By: Barry Friends | Bob Goldin and Bob Planck*
August 15, 2019
Sysco, US Foods and Performance Food Group’s latest results reflect growth in sales, case volume, gross profit and gross profit per case. However, all three companies, like others in the industry, are experiencing significantly increased operating expenses that are negatively impacting operating profit growth. The operating expense increase is largely attributable to rising labor costs across the board, but especially in warehouse and transportation (note that food cost inflation has risen sequentially over the past few quarters). Labor shortages are chronic and systemic; they represent the most consequential headwind the industry has faced since the recession, and expense-wise, the toughest in a generation. We fully expect these adverse conditions to continue – and likely accelerate – for the next few years. This will cause distributors (and the entire food supply chain, for that matter) to make major changes to their operating practices to adapt to the new market realities.
By all accounts, restaurant traffic and same store sales are flat to down across virtually all major segments. In spite of this, Sysco, US Foods and Performance Food Group – the Big Three – continue to achieve above market case volume growth to the financially lucrative independent segment. We believe much of their independent case volume growth is due to increased line item sales to existing accounts, improved product mix (including more sales of exclusive brands) and better account retention (in other words, less churn). In an intensely competitive market, the Big Three – to their credit – are focusing their efforts on improving their penetration and overall position with their “best” independent customers. Performance Food Group is also benefitting from the strong performance of its Vistar Division.
Consolidation is a major current theme in foodservice distribution. US Foods expects to close its acquisition of SGA Food Group in September. Last month, Performance Food Group announced its plans to acquire $6 billion Reinhart Foodservice, a strategic transaction that will expand its reach, market density and overall scale. Both of these transactions will be transformative. And just this week, Sysco acquired J. Kings, a well-regarded $150 million New York area broadline distributor. We are quite certain that there will be further consolidation in the very near future as major distributors seek to expand their businesses, and owners of independent distributors take advantage of a “seller’s market.”
Each of the referenced acquired companies had existing alliances with buying and marketing groups. The groups will feel the effects of the loss of such important and committed members and will need to find ways to fill the gaps that have been created.
* Bob Planck, a valued Pentallect affiliate, is the founder and former CEO of Independent Marketing Alliance (IMA)