A wave of consolidation has swept across the foodservice distribution industry over the past decade as Reinhart Foodservice, Performance Food Group and Gordon Food Service and others have expanded their market share through acquisition. Notable deals in New England include Reinhart’s purchase of Agar Supply and Gordon’s purchase of Perkins Paper.
That wave is about to crest.
If Sysco obtains government approval as expected for its planned acquisition of US Foods for a total price of $8.2 billion (including $3.5 billion for US Foods’ private equity stockholders, plus Sysco’s assumption of US Foods’ $4.7 billion debt), the deal would combine the only two foodservice distributors that have a national presence. According to Technomic the companies’ combined revenues total $60 billion – five times larger than the new #2 player, Performance Food Group – and the Wall Street Journal reports that the combined entity would control more than 25% of the domestic foodservice distribution industry.
The merger’s impact on restaurants, schools, hospitals and hotels has garnered attention in the press, as restauranteurs bemoan their lost ability to keep food and beverage prices in check by pitting the two market leaders against each other.
Less attention has been paid to the looming impact on middle market food & beverage manufacturers. These companies are already hit up by the large distributors for rebate programs, spiffs, in-house food shows and other forms of sheltered income. Sysco’s takeover of US Foods will increase its importance to each manufacturer that now supplies either of the distributors, and in each product category Sysco will likely pit supplier against supplier for the right to sell to the combined entity. Moreover, those manufacturers which currently supply both Sysco and US Foods and have unequal trade spending between their current Sysco and US Foods programs will likely be pressured to transition the combined program to the higher spend level.
The result? Thinner profit margins for food manufacturers.
To combat this trend food processors need to adapt to changes in foodservice distribution, according to the president of Japanese seafood conglomerate Maruha Nichiro Foods. “Food processors haven’t prepared enough to meet with expansion and integration of food distributors,” said Michiro Sakai at a press conference in December. “We need to meet with their changes on scale, speed and skills.”
The Hale Group suggests that manufacturers structure their future interactions with Sysco/US Foods similar to the manufacturers’ grocery business with Walmart, including:
- Dedicated cross-functional teams aligned with Sysco/US Foods counterparts
- Integrated systems and transparency of information and data flow
- Category captains within key product groups to help manage the categories and drive demand creation plans
- Aligned go-to-market teams focused against strategic customer segments
- Embracing innovation and new products under their brand, or on a first-to-market basis
For manufacturers less dependent on Sysco/US Foods business, or those who wish to have a more balanced distribution model, the Hale Group says the priority will be to build a strong national distribution plan that incorporates distributors beyond Sysco/US Foods. This will ensure broad customer access to the manufacturer’s products and services, especially from those customers who turn to regional distributors to mitigate Sysco’s pricing power.
When swept by the wave of distributor consolidation, these and other strategic initiatives in sales, marketing, front office and customer service will be key factors determining which manufacturers sink or swim.