by: Barry Friends | Bob Goldin | Bob Planck*
February 19, 2019
Market-leading growth in high-margin independent case volume and private brands continues to be a major catalyst for improved year-over-year performance by the three largest foodservice distributors – Sysco, US Foods and Performance Food Group. However, while generally solid, the 2018 fourth quarter results of the “Big Three” show an alarming, but not unexpected, increase in operating expenses. In the case of US Foods and Sysco’s US Foodservice, operating expenses grew faster than gross profit. The increase is largely due to higher freight, labor and other supply chain costs.
Given the extremely tight labor supply, the referenced cost pressures are likely to continue (and perhaps accelerate) in 2019 and beyond, making cost improvement and enhanced productivity even greater priorities for these companies and other distributors. To illustrate, Sysco just implemented organizational changes resulting in the reduction of 10% (~200) of its corporate support salaried positions, and we expect the other distributors to pursue streamlining initiatives. The downsizing move may reflect concern about worsening headwinds.
The companies’ quarterly filings and analyst presentations reveal some interesting dynamics relative to their performance:
- Sysco’s US Foodservice Division (+4.2% in the quarter) is significantly outpacing International (+0.8%) and Sygma (-5.9%), underscoring the relative strength of the domestic broadline market. Sysco also reported a 40-basis point gain in private brand share. This gain is especially impressive given their massive existing base of private brand business.
- US Foods’ acquisition of Services Group of America’s Food Group (SGA) will expand its footprint and enhance its capabilities in perishables and logistics. However, the government shutdown has caused a delay in the closing of the transaction, which is now expected to occur in the second quarter of this year. Further, as part of a multichannel strategy, US Foods is expanding its cash-n-carry and e-commerce platforms.
- Performance Food Group’s Vistar Division is an increasingly important contributor to the company’s top- and bottom-line growth. Last quarter, Vistar’s sales were +12.1% and its EBITDA +33.5% vs. the same period in the previous year; Performance Foodservice was +5.8% and +2.1%, respectively.
The “Big Three” have reaped the benefits of their strategic focus on the independent market, which has been in a growth cycle over the past five or more years.They have gained valuable share of this important segment at the expense of other distributors and appear to expect independents to continue to be a major growth driver. The comparative profit advantage of independent vs. chain and contract volume cannot be understated – it is, at least, 3 times as profitable. However, independents are being adversely impacted by a confluence of factors, including huge occupancy cost escalation and wage increases; chains and many institutional accounts are better able to withstand these cost pressures. Consequently, we increasingly believe that independents are experiencing a marked and deepening slowdown and growing closure rate that may require the distributors to revise their go-to-market priorities.
*Bob Planck, founder and former CEO of Independent Marketing Alliance, is a Pentallect Senior Advisor