There was a significant announcement that occurred in the U.S. grocery and natural foods sector last week, one that we believe will lead to subsequent impacts for food and grocery supply chains down the road.
Natural and organic foods distributor United Natural Foods (UNFI) announced a definitive agreement to acquire food and grocery distributor and retailer Supervalu for a reported amount of $2.9 billion, including the assumption of outstanding debt and liabilities. According to the announcement, the acquisition will accelerate UNFI’s “Build Out the Store” growth strategy by broadening both its product distribution range and grocery retail customer base. UNFI was willing to pay a 67 percent premium over Supervalu’s closing stock price last Wednesday in order to gain approval.
Supervalu is often characterized as the largest publicly traded food wholesaler. The company’s business model includes operations as both a wholesale distributor of named and private branded goods, along with operating various branded grocery and food retail outlets among 7 U.S. Midwest States and the District of Columbia. Retail banners include:
Shop N’ Save
In addition to distribution to its owned stores, the company also supports upwards of 7000 independently owned and operated retail food companies in the supply of name and private branded foods. Private brands include: Culinary Circle, Essential Everyday, Wild Harvest, among others.
This transaction has been approved by the boards of directors of both companies but is subject to antitrust approvals.
Implication for Industry Participants
Supply Chain Matters readers will likely recall that UNFI’s largest retail customer is Whole Foods Market, and the distributor has since become linked to the fortunes of Amazon with its recent acquisition of the U.S. wide natural foods retailer.
In our Supply Chain Matters blog commentary in March, we updated readers on the likely first joint initiative, namely plans for integrating the online and physical store merchandising, inventory management and customer fulfillment capabilities of both organizations. Efforts are already underway where Amazon Prime Now customers have the ability to shop a wide variety of Whole Foods product selections, both online and in-store. Further, a business network CNBC report indicated that Amazon took on an additional $22 billion in contractually obligated future purchase commitments. According to the report, that balance also appeared in Whole Foods securities filings, and is almost entirely tied to the natural foods chain’s contract with supplier/food broker UNFI, based on CNBC’s estimates and prior filings. Further reported was that the new supply agreement extends to 2025, well beyond current grocery industry contract norms. The implication being made is that Amazon has initiated a longer-term supply agreement to assure a supply pipeline for both online and in-store merchandising and inventory management needs. Perhaps last week’s acquisition announcement was a further component to a longer-term food distribution capability.
This latest announcement of the acquisition of Supervalu, from our lens, represents a strategic move to add further geographic distribution depth along with broader traditional grocery and food product variety for both Whole Foods and Amazon’s customer fulfillment needs. The announcement points to the ability to leverage and enhance technology, capacity, and systems of the combined entities, to streamline processes and efficiencies, as well as reduce future capital investment needs as independent distributors. UNFI indicates it expects the deal to result in $175 million in savings in the first three years.
According to last week’s announcement, UNFI intends to divest of Supervalu retail branded stores “in a thoughtful and economic manner.” We believe that statement reinforces a strategy of increased food distribution scale. More problematic, again from our lens, is the ongoing strategy for supporting the many independent grocers, and there lies the potential implication for U.S. retail food distribution in the coming months and years.
Will consumers value shopping at local independent grocers, as well as online, and what happens to the distribution network. We suspect that U.S. regulators will review such aspects.
This indeed is a significant development for the U.S. food and grocery sector, and yet another indicator of significant industry changes.
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