Distributor United Natural Foods (NASDAQ: UNFI) has bought ailing grocer Supervalu (NYSE: SVU). Therefore, it is time to ask if UNFI makes money.
Moreover, we must ask if UNFI can compete with Amazon (NASDAQ: AMZN) and Kroger (NYSE: KR). To explain Kroger is the biggest player in organics and natural foods right now.
For instance, Kroger’s Simple Truth natural foods brand hit $2 billion in sales in 2017, Progressive Grocer reports. Additionally Kroger sold $1 billion worth of organic produce in 2017, a press release claims. If that figure is correct, Kroger controls 20% of the organic produce market in the United States.
Beyond that, Amazon owns the nation’s most visible organic and natural grocer; Whole Foods Market. In addition, Amazon is making a major foray into the grocery business with Go, Fresh, and Prime Now.
United Natural Foods buys Supervalu
United Natural Foods or UNFI is a Rhode Island-based distributor that markets several organic brands in the United States and Canada.
UNFI bought Supervalu Inc. for $2.9 billion on October 23, 2018, The Minneapolis/St. Paul Business Journal reports. Thus Supervalu no longer exists as a standalone company or a stock.
Importantly, UNFI will probably sell off Supervalu’s supermarket brands including Cub Foods, The Journal speculates. Interestingly, Kroger; which has no operations in Minnesota, is a likely buyer for Cub Foods. Cub Foods is the largest grocer in the Twin Cities with 81 locations.
Supervalu (SVU) disappeared from the New York Stock Exchange (NYSE) because of the deal. Supervalu shareholders will receive $32.50 a share as a result of the acquisition. Additionally, UNFI has taken on $1.6 billion in Supervalu debt, The Minneapolis Star-Tribune reports.
Can Grocers Make Money?
A UNFI sale of Supervalu’s supermarkets raises doubts about the viability of brick and mortar grocers as an investment.
Grocers are not making much money in today’s market. For instance, Supervalu reported $36 million in cash and short-term investments on September 9 2018. In addition, Supervalu reported a free cash flow of $8 million and an operating cash flow of $48 million for 3rd Quarter 2018.
Supervalu reported a net loss of -$57 million and an operating loss of $53 million on $3.512 billion in revenues for 3rd Quarter 2018. Therefore, it is easy to see why UNFI wants out of the supermarket business.
Amazon is an Opportunity for United Natural Foods
I suspect UNFI’s management feels selling to Amazon and Kroger is a better business plan than competing with them. For instance, there are some big opportunities for distributors at Amazon.
Amazon could open 3,000 Go cashierless convenience stores by 2021, Bloomberg speculates. Furthermore, most of the Go locations will be in hip, inner city neighborhoods.
Therefore, the Go stores will need organic and natural foods and somebody will have to supply them. United Natural Foods is an obvious candidate to supply produce and natural foods to Amazon Go.
Is United Natural Foods (UNFI) a Value investment for the Age of Amazon?
Moreover, Supervalu could supply Go with general merchandise and groceries. Thus, United Natural Foods could be a value investment for the age of Amazon.
UNFI will make money by supplying Amazon rather than competing with the Everything Store. Thus, UNFI is like Berkshire Hathaway (NYSE: BRK.B) subsidiary McLane.
To elaborate, the McLane Company supplies retailers; such as convenience and discount stores, with merchandise. Hence, McLane makes money from retail without the risks of owning and operating brick and mortar stores.
Importantly, McLane makes money no matter who owns or runs the stores. If Amazon Go drives Seven-11 out of business McLane simply sells to Amazon. UNFI is following the same strategy.
Uniquely, UNFI has a similar opportunity in the grocery business with Supervalu. For instance, Supervalu operates 18 distribution centers and warehouses that ship 600 million cases of goods a year to 2,000 retailers in 39 states. Moreover, Supervalu supplies 5,000 food and general-merchandise items to grocers.
Will Supervalu make United Natural Foods a Value Investment?
United Natural Foods could be a value investment because it is cheap. UNFI stock was selling at $22.01 a share on 29 October 2018.
UNFI recorded a gross profit of $375.94 million on revenues of $2.592 billion on 28 July 2018. In addition, United Natural Foods recorded a net income of $32.79 million and an operating income of $49.76 million for 3rd Quarter 2018.
United Natural Foods achieved a free cash flow of $149.63 million and an operating cash flow of $164.64 million for 3rd Quarter 2018. Unfortunately, United Natural Foods reported $23.32 million in cash and equivalents on 28 July 2018.
Thus it is easy to see why UNFI wants to sell off Supervalu’s grocery stores. It needs cash generating assets.
Not surprisingly, United Natural Foods pays no dividend but it has some potential value. For example, UNFI is a probable acquisition target.
Notably, Amazon will need supply chain infrastructure for Go and UNFI has it. Hence, UNFI could be a speculative investment because shareholders might reap an acquisition profit.
Are Supermarkets Profitable?
Supervalu shows that regional supermarkets are no longer value investments. However, logistics and supply chain could be value investments.
Thus, retail investors need to keep an eye on United Natural Foods. Its success or failure could show us the future of the grocery business.