Business Strategy in Food Service Distribution
The Food Distribution Industry
Simply put, foodservice is the industry that serves food that is not prepared at home. If you ate out this week, last weekend, or today for lunch, you contributed to the $226 billion in annual sales of the foodservice industry. If your child had a school lunch, your grandmother or grandfather had breakfast in a nursing home, your spouse had coffee at the company cafeteria, or your nephew ate in a military chow hall – they were all being served by some segment of the foodservice industry. All of this being achievable through a complex food service supply chain – a distribution network of independent companies that supply a broad range of products and services that help the food prepared away from home industry be possible. In fact, next time you catch yourself in a restaurant, it wouldn’t be a stretch to state that almost everything within that facility was brought there by a foodservice distributor. The menu items, the plates, the high chairs and yes even the paper towels and toilet paper in the bathroom – all brought in and provided by a food distributor. Every day, foodservice distributors make sure that products needed by foodservice operators are delivered safely – from seafood, proteins, produce, dry goods, dairy, and frozen products to the beyond (Perkins, 2014).
Sysco
Company Profile
Since the initial public offering in 1970, when sales were $115 million, Sysco has grown to $44 billion in sales for fiscal year 2013. Today, Sysco has sales and service relationships with approximately 425,000 customers. Operating from 193 locations throughout the United States Bahamas, Canada, and Ireland; Sysco’s product lines are as diverse as the 48,100 employees who support its daily operations. Safe to say, Sysco Corp. is the largest distributor of food and related products, primarily to the foodservice industry (Sysco, 2014). In FY 13, U.S. sales represented 88% of Sysco’s total, Canada sales represented 11%, and other geographic locations only 1.6%. Like all broadliners, Sysco distributes an assortment of food products, including frozen foods such as meats, fully prepared entrees, fruits, vegetables and desserts; canned and dry foods; fresh meats; dairy and beverage products; imported specialties; and fresh produce. The company also distributes non food products. These include paper products, tableware such as china and silverware, cookware, restaurant and kitchen equipment and supplies, and cleaning supplies. The company also provides customers with additional services like providing product usage reports, menu planning, food safety training and assistance in inventory control. To clarify, no single customer accounted for 10% or more of sales in FY 13, limiting Sysco’s liability and ability to absorb the loss easily should a large customer leave (S&P, 2014).
Financials
(SYY, 2014)
(SYY, 2014)
(SYY, 2014)
Competitive Strategy
Sysco’s competitive strategy is that of Cost Leadership. We’re all very familiar with Walmart and its use of its massive scale to procure and distribute products at a lower cost than its smaller rivals can obtain. Simply put, Sysco is the Walmart of the food distribution industry. Because of its size, Sysco has the ability to – like Walmart, procure products at lower prices than its competitors and distribute them at a competitive advantage. In fact, exactly like Walmart, Sysco derives advantages from having a large and efficient distribution system that allows it to deliver goods to its stores at a low per unit cost. This enables the company to earn higher profits than its competitors. Sysco and Walmart’s competitive advantages are so similar, in fact, that the two companies even earn similar operating margins as presented in the following graph (Cooper, 2013).
(Cooper, 2013)
Recommendations
With the news of Sysco Corp. buying the second largest distributor in the United States U.S Foods for a total value of the deal at about $8.2 billion. If allowed by government regulators, when the acquisition closes, Sysco will have annual sales of about $65 billion. (Sysco, 2013). As strategic value innovations go, this would have been my recommendation. While keeping in line with its current strategy, the synergies and sheer size of the “new” Sysco will eclipse its competition in regards to buying power and influence on vendors. It can remain the Cost Leader but moving forward Sysco will have the advantage and power to influence prices like never before and therefore increase its margins. Unfortunately, some operators will have no choice but to use Sysco, therefore empowering them to quickly make up for the $8.2 billion expense. Should the deal not go through, as a value innovation, my recommendation to Sysco would be to reevaluate its inventory model and match it to that of its competitive strategy. Too many broadliner foodservice distributors try to be everything to everyone. It is important to understand ones strategy and its customer base. As the Cost Leader, it is Sysco’s responsibility to evaluate the inventory it carries and how it can further maximize that strategy. To be specific, some broadliners carry fifteen variations of apples. Under the Cost Leader model, it would be ineffective to carry that many stock keeping units (SKUs). After all, it most likely not purchasing truckloads of each item and therefore not maximize its efficiencies where it can pass those savings onto their customers and in effect continue their trajectory to offer lower cost items. Of course some customers may not like the lack of choices, however under this new economy, price more often than in the past, trumps variety.
References
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Perkins C. (2013). Foodservice Distributors: If You Eat Out, You Know Us. IFDA. Retrieved March 12, 2014, from http://www.ifdaonline.org/About-IFDA/Who-Are-Foodservice-Distributors
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United Natural Foods, Inc. Extends Its Partnership With Whole Foods Market. PR Newswire. (2009, June 02). Retrieved March 17, 2014, from http://www.prnewswire.com/news-releases/united-natural-foods-inc-extends-its-partnership-with-whole-foods-market-95400729.html
