Several months have passed since the collapse of the merger between Sysco Corp. and US Foods Inc., and in that time both distributors have been relentless in their efforts to put that episode behind them.
Just last week, the two distribution giants announced three acquisitions, including one apiece on Friday, when Sysco announced plans to buy North Star Seafood Inc., based in Florida, and US Foods announced an acquisition of Massachusetts-based distributor Cara Donna Provision Co.
At the same time, the companies have taken steps to evolve their businesses. US Foods filed a registration statement for an initial public offering earlier this month. On Monday, Sysco announced a three-year plan that includes a 2-percent reduction in its workforce.
“This period over the past couple of years was a pretty big distraction for both companies,” said Bob Sala, an industry consultant and former founder and CEO at distribution marketing company Distribution Market Advantage. “So many things were put on hold due to the merger discussion.
“What you’re seeing now is that both companies are getting back to the basics of broadline distribution.”
Sysco and US Foods are the two largest distributors in the U.S. They proposed a combination in late 2013, but called off the deal last summer after the federal government sued to keep it from happening.
So now the industry has returned to where it was in late 2013, with the broadline distributors consolidating and playing to their respective strengths.
With Sysco and US Foods adding to their already substantial businesses, the rest of the industry might have to consolidate to keep pace. “With the explosion of new routes and channels throughout the industry, it’s an ‘all versus all’ game for distributors,” said Debra Bachar, president of food industry consulting firm Blueberry Business Group. “Everyone is at risk of being overtaken.”
US Foods lost the most during the year and a half when its sale to Sysco was in limbo. It is the smaller of the companies, with $23 billion in annual revenue versus $36 billion for Sysco, and has $4.7 billion in debt.
Sala said that the company appears to be working to rebuild its sales force and market share lost during that limbo period. The company has lost some sales, which declined slightly in the first nine months of 2015, according to Securities and Exchange Commission documents.
In December, the Rosemont, Ill.-based company acquired Dierks Waukesha, a family-owned distributor with 3,500 customers in the upper Midwest.
On Friday, it announced the acquisition of Cara Donna, a family-owned company with 1,300 customers in New England.
Sala believes these deals were about getting those distributors’ local customers, as well as their sales representatives. By acquiring these distributors, he said, the company can quickly rebuild its sales force.
“Now you don’t have to go out and borrow, steal and train a sales force, and you’ve acquired a company with a great reputation with local customers,” Sala said.
The $100 million initial public offering that US Foods filed in February may, in fact, be designed to improve the company’s liquidity to continue funding such deals in the near future, Sala said. The funds will be used to pay off some of US Foods' debt, which could improve liquidity.
As for Sysco, its acquisitions have been designed to build its product array and expand its reach. With its acquisition of North Star Seafood, which has about $128 million in annual sales, Sysco gets access to that company’s relationships with seafood suppliers. That can help improve the company’s ability to serve restaurants and other customers in Florida.
Sysco’s $3 billion acquisition of European distributor Brakes Group, meanwhile, expands Sysco internationally.
“Sysco is leveraging value up and down the stream,” Bachar said. “The long-term strategy includes diversification with an enhanced product portfolio and an international footprint.”
These deals from both Sysco and US Foods also signal a shift in the focus of distributors toward more local, independent customers instead of chains. Both companies have been working to increase their base of local customers, which are more profitable because independents are more likely to purchase the distributors’ in-house brands, Sala said.
During the recession, he noted, distributors concentrated more on winning chain business, which can drive top-line sales. But now that local and independent restaurants are growing again, the focus has shifted toward the more profitable lines of business.
To that end, Sala said, the mergers and moves by US Foods and Sysco could be good news for independents that will have more access to in-house brands that are cheaper.
But multi-unit operators and chains could see higher distribution prices as a result of the increased consolidation.
“It’s good news for local operators,” Sala said. “It’s not so good news from a pricing standpoint for the multi-unit operators.”