Dive Brief:

• United Natural Foods (UNFI) announced Monday that it has completed its $2.9 billion acquisition of Supervalu, the Minneapolis-based retailer/wholesaler. 
• Steve Spinner, UNFI’s chairman and chief executive officer, will lead the new company, while Chris Testa will remain president of UNFI and Sean Griffin, formerly UNFI’s chief operating officer, will be Supervalu’s chief executive officer. UNFI will keep two top Supervalu executives in place — Anne Dament, as executive vice president of retail, marketing and private brands; and Mike Stigers, executive vice president of wholesale.
• UNFI says it hopes to achieve $175 million in annual synergies through the first three years after the merger, reaching $185 million by year four. "Today is an important milestone for UNFI. We will take the best from both businesses to create North America's premier food wholesaler with significant scale, reach and choices for our customers,” Steve Spinner, UNFI's chairman and chief executive officer, said in a statement.

Dive Insight:

Spinner said in the news release that the combined companies will form “America’s premier food wholesaler.” That may be the case, but first the companies have to navigate Supervalu’s various challenges following the highly leveraged deal.

Supervalu has had a difficult time transitioning from a retailing to a wholesaling company. This includes an underperforming lineup of retail assets — which are in the process of being sold — as well as operational issues such as shrinking margins and a few key acquisitions that are still being digested. UNFI will have to take on these challenges while financing the acquisition with debt. On its own, UNFI has dealt with various operational issues, including rising freight costs and strained warehouse capacity.

In a filing last week with the Securities and Exchanges Commission, Supervalu reported a 1.9% increase in net sales for its second quarter of fiscal 2019 ended September 8, while net loss amounted to $57 million. The company’s wholesale division grew 3.6%, to $2.84 billion, while its dwindling retail division saw sales fall 3.1%, to $650 million.

This all puts a lot of pressure on the combined company. Still, there are many reasons to believe the new UNFI/Supervalu will succeed. UNFI will be able to diversify its customer base beyond Whole Foods, which makes up roughly a third of its sales and is producing slimmer margins. The many conventional retailers Supervalu supplies will have access to UNFI’s leading specialty products and distribution channels. Supervalu’s independent retail customers — many of whom have struggled amid industry disruption — could see better prices coming through the combination.

UNFI will gain other assets through the deal, including Supervalu's Quick & Easy Meals program along with more than 5,000 private label products, which cover a wide range of categories and value points. The top brand is Essential Everyday, with more than 2,700 products across 140 categories, though the star performer of late has been Wild Harvest, the company’s natural and organic brand that launched more than a decade ago.

Ultimately, UNFI and Supervalu will hope their tie-up will better serve the needs of retailers in a grocery industry that’s seeing its fair share of consolidation and other disruptions.