave of consolidation — most of it defensive in nature — will hit the industry, with Kroger Co. and possibly Cerberus likely to lead the way as buyers. “It’s like the nuclear bombs have dropped, and the industry is rebuilding as much as it can,” Andrew Wolf, managing director of BB&T Capital Markets, Boston, said, “so consolidation is definitely a defensive reaction, mainly by the …

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