WTF Is Up With UNFI's SSA?

0:05Welcome to the CPG Week podcast by BevNet and Nosh, your source for the latest food and beverage industry news. I'm Monica Watrous, Managing Editor of NOSH, here with my co-hosts Brad Avery, Lucas Southerd, and Adrian DeLuca. If you're enjoying the show, please subscribe on your listening platform of choice. On the podcast today, we're discussing WTF is up with UNFI's SSA policy change. So Adrian and Lucas have been reporting on the distributor, UNFI, announcing a new policy change to its supplier agreement called the Simplified Supplier Approach. And they implemented it in May. There's a lot of buzz in the industry about it, not so favorable in many cases.

0:48Adrian, can you tell us what happened here? UNFI announced this policy about 60 days out before it was implemented. It essentially said all those main compliance fees that brands had trouble with in the past would be lumped into this 2.5 % standard fee that everyone would be charged instead of having to field whatever else may have come their way. But that policy went into place pretty quickly. And I think one of the biggest things that Lucas and I have both come across in reporting this story is there's still not many answers as to what fees at this point in time are included in that 2.5%. So Unify had shared a statement with us yesterday to add some additional clarity as to what that policy looked like.

1:38but we still haven't quite gotten a detailed and up-to-date list on exactly what is included. They did give brands access to this data insights platform through this new policy change. However, that's brought up some issues of its own. So Lucas, anything to add there? I talked with two different consultants in the industry who work with brands that distribute through UNFI, one of which is Greg Eslinger, who used to be a national supplier group manager for UNFI for many years and has since begun working as a consultant with brands, especially dealing with deductions and chargebacks. Eslinger has been pretty outspoken about the SSA program as not being as beneficial to small brands as it was originally marketed by UNFI.

2:31So he said that it was, quote, seen as doing a solid for the industry, whereas if that was the case, it would have been made optional for people to opt in. And one of the big things that he focused on in our conversation was that for emerging brands, having all these fees lumped together into a 2.5 % can be somewhat helpful. But really what the big benefit was, was access to some of this data that they would not have normally had access to. Yet it seems like the policy has somewhat changed from when it was originally announced at the end of February. And he posted about a month ago, a couple screenshots of the new policy.

3:19And in it said that suppliers with annual purchases by UNFI of less than$25 ,000 in the previous four quarters, so$100 ,000 in sales for the last year, would not be eligible for the SSA program, basically barring them from the data that they would normally use and instituting some of these fees that would have been helpful to the emerging brands. I think you bring up two really solid points about the rollout, especially Lucas, because as we know, this policy has changed a few times since they've announced it. But one thing that came up in my conversations with George Milton from Yellowbird Foods was that originally, as you mentioned, this policy was not something brands thought they could opt out of.

4:06They were almost being forcibly auto-enrolled as they logged into Unify's supplier portal and just had to hit accept in order to view their account. But after some back and forth with Unify, George managed to understand that they could opt out of this program, but doing so, they brought about a bunch of other fees and possible repercussions to their business. So it kind of goes both ways. When this originally was announced, one of the big complaints was that this wasn't going to be good for the larger brands that have been around for a while. They don't need all the extra benefits that were being offered by UNFI.

4:46Now they're saying that this isn't going to be good for the smaller brands. So who is this supposed to be good for? UNFI. It's funny you say that because Eslinger told me in our conversation that the timing of this was very interesting. The SSA program went into effect on May 1st, and this was just in time for the Q3 earnings report that we just got last week. So it was almost like a signal to UNFI investors that, hey, we're doing something to build some more revenue and try to stem the bleeding a little bit from what's been happening at UNFI for the last year. It seems brands have caught on as well, because in speaking with George Milton as well, he had some estimates on exactly how much of a cash grab this would be for UNFI just after Q1.

5:38So it was quite a sum that they came up with in just estimating what they'd make off of all of their suppliers with this new 2.5%. Well, and here is a high-level overview of those Q3 earnings that were released last week. Net sales at UNFI decreased 0.1 % to$7.5 billion. So relatively flat net sales, but they reported a net loss of$21 million, which compared to net income in the third quarter of last year of$7 million. They're actually revising their full year outlook now based on charges related to cost reduction actions that are driving lower than expected ranges for net income and earnings per share.

6:20I think what we're hearing, and I'm in the process of following back up with some of my sources and bringing this up with brands as I talk to them in reporting, is that we still don't really know how this is going to shake down from the brand perspective. The fees that they originally listed and gave to their supplier clients was pretty extensive, but one of my sources who wanted to remain anonymous said that when you look at a lot of those fees, especially for the emerging brands, those fees don't actually usually apply to them, and those are for the larger brands. So again, as you were pointing out, Brad, this is one of those situations where it doesn't seem like anyone's really benefiting from this except for UNFI.

7:09And we still don't even know if UNFI is going to benefit that much from this extra 2.5 % that they're tacking on to a lot of their clients' contracts. And even beyond the brands itself and who will benefit, it seems this is even trickling down to the retail end where in many of the conversations I've had, there's some confusion whether the price increases brands may have to push through in order to maintain business through Unify with this greater fee. that's going to make some buyers angry because that's going to hurt their margins when those prices continue to go up. So there's quite a trickle down effect that I'm sure we will continue to be watching throughout the year.

7:50I wonder how this will affect how brands come to market and whether they will avoid the natural channel to not have to work with distributors like UNFI and Kehi. It definitely seems like a conversation that's happening right now, especially when I think about Whole Foods. There's plenty of areas of that store where Unify is the only distributor you can go through on a national scale. But as you mentioned, Monica, I think over the past few years, we've kind of seen a shift away from maybe Whole Foods being that launchpad for a lot of these natural brands. We will continue to report on developments in this ongoing story.

8:27Become an insider at BevNet and Nosh to access more. And if you're in New York this week for BevNet Live, please stop by, say hi, and let us know what you think of the podcast. That wraps up this edition of CPG Week by BevNet and Nosh. Thank you to our audio engineer, Joshua Pratt. Our director is Mike Schneider and our designer is Aaron Willett. If you enjoyed the podcast, please subscribe on your listening platform of choice and we will see you next time.

9:02Thank you.