United Natural (UNFI) Benefits From Transformation Efforts
United Natural Foods, Inc. UNFI is on track to transform and realize the full value of its business. The leading natural, organic and specialty food distributor is benefiting from e-commerce strength. That being said, the company continues to battle softness in the Retail business.
Let’s delve deeper.
Transformation Efforts Solid
United Natural is committed to its four transformation pillars based around network automation and optimization, commercial value creation, enhancing digital offering and work related to technology infrastructure unification and modernization. With regards to the supply chain, management is on track to add automation technology to its facilities to increase capacity, improve service levels, enhance the customer experience and generate operating efficiencies. Under the commercial value creation pillar, the company expects to evolve its go-to-market programs to lower complexity and improve accelerated supplier brand growth.
United Natural is strengthening the supply chain for retailers and suppliers via distribution network automation and optimization, introducing smarter technology systems and investing in operational excellence and efficiency. Management is on track with undertaking actions to revamp and reduce its sustaining cost structure.
E-commerce Strength Aids
United Natural’s sales are benefiting from e-commerce strength, thanks to the increased e-commerce solutions the company offers. Several of the company’s Independents and Chains channels provide e-commerce solutions to their customers. Further, United Natural offers digital platforms and the support its customers need.
United Natural has been keen on strengthening its e-commerce business. In this regard, the company’s latest value-added supplier program, UNFI Insights, bodes well. The company launched Community Marketplace — a business-to-business digital e-commerce solution. The platform is designed for emerging brands, which helps the company expand distribution with United Natural’s customers.
Hurdles on the Way
United Natural continues to battle softness in the Retail business, as witnessed in the fourth quarter of fiscal 2023. Quarterly Retail sales fell 1.9% year over year, mainly due to reduced unit volumes. Management continues to witness pressure in the retail footprint, mainly in the Minneapolis-Saint Paul market, stemming from tightening consumer demand, lower government support programs and stiff price competition. In addition, operating expenses increased in the fiscal fourth, reflecting investments in the transformation initiatives that resulted in increased costs and escalated occupancy-related costs.
Nevertheless, United Natural’s transformation efforts and e-commerce strength will likely continue enhancing its future growth.
Other Food Players Battling High Costs
Players like McCormick & Company, Incorporated MKC, Sysco Corporation SYY and Flowers Foods, Inc. FLO have also been grappling with escalated costs.
McCormick has been grappling with cost inflation for a while now. In the second quarter of fiscal 2023, MKC’s adjusted gross margin was affected by escalated cost inflation. MKC’s quarterly SG&A expenses increased due to elevated employee incentive compensation expenses and increased distribution costs. McCormick also witnessed a spike in brand marketing costs during the fiscal second quarter.
Sysco has been encountering product cost inflation in the U.S. Foodservice unit for a while now. In the fourth quarter of fiscal 2023, SYY witnessed product cost inflation of 2.1%, which was measured by estimated changes in product costs, mainly in the frozen, canned and dry categories. Adjusted operating expenses rose 1.9%. Sysco anticipates its International segment to remain inflationary in fiscal 2024.
Flowers Foods continued to be impacted by input cost inflation, reduced production volumes, higher product returns and elevated maintenance costs in the second quarter of 2023. FLO expects inflation to persist in 2024. Additionally, FLO witnessed a rise in marketing expenses in the second quarter of 2023. The company’s adjusted selling, distribution and administrative expenses expanded 70 basis points to 38.2% of sales. Flowers Foods’ increased focus on marketing and innovation behind brands is likely to increase its cost burden in the near term.
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