For years, the country’s largest food distributors could not get enough of the independent restaurant. Sysco, US Foods, Performance Food Group and just about everybody else were busy jockeying for their business and the higher profitability they bring.
And then in March of last year a disaster hit that group, upending a key source of profits and sending those companies into an era of deep uncertainty.
How distributors come out in the future depends heavily on what happens to that particular group. If the world remains dominated by chains, which has been the case for much of 2020, then the distributors’ business model will have to change for good. If those independents come roaring back, however, then the pandemic will look more like an interruption than a permanent shift.
“Part of the challenge all the big distributors are having right now, they’re all focused on driving business with the street,” said David Henkes, senior principal with Restaurant Business sister company Technomic. “Everybody wants the street operator. That’s where the margin is. That’s where the growth has been. And when you look at the part of the business most impacted by the pandemic, it’s that core customer.”
In looking at the future of the food distribution business, much remains uncertain. The business has been in something of a holding pattern during the past several months, which should continue as it becomes clearer where the foodservice industry is headed.
To be sure, some things have changed—much like restaurants, distributors are more aggressively going digital with their customers—but the future of that industry will depend heavily on what its customers do. And that remains uncertain.
The independents problem
The coronavirus wiped out $240 billion in restaurant sales in 2020. It also led to the closure of as many as 100,000 locations, according to the National Restaurant Association.
Most of those were almost certainly independents. Chain restaurants, including both full-service casual-dining and fast-food chains, have recovered most if not all of the sales they lost between March and April. Independents, because they skew toward full-service concepts, have been hit hardest by dining restrictions. And without the benefit of social media marketing or their own app development, many struggled to generate the takeout that helped their chain brethren survive.
This has been a particular problem for the nation’s broadline distributors, which built their business largely on independent restaurants, which are more profitable than the chain business. “The part of the business that’s going to do the best is the chain business,” Henkes said. “It’s a little bit of a mindset shift, certainly among the larger distributors that focused on independents or the mom-and-pop business.”
The immediate effect of the post-COVID era is expected to boost chains over independents, which have more sophisticated takeout strategies and can more easily adapt to a shifted reality.
That said, independent restaurants haven’t closed at rates feared back in March. “Expect independents to remain strong over the longer term,” Dirk Locascio, US Foods CFO, told investors in January, according to a transcript on the financial services site Sentieo. “’It could look a little different with the specific operators over that time, but we feel very good about independents over time.”
Still, many believe distributors will have to learn to live with a different market, at least for a while, in the post-pandemic era. That means working more with chain restaurants.
But even independents could operate differently. Henkes, for one, believes more independents could join group purchasing organizations to lower their own food costs down the road. Hotels and noncommercial foodservice providers have long used such organizations, but restaurants could, too.
“As cost control and margin growth for restaurants becomes a matter of survival, more restaurants will turn to some kind of managed procurement, or centralized procurement, to get better deals,” Henkes said. “This will have an impact on distributors, how they sell and who they sell to.”
Distributors themselves appear to be working to get more competitive, which itself could push more changes in how restaurants get their food.
For instance, much like restaurants are adding apps and other technology to serve their customers, many distributors ramped up their own technology investments in a bid to get more sales out of existing restaurants.
“We have roughly 30% share of wallet at that local independent street level,” Sysco CEO Kevin Hourican told investors in December, according to a transcript on the financial services site Sentieo. “The biggest financial lever we have is to increase, and we desire to increase meaningfully, that local share of wallet.”
The company is making strategic investments in technology in the second quarter on its Sysco Shop online portal and on improving the customer experience.
The services distributors provide to their restaurant customers could become more vital over time, Henkes noted. “All these services are more critical than ever,” he said. “Operators are willing to pay for some of these things that are true differentiators.”
Yet as restaurant companies themselves change and evolve, the distributors will have to evolve, too. Pat Mulhern, executive director of DMA, a national foodservice distribution system, believes that distributors could make more, smaller deliveries over time—in part because restaurants themselves could be smaller over time and have less room for storage. “The future restaurant looks like a pop-up camper,” he said.
And restaurants themselves could look for fresher ingredients or more control over how much they order at any one time. Already, some distributors such as Sysco have eliminated minimum delivery requirements. That will put more pressure on distributors over time to make more deliveries.
But there are other issues, too. Virtual kitchens are popping up quickly, which themselves could create challenges for distributors. The rise of ghost kitchens, which house multiple delivery-only brands under the same roof, could also create issues for distributors down the line.
“Logistics for distributors are going to become quite a bit harder,” Henkes said.
More or less M&A?
Distributors themselves were remarkably resilient, though like chain restaurants, many cut significant costs from their operations—Sysco, to name one, cut $350 million in costs and expects that to be permanent.
“There’s only been one larger [distributor] that declared bankruptcy earlier in the year,” Locascio said. “There’s one or two that we know that have taken some capital infusions. But otherwise they’ve held up fairly well.”
What is likely not to change is the makeup of the largest distributors. “The mega-mergers are done,” Mulnern said.
The three large, dominant delivery providers, Sysco, US Foods and Performance Food Group, are unlikely to make another effort to merge with one another. They could, and certainly they have the cash, to make smaller deals. Or they could push into international markets.
Smaller providers, meanwhile, could pair up. But the pandemic has yielded surprisingly little change in the overall distribution market.
In the end, in other words, though distributors faced many of the same challenges during the pandemic, and have work to do to adapt to a shifted market, in the end they will look much the same as they did beforehand. “I’m not sure the basics of food distribution changes much,” Henkes said. “The details in how they make money is going to change.”