"The industry is showing growth but this growth can be described as tenuous." – Technomic |
"From the demand side, the situation is positive as the industry continues to grow at a good pace. Food inflation from a supply-source side has moderated somewhat, as well. However, the cost environment has become very challenging with rising fuel and insurance prices impacting negatively on profitability," the Chicago-based researcher indicated.
In 2004, foodservice distributors recorded $207 billion in sales, with broadliners ringing up $114 billion or 55%; specialists – $68 billion or 33%; and systems – $25 billion or 12%. At the same time, the ID Top 50 broadliners reached sales of $73.1 billion or 9.5% more than the previous year.
Certain other trends, such as government regulations, notably the one concerning hours of service, also need closer monitoring by distributors, Technomic said.
PERFORMANCE INDICES SHOW STRENGTH Analyzing three distributor-performance indices, Technomic noted that year-to-date comparisons between July 2005 and the previous year, which was assigned a 100 index, sales and gross profit were pegged at 106 and operating costs at 107. Distributors' pre-Katrina assessment of business prospects for the next 90 days attained a positive rating of 75 out of a possible 100 points. However, in the midst of the devastation created by hurricanes Katrina and Rita, ID Access has learned from distributorships that despite initial damage some of them are finding immediate success from supplying relief efforts, which could turn into long-term profitable relationships.
In the five years between 1999 and 2004, the face of the distribution customer has been morphing from an even split between chain and street accounts to 60% multi-unit business. Nonetheless, Technomic indicated, while their share of the distributor's till is 40%, independents are their profit engines. Street accounts' share of gross profits equals 75-80%.
Technomic further pointed out that while the average gross margin for broadline distributors is 17%, the margin on chain business dips to 10% while for street accounts it skyrockets to 20-25%.
Assessing the top three distributorships' 2004 results, Technomic said No. 1 Houston-based Sysco's growth has slowed, including that of its distributor-owned brands. On the positive side, its redistribution centers, with Virginia on line and others fast finishing completion, is the distributorship's "largest strategic project," with internal software R&D investments costing a couple of hundred million dollars.
No. 2 U.S. Foodservice, Columbia, MD, is busy restoring its credibility, however without any top-line growth, the researcher reported. It is improving its financial reporting, involved in selected divestitures and focusing on an improved product mix.
The sale of the fresh cut produce group has improved Performance Food Group's balance sheet and strengthened its focus, Technomic said. Despite year-to-date sales increase of 14%, analysts are concerned about the No. 3 firm's profit performance, it added.
Technomic listed among notable "emerging forces" two chain-focused marketing/procurement groups: Independent Marketing Alliance, Houston, with six major regional members, and Distributor Market Advantage, Schaumburg, IL, with 14 members.
REDISTRIBUTORS TO CAPITALIZE ON BRIGHT PROSPECTS Redistributors are also facing a bright future, Technomic said. Dot Foods, Inc., Mount Sterling, IL, with sales already in excess of $1 billion, is on the acquisition path, having recently purchased Chicago Sweeteners. Sysco is planning nine redistribution centers across the country, and nonfoods firms, such as Bunzl and Lagasse, are enlarging. By 2010, redistributors' revenues should tip the scale at $30 billion, Technomic projected.
Overall, Technomic said the distribution industry faces continued growth of regionals or major independents; mastering of operating expenses due to intensifying margin pressures; increasing emphasis on street business; and portfolio rationalization.
Technomic forecasters placed a great deal of emphasis on category management as a vehicle with which the foodservice industry can cope with the vagaries of doing business today.
Calling category management a "solution" for the industry, Technomic explained that it is "a formal process that facilitates collaborative sharing of information between trading partners to manage categories as strategic business units, producing enhanced business results that lead to a more efficient supply chain, while satisfying the needs of operators."
Technomic continued: Category management is a process to establish annual category objectives and plans; identify and eliminate duplication, identify gaps and fill needs; and leverage manufacturers for insights and implementation support. It isn't a process earmarked to eliminate slow-moving SKUs and their vendors or to fill slots, the think tank added.
Among the operator trends that distributors should be aware of are health and wellness, ethnic menus, beverages, sandwich/bakery café; and varied menus.
"In all, the industry is showing growth but this growth can be described as 'tenuous.' Any economic shock could result in a less positive picture. Cost pressures are intensifying within all links of the channel; hence, price increases are expected to continue. However, historical patterns suggest that foodservice is resilient during economic rough patches and there is no reason to believe that any future downturns would have a different impact on the industry," Technomic concluded.
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