United Natural Foods, Inc. Business Information, Profile, and History

Company Perspectives:

Our mission is to excel in the distribution of natural and organic fo ods and wellness products by fulfilling the highest standards for qua lity, consistency, product assortments, dependability, value-added su pport services and integrity in our business and personal relationshi ps; to exceed the needs and expectations of all our stakeholders: our customers, suppliers, employees, shareholders, communities, the envi ronment and the planet; and to be an enduring, successful and profita ble company.

History of United Natural Foods, Inc.

United Natural Foods, Inc., is the leading distributor of natural foo ds and related products in the United States. Originally known as Cor nucopia Natural Foods, Inc., the company has expanded through strong internal growth, acquisitions, and mergers. United Natural has more t han 20,000 customers--including independent retailers, natural superc hains, conventional supermarkets, and restaurants--across the country . The company is the primary supplier to a majority of its customers, offering them a mix of more than 40,000 high-quality national, regio nal, and private-label natural products. These products include groce ries and general merchandise, nutritional supplements, bulk and foods ervice products, perishables and frozen foods, and personal care item s. For more than ten years, United Natural has been the primary distr ibutor to the two largest natural superchains: Whole Foods Markets, I nc. and Wild Oats Markets, Inc. To complement its distributorship, th e company also owns and operates the National Retail Group (NRG), whi ch consists of 12 retail stores selling natural products in the easte rn United States. The company has organized its ten distribution oper ations into four principal units: United Natural Foods in the Eastern Region (previously Cornucopia Natural Foods, Inc. and Stow Mills, In c.); United Natural Foods, Western Region; Albert's Organics; and Sel ection Nutrition. For the fiscal year ending July 31, 2004, United Na tural generated net sales and operating income of $1.7 billion an d $31.9 million, respectively.

The 1970s: Going Back to Nature for Business

The 1970s could be seen as a time of search for relevance between "th e world that had been" and "the world that was becoming." Entrepreneu rs made and sold tofu; they raised and marketed herbs as well as orga nic and natural foods. Yoga gained popularity as a calming form of ex ercise. According to Elaine Lipson's comment in the February 1999 iss ue of Natural Foods Merchandiser, in 1979 the editorial staff of that periodical used typewriters to chronicle the growth of the na tural products world. There were no fax machines, web sites, or compa ct/digital-video discs and players. The period of transition between the rebellions of the 1960s and the excesses of the 1980s, Lipson wro te, was a "perfect breeding ground for natural products visionaries r eady to blend alternative lifestyles with business potential."

One of these visionaries was Norman A. Cloutier, who founded Cornucop ia Natural Foods, Inc. (Cornucopia) in Coventry, Rhode Island. From 1 977 to 1978 he operated Cornucopia as a retail store for natural food s. In 1979, however, Cloutier changed his focus from retailing to the distribution of natural foods and related products. Although most na tural products were food products (which included organic foods), the natural products industry encompassed a number of other categories, such as nutritional and herbal supplements, toiletries and personal c are items, naturally based cosmetics, natural/homeopathic medicines, and naturally based cleaning agents.

As a matter of fact, by changing from retailing to distribution, Clou tier zeroed in on an emerging need in the rapidly expanding natural p roducts industry. Suppliers of natural products found it difficult to meet the demands of an increasing number of retail outlets; they rel ied on distributors to reach a fragmented customer base and to provid e information on consumer preferences at the retail level. Retailers wanted more frequent deliveries, greater product selection, higher fi ll rates, more information on product movement, and specialized progr ams--such as financing information, merchandising assistance, marketi ng support, and assistance in consumer education. Cloutier envisioned the possibility of meeting these needs through a national natural pr oducts distribution business that would provide the sourcing, purchas ing, warehousing, marketing, and transportation of natural products f rom suppliers to retailers.

Launching a National Presence: 1980-95

At first, Cornucopia grew by acquiring other distributors of a variet y of natural foods and related products. For example, in 1985 the com pany purchased two distributors to strengthen its position in the New England market and to establish distribution in the mid-Atlantic sta tes: Harvest Provisions, Inc. of Boston, and Earthly Organics, Inc. o f Philadelphia. Cornucopia also acquired two specialty suppliers of n atural products. In 1987 the company bought Natural Food Systems, Inc ., a distributor of seafood and owner of the "Natural Sea" brand; in 1990, Cornucopia acquired certain assets of BGS Distributing, Inc., a regional distributor and manufacturer of vitamins and the holder of distribution rights to several additional product lines. Furthermore, in 1991 the company made its way into the southeastern United States by opening a distribution center in Georgia.

Then, in 1993, Cornucopia added retailing to its distributor operatio ns by forming the Natural Retail Group with the intention of acquirin g retailers of natural products. The NRG strategy consisted of buying independent stores but keeping the former owners to run the stores. By April 1995 Cornucopia owned and operated eight natural food stores located in Connecticut, Florida, Maryland, Massachusetts, and New Yo rk. The company believed that these stores received a number of advan tages: Cornucopia provided its financial strength and marketing exper tise, economies of scale resulting from group purchases, and access t o a wider selection of products. The NRG retail stores offered produc ts in each of Cornucopia's six main distributor categories as well as produce, meat, poultry, fresh seafoods, baked goods, and other prepa red foods. In addition, NRG provided consumer education through infor mational brochures, promotional flyers, seminars, workshops, cooking classes, and product samplings.

On the other hand, benefits also accrued to the parent company, which was both the owner of, and distributor to, its retail stores. Cornuc opia controlled the purchases made by these stores; increased the dis tribution and marketing of its private-label products; and stayed in touch with the retail marketplace. Furthermore, in these NRG stores, the company could test and evaluate consumer reaction to select produ cts before offering them to a broader, national customer base.

Having established itself in the eastern United States, in May 1995 C ornucopia reached across the country to purchase Seattle, Washington- based Nutrasource, Inc., a distributor of natural products in the Pac ific Northwest region. Then in July the company acquired Denver-based Rainbow Natural Foods, Inc. (Rainbow), the largest distributor of na tural products in the Rocky Mountains and the Plains areas.

1996-99: Stabilizing a National Presence

Cornucopia buttressed its entry into the West in 1996 when it complet ed a merger with Auburn, California-based Mountain People's Warehouse , Incorporated, the largest distributor of natural products in the we stern portion of the United States, to form a new company: United Nat ural Foods, Inc. Cloutier had succeeded in crossing the country with his company. On the other hand, Michael S. Funk, founder and presiden t of Mountain People's, thought the merger broadened "Mountain People 's buying power and enabled the company to offer more services and a wider selection of natural foods and products," according to the Apri l 20, 1996 issue of the Sacramento Bee. United now had five di stribution centers strategically located in the states of California, Colorado, Connecticut, Georgia, and Washington, as well as two satel lite staging facilities in Florida and Pennsylvania. The company was well positioned to offer nationwide distribution services: namely, ne xt-day delivery service to a majority of its active customers and mul tiple deliveries each week to its largest customers. Cornucopia could better coordinate its inventory management with regional purchasing patterns and realize significant operating efficiencies. The company also was able to eliminate geographic overlaps in distribution; integ rate administrative, finance, and accounting functions; expand market ing and customer-service programs; and upgrade information systems.

United Natural, however, did not centralize the making of decisions f or the majority of its purchasing, pricing, sales, and marketing. The se managerial activities remained at the regional level in order to e xpedite response to the preferences of regional and local customers. Each of the three 1996 regional operators (Cornucopia, Rainbow, and M ountain People's) were better suited to make these decisions because they had extensive knowledge of the local and regional taste preferen ces in their particular marketplace and could provide products to acc ommodate local trends. By the end of fiscal 1995, the company's net s ales had risen to $283.32 million, compared with $124.37 mill ion at the end of fiscal 1992. United Natural filed an initial public offering on September 4, 1996 and began to trade its stock on the NA SDAQ under the ticker symbol UNFI on November 1, 1996.

The company's private-label products addressed the preferences of cus tomers wanting products not offered by other suppliers. For instance, in 1997 United Natural launched an organic infant food product calle d Organic Baby. In the February 1997 issue of Natural Foods Mercha ndiser, Emily Esterson commented that sales in baby food were dec lining because "baby boomers' children were past baby-food age." In m ost natural products stores, the only available organic baby food was that of Earth's Best, owned by Pittsburgh-based H.J. Heinz. United N atural was interested in expanding to serve innovative, highly specia lized niche markets. Other private-label products included Clear Spri ng Waters, Farmer's Pride eggs, Guardian vitamins and supplements, Na tural Sea fish products, and Gourmet Artisan pasta and oils. Each yea r United Natural studied both existing and anticipated consumer prefe rences in order to evaluate more than 10,000 new products in the natu ral, organic, ethnic, gourmet, and specialty areas. The company purch ased products from approximately 1,800 suppliers and also sourced pro ducts from suppliers throughout Europe, Asia, South America, Africa, and Australia.

United Natural reached its goal of being the nation's largest distrib utor of natural foods and related products in November 1997 when it c ompleted a merger with Chesterfield, New Hampshire-based Stow Mills, Inc., a distributor of natural foods and related products in New Engl and, New York, the Mid-Atlantic states, and the Midwest. According to Emily Esterson's article, "United Adds Stow, Strengthens Midwest Reg ion," in the August 1997 issue of National Foods Merchandiser, Stow had sales of $208 million for fiscal 1996 and distributed 1 2,000 products to stores in the Northeast, the Midwest, and the Mid-A tlantic regions. The merger "filled gaps in United Natural's services by adding warehouses in New Hampshire and Pennsylvania, plus a Chica go facility that Stow Mills acquired when it bought Rainbow Distribut ing in 1996," Esterson wrote.

Cloutier also pointed out that Stow brought additional natural produc ts expertise to the company because "Stow is a well-established, soph isticated operation with experienced and talented staff. There is no shortage of good ideas in the industry, but what separates the succes sful from the unsuccessful is organizations with the expertise to exe cute plans," said Cloutier. Furthermore, he noted that "despite the g rowth of the company and concerted efforts to reach conventional groc ers, United remained loyal to independent retailers, which made up ap proximately 60 percent of the company's sales." According to the June 30, 1997 issue of Sacramento Business Journal, United Natural President and Vice-Chairman Funk commented that by 1997 the natural foods industry was increasing by 15 percent a year and that conventio nal supermarkets were selling more and more natural foods products. " More people are aware of diet and how it affects our health and are i nto self-healing," Funk said, and added that an aging population woul d fuel continued growth of the industry.

In February 1998 United Natural acquired Hershey Import Co., Inc., a business specializing in the international trading, roasting, and pac kaging of nuts, seeds, dried fruits, and snack items. In September of the same year United Natural bought Albert's Organics, Inc., a compa ny specializing in the purchase, sale, and distribution of produce an d other perishable items. Albert's was the country's largest organic produce wholesaler, according to the March 17, 1997 issue of Busin ess News New Jersey. Since 1985 United Natural had successfully c ompleted 20 acquisitions and/or mergers of distributors, suppliers, a nd retail stores. The company's net sales increased to $728.9 mil lion for fiscal 1998, compared with $634.8 million for fiscal 199 7.

1999-2000: Reorganizing for a New Millennium

United Natural became a primary source of supply to a diverse base of customers having significantly varied needs. To meet these needs the company distributed more than 26,000 products consisting of national brands, regional brands, and private-label brands. The company held distribution rights to more than 1,000 nationally known products. Mor e than 800 regional brand products were distributed to consumers in s pecific geographic regions. United Natural's decentralized purchasing practices enabled regional buyers familiar with consumer demands in their respective regions to offer products of special appeal to these regional consumers.

During fiscal 1999, after an operations and logistics study, United N atural found that $3.4 million could be saved in the northeast re gion if the company operated two warehouses instead of three in that area. Consequently, the business of the Chesterfield, New Hampshire-b ased warehouse of Stow Mills was integrated into the Dayville, Connec ticut, facility and into the expanded New Oxford, Pennsylvania, wareh ouse. Continuing problems and expenses related to the consolidation r esulted in lower sales, lower gross margins, and higher operating exp enses in the East for the first quarter of fiscal 2000. Furthermore, Chairman and CEO Norman Cloutier resigned for personal reasons, and t op management had to be restructured. Michael S. Funk, United's vice- chairman and president, was elected to succeed Cloutier as CEO. Thoma s B. Simone was elected chairman of the board, where he had served si nce 1996; he was president and CEO of Simone & Associates, a cons ulting company for healthcare and natural products investment.

The change of management came at a time when sales of natural foods w ere still spiraling upward. According to industry analyst David Wanet ick, who chaired the 1999 Natural Foods Industry Conference, sales of natural products continued to grow because of increased accessibilit y. "While there were fewer than 90 natural products stores in 1990 wi th more than 5,000 square feet," Wanetick told Natural Food Mercha ndiser, he expected "the number of these stores to reach 1,000 by the year 2000." Wanetick commented that another factor propelling sa les of natural foods was Americans' increased health consciousness: " Millions of American adults are now watching their fat intake and mon itoring their dietary cholesterol," he explained. Among other trends beneficial to the natural foods industry, Wanetick noted, were the fa ct that rising costs of healthcare led more people to take better car e of their health and that gourmet cooks advocated the use of natural products to ensure better taste. Yet, "despite all these growth driv ers, natural foods have barely penetrated their markets. Since natura l foods account for only 2.5 percent of the total food market, natura l goods still have a great deal of potential," Wanetick emphasized.

Indeed, as the 20th century drew to a close, mainstream customers "we re moving in unprecedented numbers into the natural products channel, " according to trends in the natural marketplace reported in the Dece mber 1999 issue of Natural Foods Merchandiser. Uppermost in th e minds of these consumers was "the concept of 'whole health'--an agg regation of many different lifestyle and shopping choices into a self -directed program of healthful living." From its earliest days of ope ration under predecessor Cornucopia Natural Foods, United Natural had seen the business potential of a focus on natural foods and related products. Because of the company's remarkable past performance and of growing consumer awareness of "whole health," it was possible to ass ume that the difficulties United Natural experienced during the first quarter of fiscal 2000 were a temporary setback and that the company would continue to prosper.

Success in 2000 and Beyond

Sure enough, United Natural experienced success due to industry condi tions as well as its growth strategy. Acquisitions, coupled with the expansion of its distribution centers, allowed the company to enter n ew geographic markets, increase its customer base and market share, a nd broaden its burgeoning product line. During 2001, United Natural s trengthened its foothold in the southwestern United States by leasing a new distribution center in the Los Angeles, California area. In ad dition, it bought Palm Harbor Natural Foods, a Florida-based company.

The firm faced a major setback in 2002 when Wild Oats Markets, one of its largest customers, chose competitor Tree of Life Inc. as its sup plier. Wild Oats began to experience problems with its new primary su pplier, however, and quickly returned to United Natural. In January 2 003, a new five-year contract was signed and in April of that year, U nited Natural resumed its position as Wild Oats' main distributor. Th e company also signed a deal with Sodexho USA to supply its 6,000 foo dservice outlets with natural and organic foods. During 2004, United Natural renewed its contract with Whole Foods.

In 2002, United Natural acquired Blooming Prairie Cooperative, the Mi dwest's largest volume distributor of natural foods, in a $31 mil lion deal. It also completed its merger with Northeast Cooperatives, a distributor serving more than 2,800 customers in the Northeast and Midwest.

In January 2003, Steven H. Townsend was named president and CEO. Late that year he assumed the chairman position as well. Industry conditi ons bode well for United Natural as demand for natural and organic pr oducts continued its upward trend. The company became the first and l argest certified organic distributor in North America in 2003. United Natural received its certification from Quality Assurance Internatio nal, an independent, third-party organization responsible for verifyi ng organic integrity and quality.

United Natural had added more than 1,400,000 square feet of capacity since 2000, increasing its distribution capacity by 93 percent by 200 5. A total of 97 percent of its deliveries were completed on time, pu tting the company in an enviable position among its competitors. Its profits had more than doubled since 2001, and the company's financial future looked promising. United Natural completed another acquisitio n in 2005, adding Roots & Fruits Cooperative to its arsenal. Town send announced his retirement in October 2005 and Michael Funk once a gain assumed the role as president and CEO. Townsend was expected to leave the chairman post in December of that year.

Principal Subsidiaries: Albert's Organics, Inc.; Natural Retai l Group, Inc.; Nutrasource, Inc.; Rainbow Natural Foods, Inc.; Select Nutrition Distributors, Inc.; Stow Mills, Inc.; United Natural Foods Pennsylvania, Inc.; United Natural Foods West, Inc.; United Natural Trading, Inc. Co.; United Natural Transportation Co.; United Northeas t LLC.

Principal Competitors: Kehe Food Distributors, Inc.; Tree of L ife Distribution, Inc.; Nature's Best, Inc.

Chronology

• Key Dates:
• 1977: Norman A. Cloutier founds Cornucopia Natural Foods, Inc. , a retail store for natural foods, in Coventry, Rhode Island.
• 1979: Cloutier shifts the focus of Cornucopia from retailing t o distribution.
• 1980: Cornucopia initiates a period of aggressive expansion in the northeastern and Mid-Atlantic states.
• 1989: 60 Minutes reports on the carcinogenic properties of Alar, a chemical used widely in apple growing; demand for organic foods skyrockets.
• 1991: The company expands into the southeastern United States by opening a distribution center in Georgia.
• 1993: Cloutier forms National Retail Group to acquire and oper ate retail outlets of natural products.
• 1996: Cornucopia merges with California-based Mountain People' s Warehouse and incorporates as United Natural Foods, Inc., trading o n NASDAQ.
• 1997: The company merges with New Hampshire-based Stow Mills, Inc. and becomes the nation's leading distributor of natural foods an d related products.
• 2002: Blooming Prairie Cooperative is acquired; the company co mpletes its merger with Northeast Cooperatives.
• 2003: Steven H. Townsend is named president and CEO; the compa ny becomes the first and largest certified organic distributor in Nor th America.
• 2005: United Natural completes the acquisition of Roots & Fruits Cooperative; Townsend announces his retirement in October and Michael Funk once again assumes the role of president and CEO.