Health foods' hidden powerbroker
United Natural Foods, five times the size of its largest competitor, wields an enormous amount of power in a growing sector.
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| United Natural Foods Co-Founder Michael Funk was in the right place at the right time and successfully took his business from the back of a pick up truck to the NYSE. |
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| United Natural Foods CEO Michael Funk |
NEW YORK (Fortune) -- In 1994, Walter Robb, then a regional president at a fast growing natural foods chain called Whole Foods, chose a new primary distributor to handle the bulk of the deliveries to his stores in Northern California.
The firm he chose was called Mountain People's, a tiny outfit based in the hills northeast of Sacramento and run by a ponytailed former garbage man who started the business out of the back of his Volkswagen van way back in 1976, before there was even a legal definition of what "organic" meant. "They were hippies from the mountains," recalls Robb, now president and COO of Whole Foods (WFMI, Fortune 500), which, as you probably know, has grown to dominate the burgeoning, $57 billion market for hormone-free beef and organic tomatoes on the vine.
What you probably didn't know is that those mountain hippies have acquired a good deal of clout of their own. Now called United Natural Foods (UNFI), the Dayville, Conn.-based company will generate $3.3 billion in sales this fiscal year by supplying over 40,000 products to more than 17,000 retailers coast to coast - from feisty mom-and-pop outlets like Debra's Gourmet in Concord, Mass., to small chains like Earth Fare of Asheville, NC, all the way up to giants like Whole Foods and Kroger (KR, Fortune 500).
As a distributor - essentially the middleman between manufacturers and retailers - United Natural, despite its $1 billion market cap, is unknown among the growing ranks of consumers who buy natural and organic products. But its size and scope place United Natural in the proverbial catbird's seat, wielding an enormous amount of power in the hottest sector of an otherwise moribund food industry.
Organic food sales increased 21% to $16.7 billion in 2006 (the most recent figures available), according to the Organic Trade Association. (Traditional supermarket distributors like Supervalu (SVU, Fortune 500) and C&S largely eschew organic and natural products as they don't move as fast as well-known staples like Corn Flakes and Coca-Cola.)
With five times the sales of its only national competitor, a company called Tree of Life, United Natural has few peers. "Like Whole Foods is to retail, United Natural is to wholesale," says Barney Feinblum, the former CEO of Celestial Seasonings and organic dairy Horizon who's now an investor in this space. Some manufacturers sell as much as 40% of their products through United Natural. "They can make or break you," says RBC Capital Markets analyst Ed Aaron.
And by pushing a hot new item through its vast distribution network - 8% of sales every year come from new products - United Natural can ensure it gains a wide audience. A recent example is Kombucha, a fermented beverage from Asia that first appeared in Seattle stores but has now gone national, growing at a triple-digit clip. "These guys are in a very dominant position," says Feinblum.
You'd never guess that after sitting down with Michael Funk. The laid-back Sacramento native, 53, still sports a straggly ponytail - it's gone salt-and-pepper now - and on this day, at least, he's ditched the purple Converse high tops that have been his calling card for years. (He even wore them during his first visit with Wall Street investors.)
Clad in less flashy sneakers and a black long-sleeve t-shirt on a typically mild autumn day at the company's Western headquarters in Rocklin, Calif., a bedroom community 25 miles northeast of Sacramento, Funk looks more like a guy who proudly doesn't remember Woodstock than the CEO of a Fortune 1000 firm. "People accuse me of being a Deadhead, but I never was," he says sheepishly.
Ironically, Funk's granola appearance makes him even more influential, as it maintains his street cred in an industry very sensitive about selling out to Corporate America. "He's stayed true to himself all these years," says Robb. Besides, "It's not what shoes you wear, it's about results," says Canaccord Adams analyst Scott Van Winkle.
And United Natural has delivered. Between its 2003 and 2007 fiscal years, both sales and net income doubled, and over the past five years its stock has returned 125%, compared with 86% for Whole Foods, which now accounts for about 31% of United Natural's sales after acquiring rival Wild Oats last year. United's business will take a slight hit from the closing of some Wild Oats stores, but much of those lost sales, Funk believes, will go either to Whole Foods or to smaller chains already serviced by United.
One cautionary note: The weakening consumer sentiment led Goldman Sachs to downgrade United's stock in January, causing its stock to drop from $29 to $24, but other analysts consider this a buying opportunity.
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United has seen its share of rough times in the past. A failed computer system conversion in 1999 resulted in botched orders and furious customers on the East Coast. Whole Foods almost dropped United, Robb recalls, but decided against it when United's board elevated Funk to CEO from president to clean up the mess.
"That gave people confidence that a strong leader was coming in," Robb says. "He was the savior," adds Van Winkle.
Funk, who never went to college, saved United's bacon again in October 2005, when he came out of early retirement to take the reins at then-struggling United for the second time. "I came back reluctantly - I was really enjoying my life," says Funk, who lives on a solar-powered estate in the Sierra Nevada mountains that spans several hundred acres and includes an organic orchard. "Now, I'm more enthused than ever."
What excites Funk these days is United Natural's attempt to corner another industry niche by acquiring Millbrook Distribution Services, a $300 million supplier of ethnic and gourmet items like Goya beans and Carr's crackers. Buying Millbrook, which supplies mainly traditional grocers, lessens United Natural's dependence on Whole Foods and also might give it a new customer you may have heard of - a little company called Wal-Mart (WMT, Fortune 500).
At least now, Funk won't have to explain what United is all about if he meets the folks from Bentonville. But he may wear his purple sneakers, just in case. 
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