Food Distribution Is a Great Business

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One segment that is highly fragmented is the food-distribution business. There are many mom and pop food distributors spread out across the country. Many offer specialty items and few offer one-stop shopping for the restaurant industry. Many chefs shop from several food distributors to supply their restaurants by focusing on quality and price.

The largest player in the segment is Sysco (NYSE: SYY) followed by privately-held US Foods. The segment is now seeing the rise of smaller players that cater to a specific niche. United Natural Foods (NASDAQ: UNFI) sells natural and organic foods to specialty grocers like Whole Foods. The Chefs' Warehouse (NASDAQ: CHEF) sells specialty items like cheeses to high-end restaurants. All three companies look attractive in the long run.

The food-service giant

Sysco distributes food products to restaurants, healthcare and educational facilities, hotels, and other food-services and hospitality businesses. The company also distributes non-food items including paper products, tableware, cleaning supplies, and kitchen equipment and supplies. Sysco operates 185 distribution facilities in the U.S., Canada, Ireland, and the Bahamas serving approximately 400,000 customers.

In the most recent quarter, sales increased by 4% to $10.9 billion. Earnings disappointed and came in 22.7% lower at $0.34 per share. The company cited a weak economy and poor weather for the drop in earnings as less people frequented restaurants.

The growth for Sysco is in expansion. The food-distribution business is a $235 billion business growing 1% to 2% annually. With approximately $43.9 billion in revenue, Sysco is the largest player and has the financial capability to buy any player it wishes. Acquisitions have been a big part of Sysco's growth that has seen the company grow from only $115 million in revenue in 1970 when Sysco went public.

To finance expansion, Sysco has $335.51 million in cash and only $2.8 billion in debt on the balance sheet. Operating cash flow last year was $1.3 billion, so Sysco can easily service more debt. So far in fiscal 2013, Sysco has completed 11 acquisitions that will add $1 billion in revenue.

The go-to distributor for natural and organic foods

United Natural Foods is a national distributor of natural, organic and specialty foods and products including nutritional supplements, personal-care items and organic produce. The company operates 26 food-distribution centers in the U.S. and Canada. Its customers include food cooperatives, supermarkets, natural-food stores, and specialty retailers.

In the most recent quarter, sales increased 12.8% to approximately $1.6 billion. Net income increased 8.9% to $31.6 million. Gross margin for the quarter was 16.8%.

There are several avenues for growth for United Natural Foods. For one, it is the largest natural and organic food distributor with over 65,000 specialty items. With 26 distribution centers, the company now has the scale to service more grocery store chains.

Consider that Whole Foods relies on United Natural for 31% of the goods sold in its stores. Safeway relies on United Natural for only 0.6% of its goods. United Natural has very small relationships with Kroger and Publix. As more consumers go organic, I see these chains turning to United Natural to satisfy their customers' demands and increasing revenue for United Natural.

Second, United Natural could grow via acquisition. The company has only $175 million in debt and there are an estimated 200 smaller, regional players in the organic-food-distribution business. The Organic Trade Association forecasts organic sales to grow 9% annually. As the largest player in the organic-food- distribution space, there's plenty of room for United Natural Foods to grow.

The distributor all great chefs go to

The Chefs' Warehouse is considered the place all great chefs go to shop. It is a specialty food distributor that has been sourcing products for high-end chefs for the past 30 years. The company has locations in New York City, Washington, D.C., San Francisco, Los Angeles, Las Vegas, Miami, and Portland, Ore. The Chefs' Warehouse caters to fine restaurants, hotels, caterers, and gourmet stores around the country.

In the fist quarter of this year, net sales increased 42.2% to $139.4 million. EBITDA increased 39.8% to $8.3 million. The growth is the result of the company's most recent acquisitions. Same-store order patterns for its customers grew in the mid-single digits in the quarter. Even without the acquisitions, organic sales grew 5.7%.

Going forward, the company just issued a $100 million note to finance more acquisitions. Its focus on high-end restaurants gives it an edge over other food distributors. No other competitor is as focused on servicing high-end restaurants with the specialty foods they're looking for like The Chefs' Warehouse. According to the company, there are an estimated 2,000 specialty food distributors with $10 million to $70 million in revenue that the company can target for acquisition. What I like about this niche for The Chefs' Warehouse is that chefs want premium products and are willing to pay premium prices to get the best.

For the full year, the company expects revenue to be between $650 million and $690 million and EBITDA of $46 million to $51 million. Earnings are expected to be between $0.84 and $0.94 per share compared to $0.69 per share last year.

Foolish assessment

The food-distribution business is a great business to be in. My favorite two are The Chefs' Warehouse and United Natural Foods. They have the most room to grow. Conservative investors can buy Sysco and collect a 3.3% annual yield. Either way, the prospects for the industry look great and it's a great sector for investors to be in.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Sysco. The Motley Fool owns shares of The Chefs' Warehouse . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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