Very little is set in stone for 2015 foodservice distribution. What can be said with certainty is that the distribution paradigm is undergoing scrutiny, speculation, and—at least to some degree—consolidation and segmentation. While some of the flux results from decisions driven by restaurants—such as the propensity for sourcing fresh, seasonal, and local product—much of the turmoil is beyond the control of restaurant operators and chefs. Labor challenges, government regulations, margin constriction, even the new requirements surrounding menu labeling—all are changes in the marketplace that impact the efficiency of foodservice distribution.
The looming question, however, is just how big the elephant in the room is going to become: Will Sysco’s planned acquisition of US Foods, which was announced in December 2013, create a veritable 800-pound Goliath, or will it, as the company has stated, simply drive more efficiency and cost-reduction in its supply chain?
Conventional wisdom says it will do both, and while the Federal Trade Commission evaluates potential ramifications, many in the industry see the merger as both inevitable and imbued with opportunity.
The president and CEO of the International Foodservice Distributors Association (IFDA), Mark S. Allen Jr., says, “From our standpoint, the foodservice distribution industry, with nearly 15,000 distributors, is incredibly competitive and robust. If the Sysco-US Foods merger goes through, I don’t see it having a huge impact on the marketplace initially. … I think the merger will continue to put pressure on the rest of the industry to make investments and keep pace with Sysco’s efficiencies, but we see it as continuation of how the industry has always been, which is just incredibly competitive and efficient.”
For Sysco, which reported sales of $46.5 billion for its fiscal year that ended June 28, the anticipated $8.2 billion investment to acquire US Foods would be a lucrative move, with company sales expected to top $65 billion after the merger.
“Full-service restaurants represent a substantial portion of Sysco’s customer base, and— while we will continue to vigorously compete for customers—the merger really is about bringing together the best of both companies to better serve customers,” says Sysco spokesman Charley Wilson. “For our restaurant customers—both independents and chains—the merger enables us to reduce costs in areas such as management and logistics. The combined company will be better positioned to respond to changing market dynamics.”
According to industry analyst Technomic, at the end of 2014 Sysco had 17 percent of the total U.S. foodservice market and US Foods had 10 percent, so theoretically the merged entity would hold 27 percent.
“But, they wouldn’t keep all of it,” says Bob Goldin, Technomic executive vice president. “They’ve already announced there would be some divestitures, and there will be some customer attrition. A number of distributors see it as a window of opportunity because the [merged entity] will be in an integration mode, which can create turmoil.”
He acknowledges this perception may be unduly optimistic, as Sysco will clearly be intent on keeping, and ultimately growing, its business. “For most distributors, I don’t think it will mean very much—I think it will be a neutral to a positive impact, not a negative,” Goldin adds.
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The Merger’s Impact on Restaurants
What it may mean for restaurants depends to a large extent on the restaurant’s business model. National chains with significant purchasing power rely heavily on the largest national distributors, but independent operators, restaurant groups, and regional chains source from national broadline distributors as well as from regional, and in some cases market-specific, distributors.
Often regional foodservice distributors share accounts with Sysco or US Foods, and in some instances, with both. If those two competitors merge, in theory, the regional distributor might pick up more market share—particularly from independent restaurant operators who choose partners based on relationships, service, and price.
That’s the expectation at Saval Foods, based in Elkridge, Maryland, and strategically located between Baltimore and Washington, D.C.
“In the short term, the merger creates uncertainty and disruption. We hope to benefit because as an independent distributor we position ourselves as an alternative to the national distributor—and we believe the independent restaurateur, the regional chain, and the country club caterer will look to us as that alternative,” says Paul Saval, president and CEO of the foodservice company his family started in 1932.
Saval Foods is a broadline distributor with 8,000 SKUs (stock keeping units) and a customer base that is 78 percent independent operators including more than 1,200 independent restaurants.
“It’s funny; some restaurants want to work with a large, national distributor because they think they have more resources. But Saval Foods has been around 83 years and our senior management team has been on board 10 to 15 years, so we do provide stability,” Saval says, adding that working with a local distributor gives a restaurant access to “more personal attention, no bureaucracy, and quicker decision-making. Since we focus on independent restaurants, we can satisfy their needs and help them be successful in a very difficult environment where the national chains are very powerful.”
Similar sentiments are expressed by Bill Barulich, CEO of BiRite Foodservice Distributors, another family-owned company that started in 1966 and focuses on serving independent operators in Northern California, primarily the Bay Area near its Brisbane headquarters.
“This is a dynamic culinary environment; the restaurants we serve, and their customers, have very discriminating tastes. In the greater San Francisco area there are fewer chains and more independent operators,” Barulich says, adding that his company, which clocks $310 million in annual sales, is similar in culture to the independent operators it serves, making them natural partners. “For us, it’s a tremendous opportunity.”
As for the potential fallout from a Sysco-US Foods merger, Barulich says, “I’ve talked with attorneys at the Federal Trade Commission. They’ve reached out and had conversations with people like me in various markets. Our market is interesting because—and I say this with great respect for Sysco and US Foods—we don’t have a lot of competition in broadline distribution. Sysco and US Foods are our two competitors, and if they merge, there will be a void in terms of how that business is accounted for—because, by default, restaurants would be forced to do business with Sysco. So, if I was a betting man, I’d say the FTC will allow the merger to take place, but in various pockets of the country where they don’t feel there will be enough competition, they probably will require Sysco to spin off the US Foods branch to somebody else.”
Sysco’s Wilson was unable to respond specifically to this prediction, but told FSR: “While it’s inappropriate to comment on the regulatory review process, it’s a fact that foodservice distribution is an inherently local business. Competition is street-by-street, block-by-block. It’s also easy to confuse a national footprint with a national market. The very few large, so-called national customers use numerous providers and are not locked into exclusive contracts. These customers buy large volumes, and most negotiate prices directly with food manufacturers. They use regional providers, marketing groups, and specialty providers to support their businesses.”
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Known Threats from External Forces
Regardless of what transpires with the two largest foodservice distributors, a host of challenges—many dictated by government regulations—are already impacting both restaurants and distributors.
From IFDA’s perspective, regulatory compliance brings added cost to the supply chain in a number of ways. “Health care and the Affordable Care Act are a big concern for chains and independent restaurants, and that’s of critical importance to distributors, as well,” Allen says.
“Another area of concern is labor, as the administration makes it easier for the labor unions to organize, makes changes to long-standing labor law and policy, and [promotes] an activist labor agenda,” he adds. “Taxes are also concerning. Distributors don’t have the ability to off shore their operations, and they pay an effective tax rate in the range of 35 percent. As reforming the tax system is talked about in Washington, it’s something we are critically interested in.”
However, driver regulations, which affect both costs and customer service, are perhaps the biggest area of concern. “In 2013, the Federal Motor Carrier Safety Administration changed the hours-of-service (HOS) rules, and more specifically the restart provision, which makes it harder for distributors to service their customers with the same number of drivers and trucks on the road. Distributors have had to rework delivery schedules, and in most instances, add new trucks and find new drivers in a very tight employment market for drivers,” Allen explains.
Attracting drivers into foodservice distribution is not easy. The work is intensely demanding, particularly when the driver is delivering to independent restaurants in densely populated urban markets. They drive in congested city traffic; they typically have multiple stops to serve from one load; and they manually lift and carry heavy cases into restaurants that don’t have loading docks. Compared with the career of an over-the-road truck driver, who typically has one stop where the entire load is moved off the trailer by a forklift or other machinery, a career delivering to restaurants is a lot more intensive.
“It’s so physically demanding, the driver careers are short-lived,” Barulich says, adding that BiRite’s recruiting challenges are compounded by the high cost of living in the San Francisco area. “The driver shortage is a national problem,” he asserts, “and young people simply don’t want jobs that require manual labor. The biggest concerns we face are recruiting and retaining employees, and also controlling costs because California is a highly regulated business environment.”
At Saval Foods, its 28 full-time drivers are held in high esteem and the company’s chief executive is the first to stress the importance of their roles. “The driver is the face of our company; customers see the driver more than anyone else in the company,” Saval says, and he makes certain everyone else in the organization appreciates that fact.
One way that national and regional distributors are dealing with the driver shortage, according to Allen, is by dropping a trailer into a market and using a resident driver from that area to pick up the trailer and make local deliveries.
Whether adding flexibility into the delivery schedule or managing new regulations, distributors are doing everything within their control to get a handle on operating expenses. “Fortunately, as gross margins have been compressed, distributors have been able to reduce operating expenses at a rate greater than the gross-margin compression—often by using new technologies,” Allen notes. It could be routing software on a truck, or modifications that enable more fuel efficiency, or better warehouse management systems that reduce the number of picking errors and ensure order accuracy.
Ideally, the cost-savings and efficiencies are shared with restaurant accounts in the form of lower prices or improved service. However, the business model differs for restaurant chains, which are buying in larger volume under contract pricing, and independent operators, which may be paying more for the same items.
“The best friends of distributors are the independents because they are a much more profitable business for the distributors,” says Technomic’s Goldin. “Selling to a chain, distributors are lucky to get 10 percent margins. Selling to an independent, they are more likely to get 20 percent margins.”
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The Cost of Having More
While independent operators may be more profitable accounts, they are also driving the movement to serve fresh, sustainable, local, and artisanal products—all great attributes to the menu, but potential stressors for the distribution network.
“Local sourcing is a real, significant threat,” Goldin says. “It presents a challenge because most distributors aren’t set up to handle that, not to say they can’t, but it’s not their strength, and it adds complexity to the business. Many operators perceive that local distributors are better able to handle this, so I think restaurants will continue to fragment purchases among distributors, and we’ll continue to see specialty distributors in major metro areas do quite well.”
Both Saval and BiRite are prime examples of distributors that have risen to this occasion and set themselves up to effectively manage all the complexities inherent in sourcing specialty items.
At Saval, a virtual inventory system, the Saval Gateway, gives access to products that aren’t in the warehouse but that can be in-stock overnight or within two days, and the products automatically integrate into the customer’s next order for efficient delivery.
“Consumers and restaurants are demanding more variety, and the challenge is to manage all that variety without having to build more and more warehouse space. I’ve been in the business 31 years, and the most amazing thing is how much water we sell now,” Saval says. “The proliferation of [a type of] food in different forms, shapes, and flavors is also surprising. We could have a whole freezer full of french fries.”
BiRite countered the demands for variety by creating a specialty division within the company that addresses the needs for local sourcing, specialty items, and gourmet foods. “In this market, operators are looking for fresh, sustainable, high-quality product—but even in California, there is a limit in terms of the amount produced,” Barulich says.
The specialty division helps balance the supply and demand, and fosters relationships with smaller manufacturers. Noting that the company has 13,000 to 15,000 SKUs, Herb Brosowsky, director of the specialty department, says, “BiRite has a phenomenal 99.4 to 99.6 percent fill rate. To keep in step with that fill rate, we ask the small-batch and artisan manufacturers: ‘What if we are successful selling your product? What’s that going to do to your inventory?’”
For artisan producers or small-batch manufacturers that are accustomed to selling to farmers’ markets, those questions can be surprising. However, the logistics and expenses of selling direct to restaurants—processing orders, delivering products, providing customer service—lead them to work with a distributor. “We like introducing new products, but we always have to ask those ‘what if’ questions to know the product will be available,” Brosowsky says.
Allen reports that IFDA members have embraced local sourcing, and most are finding ways to help accommodate requests from restaurants. “The perception is that locally grown is better for you and fresher, but distributors also take a lot of pride in [upholding] their responsibility around ensuring food safety,” he notes.
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Standards for Excellence
Over the past five years, the International Foodservice Distributors Association (IFDA) has led the charge toward establishing product standards that foodservice manufacturers use to convey complete and accurate information to their customers. This initiative, GS1, has created a common global platform, the Global Data Synchronization Network, for structuring and sharing product information.
“Our initial goal was to have 75 percent of the industry volume (measured by revenue) adopting GS1 standards by 2015, and we’re close,” says Mark S. Allen Jr., IFDA president and CEO. “We developed a list of recommended attributes, and asked manufacturers to populate their products with that information.
Information includes details such as case dimensions and weights that are significant for logistics planning as well as data that a restaurateur needs, such as allergen notes, nutrition facts, shelf-life projections, and expiration dates.
GS1 also establishes precedent for updating information, helping to ensure that manufacturers have adequate processes in place. “Theoretically, any time an attribute changes the update should happen almost simultaneously and be communicated to customers,” Allen says. “If they change an ingredient, a packaging dimension, or a pack size, that’s information the distributor and the restaurant operator would want to know.”
GS1 standards also address food safety, as Allen explains, “When GS1 is fully implemented, it should be easier to understand where the product originated and where it has been. If there has been a recall or withdrawal, distributors should be able to identify it faster.”
