Here’s how a company can thrive with a broader purpose than just profits

October 25, 2019

By H. Lee Murphy | Crain’s Chicago Business

Leaders of America’s biggest companies generated headlines—and considerable skepticism—with a proclamation redefining the purpose of a corporation to include goals beyond maximizing profits.

Observers wondered how a company could prosper in cutthroat markets while trying to serve not only shareholders but an array of “stakeholders,” from suppliers and customers to local communities and the environment, as the Business Roundtable recommended in August.

A low-profile food distributor in west suburban Naperville sheds light on the question. Kehe Distributors has grown tenfold to $5 billion in sales over the past decade while devoting considerable attention and resources to causes such as protecting the environment, fighting hunger and battling human trafficking.

Specializing in natural foods, employee-owned Kehe carries more than 70,000 brands, including most of the meat substitutes that have surged in popularity recently. With 5,500 employees, 700 trucks and 5 million square feet of warehouses across the U.S., it’s the second-largest natural foods distributor, behind publicly held United Natural Foods Inc. in Providence, R.I. However, UNFI is four times Kehe’s size—sparking speculation that Kehe will make a deal to close the gap.

An acquisition nearly a decade ago—of Florida-based Tree of Life—put Kehe on its idiosyncratic path. Kehe CEO Brandon Barnholt was still relatively new and seized on Tree of Life’s dedication to social responsibility, quickly transforming Kehe’s culture. “Our goal has been to simply make the world a better place,” says Barnholt. “The culture here is built on a passion for serving. I think it’s a major reason why we’ve grown as we have.”

Kehe’s status as one of the nation’s 2,400 certified B corporations allows more leeway to pursue an altruistic agenda. B corporations pledge high standards of transparency, accountability and economic success as a force for good. Ari Goldsmith, Kehe’s vice president for marketing, says B status “validates Kehe’s core purpose—we serve to make lives better.”

The company gives 10 percent of profits to Kehe Cares, a two-year-old foundation administered by employees who donate time and money to good works such as running soup kitchens, creating healthy meal kits for the hungry and building and repairing homes in disadvantaged neighborhoods. Through its CareTrade program, Kehe runs special promotions for brands from suppliers committed to values broader than commercial success. It also contributes to organizations that rescue women caught up in sex trafficking.

Kehe works hard to reduce its energy use. Through the U.S. Environmental Protection Agency’s SmartWay Transport Partnership, the company manages its logistics in an environmentally responsible manner. It operates a “spoiler alert” system that sends out-of-date packaged foods to charities for distribution to the needy, cutting food waste 10 percent. Kehe offers those controls to its retail customers to help them reduce waste, too.

How do all these do-good initiatives affect the bottom line? Goldsmith says fiscal 2019 profits are on a record course, noting annual revenue zoomed from $600 million to more than $5 billion in 10 years. The Kehe culture, she says, “affects the bottom line in a positive way. It leads to higher engagement from our employees and a deeper connection with our supplier and retailer partners because we’re all working together to make a difference.”

COMPETITIVE EDGE?

Analysts applaud Kehe’s priorities. Bill Weiland, CEO of Presence Marketing in South Barrington, who has consulted with Kehe, says, “Yes, retail customers of Kehe want to see competitive pricing and service. But in the natural foods space, many of them like to do business with corporations that are showing social and environmental responsibility, too. It’s these companies they’ll choose to partner with before others.”

A sophisticated investor also buys into Kehe’s approach. TowerBrook Capital Partners, a New York private-equity firm that backs companies with social missions, acquired a small stake in Kehe in May. TowerBrook didn’t return calls.

Kehe’s altruistism even helped smooth the way for several acquisitions, including Nature’s Best in 2014. Now some observers say Kehe itself may be a target for retailing giant Amazon, which has acquired the 500-store Whole Foods chain and started building more grocery stores. Acquiring an in-house natural foods distributor would enable Amazon to short-circuit the wholesale tier (UNFI is the current supplier).

“Kehe would be a perfect acquisition for Amazon,” says Burt Flickinger III, managing director of New York retail consulting firm Strategic Resource Group, who reckons Amazon might pay as much as $3.5 billion for Kehe, a number that employee owners might find hard to refuse. “Kehe has the ideal distribution network and expertise to fill the big missing link at Amazon—dedicated distribution to Whole Foods.”

While Barnholt, who ran the White Hen Pantry chain before joining Kehe in 2007, won’t comment on such speculation, and Amazon also had nothing to say, other food industry followers find the idea of a Kehe link-up to Amazon intriguing. Amazon is a master warehouser, but Kehe’s million-square-foot facility in southwest suburban Romeoville takes a back seat in technology to nobody. It rises more than 80 feet, with robots picking products off shelves seven stories high around the clock.

“Like Amazon, Kehe is equipped to be very good at fulfilling online orders,” says Jim Wisner, president of Wisner Marketing Group in Lake Forest, who frequently consults with Kehe. “On paper and in practice, the two companies could be a very good fit.”

If Amazon doesn’t swoop in, Kehe has an array of potential buyout targets, including SpartanNash in Michigan, Wakefern Food in New Jersey and AWG in Kansas (none would comment). “There is no shortage of possible combinations,” says Ajay Jain, an analyst at Pivotal Research in New York who follows food wholesaling.

Founded in Art Kehe’s Palatine basement 67 years ago, Kehe focused for years on independent local retailers. As that clientele dwindled, it pivoted to major grocery chains like Albertsons and Kroger. Organic and natural foods are expanding at 5 percent annually, compared with 1 percent for broad-line groceries, according to data technology company Spins.

CEO Barnholt figures the available market for natural and organic foods grocery distribution is worth about $30 billion annually. He recognizes Kehe needs more deals to keep growing, even while holding fast to its high-minded ideals. “No question we can continue to grow at a nice pace,” Barnholt says.