Sysco Corporation (SYY) is a leading distributor, marketer, and seller of food, equipment, supplies, and related products to the foodservice industry. The company’s diverse customer portfolio includes restaurants, educational institutions, hospitals, nursing homes, and lodging establishments. Currently, it operates 180 distribution facilities, and serves more than 400,000 customers in the United States and Canada.
Think of Sysco as the supermarket where professional chefs go to shop. Although the food services industry is a highly fragmented segment, Sysco is quickly becoming the Goliath of the group, and size has its advantages. Its market share is 15% vs. 10% for number two U.S. Foodservice (part of Ahold), and the 3% market share for number three Performance Food Group. For example, Sysco is able to contract with food makers to develop products sold under the Sysco brand, and roughly half of its sales come from private-label products. Another advantage to being large is the ability to weather the economic vagaries, which Sysco has been able to do, perhaps better than its competition. While food distribution is generally a low-margined, capital-intensive business, Sysco’s economies of scale have allowed it to consistently post returns on invested capital that exceed its cost of capital.
Broad growth avenues exist for Sysco moving forward. It should come as no surprise that because of this company’s size, it could utilize acquisitions as a growth strategy. Take FreshPoint for example, Sysco’s produce subsidiary, which has completed five acquisitions since 2005. Another route the company may choose to take is expanding its footprint to include more of the Southwest and the Pacific Northwest territories, since it already has a strong market presence in the eastern half of the United States. In addition, it may be looking at cost-efficient strategies to expand on facilities located in Canada. These possible paths for growth that have been mentioned may prove to be profitable in the future, but right now Sysco is focused on expanding its private-label food business. This includes five in-house brands that exist under the Sysco banner. These brands offer more than 40,000 higher-margined products aimed at meeting the industry’s need for reasonably priced, quality products.
Perhaps the most exciting and groundbreaking business tactic currently employed at Sysco, may be the iCare entity. iCare specializes in connecting restaurateurs with other business partners. Sysco professionals, in order to market their business, hire specialized employees, and connect its clients with various financial and operational resources. Every aspect of owning and operating a successful business in the food services industry is covered in the iCare program.
This company is a unique player in the retail/wholesale food industry and appears to be on solid footing, with bright prospects for future growth. Despite this market segment lagging slightly behind the economic recovery due to selective deflationary pressures on shelf prices and customers becoming more bargain conscious, causing current positive dining trends to take a brief hit, Sysco’s broad mix of products and services have it well-positioned going forward. A recent IGD market survey of more than 1,000 consumers found that 98% of respondents are dining out one or more times a week and spending more while out, against the previous year’s purchasing habits. Also of importance is that of those polled, 75% stated that they are trying one to three new restaurants a month, while 17% said they are visiting four or more new eateries during that same time frame. All of this new data is great news for Sysco, proving that although current market conditions remain restricted, over time individuals are dining out more often. Supplying these restaurants comprises an ever-large share of its business portfolio.
Overall, the long-term view for Sysco is overwhelmingly positive. The company has managed to record earnings gains, without interruption, for the past ten years, along with double-digit historical growth rates for earnings per share over the 3- to 5-year time frame. In addition, Sysco is keenly focused on trimming costs from its already lean operating structure. For instance, the company is working to reduce the complexity of its supply chain by more efficiently routing its deliveries, and building several new redistribution centers. It has already seen some initial benefits from these efforts. This company’s expansive distribution network and its leading market position should enable it to continue generating strong cash flows and solid returns for shareholders.