On Monday, December 9, 2013 it was announced that the nations largest foodservice distributor, Sysco, essentially acquired the nation’s second largest food distributor for $8.2 Billion or a multiple of 9.9 of US Foods EBITDA. For those of you who work in the industry this is really big news right now and probably the beginning of an entirely new journey for many. For Sysco more is better as they will ultimately own or control over 200 distribution facilities across the US. Sysco reports that they currently serve over 425,000 customers while US Foods states that they serve over 250,000. According to the National Restaurant Association there are 980,000 restaurants in the US with 7 out of 10 of those being single-unit operations. So if Sysco and US Foods have a self reported combined total of 675,000 customers does that mean that they serve 7 out of 10 restaurants? Probably not, effectively those customer numbers reflect all customers to include hospitals, schools, prisons, little league teams, neighborhood pools, and many that do not purchase products every week.
So why the merger?
Foodservice distribution is a labor and capital intensive business with a somewhat unpredictable sales and revenue model. Scale is critical for food distributors to leverage costs. For a restaurant owner, imagine how profitable your restaurant would be if you could fill every seat from open to close and turn those seats every hour. For foodservice distributors that would be filling every truck that leaves the dock and returning that truck back to the distribution center in less than 10 hours.
Most foodservice companies load trucks with 600-700 cases while probably delivering about 10-12 customers in a 8-10 hour time period on average. But average is the problem, imagine a driver delivering 350 cases to a hospital and then having 20 more deliveries of 17 cases or less to everyone else. That’s an average of about 35 cases per delivery or a little over $1,000 per order not including the hospital. Add in 120 miles of driving time in a truck that gets about 8 miles per gallon, pay the driver with benefits, back the process up less than 24 hours when the order was placed then picked and loaded from a 250,000 square foot warehouse with product that may have been received that day in at least three separate environments, refrigerated, frozen, and dry, weighted, invoiced and delivered. For an average restaurant that is the equivalent of being told in less than 24 hours that you are getting 5 busloads of people for lunch and only 2 people an hour for the remaining hours in your day. Given that there are only 100 pennies in a dollar and only 24 hours in a day I think it’s easy to see the problem.
Mergers are designed to solve problems, combining companies to leverage their individual strengths and incorporate scale, reduce costs and essentially increase profits is a foundational principle of business. One needs to look no further than the airline industry to see the same model. Ironically, on the day that this merger was announced American Airlines emerged from bankruptcy and was acquired by US Air. Similar business model, but instead of moving boxes, move people from point A to B often with multiple airlines flying to and from the same places competing for the same customers.
Sysco wants scale and marketshare and acquiring US Foods will do that as long as all of the customers stay on both sides of the merger for the respective companies. Sysco reports that the combined companies will ultimately acquire $600 million in synergistic savings and before restaurants get too excited, those savings will probably not end up in your pockets. That $600 million will pay down debt and more than likely will end up in dividend checks to Sysco shareholders. As for monopoly, forget it, the combined company will only have about 25% of the available market. In my opinion, our government is too busy trying to fix a website to worry about this merger.
What’s the benefit to restaurants?
If you are a restaurant that thinks that all of this will somehow benefit you, you are probably going to be disappointed. Your prices are not likely to go down, your deliveries won’t now magically appear, and you will still have to pay your bill. What you can do is consolidate your purchases, reduce your deliveries, and pay your bill faster and you could conceivably reduce your overall food bill by a percent or less if your lucky. The facts are that you probably are not really saving any money bidding one against the other. My suggestion is that you focus on building your restaurant brand from the inside out and focus on your customers. If somehow you think you are going to end up with the wrong dance partner as a foodservice distributor then you should take a look at alternative suppliers.
There are a lot of distributors out there and they will undoubtedly be knocking down your door to get your business. My suggestion is to take a look at UniPro Foodservice Member Distributors like Performance Foodservice. UniPro Foodservice is essentially a group that member companies use to gain competitive pricing and efficiencies. UniPro actually has a combined membership that exceeds Sysco, US Foods, and Gordon Foodservice’s combined sales and purchasing. For restaurants that means that you get competitive pricing on the products that you buy. Effectively, member companies of UniPro Foodservice utilize their collective strength’s to procure major branded and private branded products while allowing them to focus on taking care of their customers on a local basis without corporate product constraints on purchasing. PFG is probably has the highest sales growth of all distributors $5 billion or more and I personally think their growth is related to their strategy of letting it’s operating companies run their businesses allowing them to focus on customers and not decisions made in a boardroom.
The Road Ahead
A look back at the last twenty years in foodservice is probably a relative predictor for the future. Mergers and acquisitions played a significant role in building both Sysco and US Foods and are likely to continue in the foreseeable future. Look for Sysco to acquire smaller regionals to increase marketshare and scale in strategic markets. I suspect they will also begin to focus on specialty distributors in select markets. Produce, Seafood, and Meat Specialists will probably be part of the plan. Sysco itself notes in its 2012 annual report that there are more than 15,000 companies engaged in food distribution which provides for plenty of acquisition targets.
The internet/cloud will probably become a more prolific part of foodservice distribution enabling restaurant operators to not only place orders from their iPads, iPhones, Droids, and tablets but manage inventory as well. Restaurants will most likely adopt those tools if they actually help them reduce time and expense but will really embrace them if they can help them build revenue and profits. For most restaurateurs the days of sitting across the table from a foodservice distributor and negotiating prices is probably coming to an end. Pricing will become more transparent with technology and really isn’t the issue it once was so there really isn’t any reason to spend inordinate amounts of time on it. Get your order guide on your computer or tablet and spend time building your business and really understanding your customers.
Finally, if the foodservice distributor spends more time talking about their business than they do yours, get rid of them and get someone that understands your business. If any foodservice rep walks through your door leading with this merger, show them the door, however; if they lead with your business, grab a chair as they are probably worth your time.
UPDATE: July 18, 2014