The Cost Of UNFI’s Breakup With Key Food

While last week’s cyberattack dominated the discussion during UNFI’s third-quarter earnings call Tuesday, executives also shed light on the company’s decision to exit its “unprofitable” long-term supply agreement with grocery operator Key Food Stores Co-operative.

The two parties mutually ended the pact under which UNFI served as the primary grocery wholesaler to Key Food locations in the Northeast, per a Form 8-K filed in May with the U.S. Securities and Exchange Commission (SEC). According to the filing, Key Food’s conventional products business will transition to another wholesaler.

In conjunction with the termination, which is slated for September, UNFI said it will cease operations at its 1.3 million sq. ft. Allentown, Pa., distribution center and optimize its distribution network in the Northeast to improve service to its customers and suppliers. More than 700 jobs will be affected by the closure, according to a Worker Adjustment and Retraining Notification Act (WARN) notice filed with Pennsylvania’s Department of Labor and Industry.

Sandy Douglas, CEO of UNFI, said the decision to sever the contract – which was previously expected to generate $10 billion in sales to UNFI over its decade-long term – will improve profitability and advance the wholesale distributor’s strategic financial goals.

Key Foods operates 375 stores with a large share of the New York market, per a press release. Under terms of the agreement, UNFI supplied Key Food stores with conventional, natural and organic grocery products, along with a variety of international items, with the “ability to service the entire store on a single delivery,” Key Food’s top executive said when the deal was announced in 2020.

On Tuesday’s call, Douglas said, “We simply found that the combination of operational factors, post-COVID impacts and the details of that agreement were very difficult.”

UNFI recorded a $24 million non-cash asset impairment charge and about $4 million in severance expenses in the third quarter related to the termination, president and CFO Matteo Tarditi said during the call. The company expects to incur a $53 million contract termination fee during the fourth quarter that will be paid to Key Food over several months and will impact free cash flow, he said.

“However, the net cash impact of the payment is materially lower, because as we discontinue our operations at Allentown, we’re going to get some upside from the working capital release, as well as the benefits of the expense reduction, so we project the payback period of a year or less,” he added.

The ended agreement is part of a multi-year business transformation underway at UNFI, which in recent months has streamlined operations, restructured its leadership team and optimized its network to increase efficiencies and enhance profitability. Earlier this year, the distributor announced a realignment of its wholesale business that separates conventional grocery products and natural, organic, specialty and fresh products into separate divisions.

Overall, UNFI posted strong third-quarter results that benefited from new profitable business wins and steady margin improvement. Net sales increased 7.5% to $8.1 billion, driven by higher wholesale unit volumes and inflation. The company reported a net loss of $7 million, a significant improvement compared to its posted net loss of $21 million in the prior-year period. Adjusted EBITDA grew 20.8% to $157 million.