US Foods Inc – Positioning for Market Share Gains
Across Foodservice Recovery – 4 May 2021
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Specialist:
Title:
Bradford Foerster (BF)
Former Division President, National Chain Account Business Development at US Foods
Holding Corp
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
Agenda:
1. Food-away-from-home segment strategic update
2. US Foods Inc's opportunity for market share gains across key customers
3. Margin pressure – commodity, labour and freight inflation
4. Sales growth outlook
Contents
Q: Could you give an overview of the US food service distribution industry’s structure? How has it developed
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over the last few years? How has the competitive landscape evolved?
Q: You mentioned restaurants struggling to find labour and losing talent to warehouses. Have any leaders in
the restaurant industry successfully addressed these labour challenges through methods such as automation
or higher wages? What are the trends around the talent exodus to warehouses?
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Q: How do you think US Foods is leveraging technology to capitalise on the changing landscape? Is it lagging
vs peers? You said it lacked Sysco’s talent breadth. Could you elaborate on the innovation challenges at US
Foods, including its ability to adapt new technologies to improve processes?
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Q: You mentioned that US Foods, Sysco and PFGC are the distribution industry’s three top players. Could
you quantify their market shares? Beyond those three players, why does the market seem so fragmented
across regional and local distributors?
Q: Could you evaluate the success of US Foods’ private label strategy?
Q: Could you outline US Foods’ acquisition strategy? How does the company source acquisition targets?
How would you assess its previous acquisitions? Is its strategy fundamentally flawed in any way?
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Q: What is your two-year outlook for US Foods and the distributor industry? What are the possible best- and
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worst-case scenarios?
US Foods Inc – Positioning for Market Share Gains
Across Foodservice Recovery
Transcription begins at 00:00:01 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview on US Foods Inc - Positioning for Market Share Gains
Across Foodservice Recovery. I am Nyree Hinton and I will be facilitating today’s Interview with Mr Brad
Foerster, former Division President, National Chain Account Business Development at US Foods Holding
Corp.
Brad, before we start today’s Interview, please state I agree or I disagree to the following statement: You
understand the definition of material non-public information and agree not to disclose any such information
or any other information which is confidential during this Interview.
BF: I agree.
NH: Thank you. Could you begin with a brief introduction to your background?
BF: I grew up in Los Angeles, my family owned and operated a meat processing facility. They would take, we
didn’t slaughter anything, they would take primals and make them into all kinds of speciality meat products. It
was what I grew up in so commodity research and the kind of things to run the facility was part of my
upbringing. From that, worked in the restaurant business, was a ski coach at Squaw Valley, ended up back
with my family, travelled the nation. My father sold the company, ended up with Sysco Food Service. Did 20
years with Sysco in four different locations. Retired from Sysco, consulted for a year with PFGC, at that time it
was PFG, and then after that year, US Foods, I outlived some non-compete doing the work with PFG and came
to work for US Foods. Was hired to eventually become the President in Kansas City because the President in
Kansas City wanted to go back to Philadelphia where he was from. From that, did 10 years with US Foods, and
COVID re-arranged US Foods management levels and I was one of those people that got to retire early, though
at my age it wasn’t really a burden, but I wasn’t ready to quit working. I got to see the evolution of Sysco over a
long period of time, and then see the evolution of US Foods over a shorter window because technology was
moving the business so rapidly that US Foods rode that horse pretty hard to get them to COVID, and then
COVID of course threw out everybody into a tizzy and it isn’t over. That’s a quick spin through my food service
career.
[00:03:19]
Q: Could you give an overview of the US food service distribution industry’s structure? How has it developed
over the last few years? How has the competitive landscape evolved?
BF: As far as the structure of the industry, the majors, and I’m talking US Foods, Sysco, PFGC, they’ve
primarily put up growth numbers based on acquisitions. If you back out their acquisitions, they’ve had a tough
time growing organically but through acquisitions, they’ve seen big bumps, all three. Sysco did most of their
acquisitions really 15, 10 years ago, they bought a lot of companies, the better independents that were
available. US Foods has tried to duplicate that activity. They did, some people consider, overpay for the Food
Service of America Organisation up in the Pacific northwest, that’s still being brought into the organisation.
That was a big platform, had a lot of things that they did well. US Foods doesn’t want to lose those, they’ve
done that with other acquisitions, I was part of some analysis on some bad acquisitions, primarily around
culture. I don’t think they want to make that mistake with Food Service of America because it’s such a big part,
over USD 3bn of new sales for US Foods, a big deal. I think they’ve put really good people in and left a lot of
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the good Food Service of America people in place. Right now, it’s really three major players and then
thousands of independent outlets, ways to get food. Could be a big regional player like Gordon Food Service up
in the north as well, they’re now northeast and southeast, even in Texas, you’ve got players like Ben E Keith
that are very predominant in Texas, Oklahoma, Arkansas, a little up to Kansas, Missouri. Labatt’s down in
Texas, Proper, all those folks do a reasonably good job.
Shamrock in the west, so that’s the next layer of competitor, so if you take all those regional players and the
national players, they still leave for some people, 40-50% of the marketplace is being service by you could say
anybody and everybody. Little USD 2m distributors, USD 5m distributors, lots and lots of produce specialists,
lots and lots of meat, protein specialists, some seafood, fresh seafood players, though there’s consolidation in
that industry going on right now. The landscape of food service, it keeps distilling to bigger and if there’s a buy
to be had, a distributor worth buying, both US Foods, Sysco, PFG not yet because they acquired the Reinhart
food distribution network, and right before COVID, they have been trying to swallow that and getting through
COVID and getting it integrated into their system was probably more than could be expected. They’re still
struggling with that integration and they are people light as a company, so you look at who’s got more people
committed to behind the sales function. Probably Sysco has the most, US Foods has second and PFGC has
third as far as headcount supporting the business. They’ve got the hardest task to get the people to integrate all
the processes on their acquisition of Reinhart. As far as who’s dominating the business, I think everybody is in
this really interesting sweet spot, now I’m talking about the majors. The smaller distributors have had their
own issues but the majors are, right now, seeing a real sweet spot that if a restaurant still opens with the
unwinding of the COVID restrictions, they’re picking up some business. I work with restaurant groups, that’s
part of what I do with my consulting company is help people understand how and where they’re going to get
groceries.
For the people I work with, they’re not dissatisfied at it. In some cases, are exceeding 1999 sales per store per
day, flipping, losing a whole year of history and going back two, people or head counts, sales per customer are
feeling pretty good. I’m getting that feedback in a lot of places across the nation. Obviously, New York City still
isn’t quite back to where it was because there are so many small restaurants, same with Philadelphia, same
with Chicago, but what’s happened in Florida, because they went pretty much open, that if you had a
restaurant, it was open, still doing business, you had a little bit of money in the bank, you were able to go right
back to it. Your only real challenge for the industry, for distributors, is head count and people, but no one’s got
a silver bullet on people, for having enough people to run the industry. I think a lot has changed. I think that
the advent of more warehouse positions with better benefits has stole from the hospitality industry, some
people have made a decision that they’re going to change careers and take the stress out of what’s my tip
payout going to be tonight? Yes, it’s great to work five hours and make USD 150 but I can’t guarantee I’m
going to have the five hours or the USD 150, where if I go work in the biggest example, in an Amazon
warehouse, I know my pay. I know my benefits. I’ve got structure in my life, I get a lot of overtime, this isn’t so
bad after all. I think that the industry is trying to understand is the extended unemployment benefits, so for
food service, warehouse workers as well as restaurant and industry workers, front-line wait staff, kitchen staff,
what’s really driving it? Either way, they don’t have enough help and they do have customers. What you see,
and this is affecting everybody, is essentially you dial back your potential.
As a restaurateur, if you have 200 seats, you’re only seating 100 of them because you don’t have enough help
to take care of 200 seats. You don’t have the production ability in the kitchen, you don’t have the wait staff and
the bar staff to take care of the front of house, and you make the restaurant smaller. That’s really all you could
do. Food service, as far as distribution, through COVID, did some similar things. They would not ship
Wednesdays, not ship Saturdays, they’d try to find ways to push their volume into four days a week, five, and
get off the six days of service. Systems people operate a full seven, but as far as food service, they’ve tried to
live in a six-day cycle of business with Sunday night load out, so it’s servicing Mondays. I think right now, the
state of the industry is there’s a whole lot of supply disruption, labour disruption, and everybody is trying to
figure out how they’re going to deal with it. How are they going to have enough people? How are they going to
have enough, I don’t know if you’ve been reading some of the supply issues? Basic commodities like beef and
chicken and soy oil. Soy beans and oil are at an all time high, and those are major inputs for the restaurant
business so the inflation is probably the next major factor that’s coming at both segments. The distributors are
reasonably good at passing it through. They did really well during the inflationary years, I know, at Sysco, we
got real good at pushing through the price increases. We’ll see, with the way the pricing structure works at US
Foods, whether they can deal with this kind of inflation which they’ve never, that management team’s never
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really seen this in their food service history because remember, US Foods is seven years old. The management
team hasn’t really experienced inflationary push.
It’s not in their DNA whereas for Sysco, they’ve got lots of people that have lived through inflationary times,
and been able to lever that and pass it through the customers and actually grow earnings during inflationary
times. So, it’ll be interesting to see how US Foods can deal with that, because it’ll be one of their first
challenges and knowing when to take up a price and when to follow the market takes a lot of knowledge and
I’m not sure the help is in place that can do that task as US Foods. I’m only seeing that from, I get to see the
supply story in a local market for US Foods and for Sysco, because they have customers on both platforms. I
can watch what’s going on with commodity price moves, basic increases. Surprisingly, there’s a lot of freight
being pushed through, freight increases being pushed through right now, which happens. It happened pre-
COVID. It’s really happening right now. The truckers feel like they have pricing power and they’re using it, so
that’s going to be another input for the distributors to have to deal with, and it pushes through no different
than if your butter costs USD 10 more a case, and freight’s USD 1 more a case, then oh well, now it’s USD 11
you have to push through. They’ll do their best to do it, I’m not convinced they’ve all got the tools in all three
platforms to handle inflation, so there could be a hit to earnings if they don’t absorb it quickly and get it
through their system, for any of the major distributors. The little people are having a tough time making a
decision because in a lot of cases, they’re not primaries. They’re a backup player in the distribution of a major
restaurant, they’ve got a little person, they’ve got a big person. Well, the little person can sometimes make
inroads if they own products below the market and can push it in and own that item into the future, if they
make some decisions about, “Well, we own it. We can price it cheaper. We know the big guys are going to go
up on their price. It’s a chance for us to grab share,” so that whole dance will be taking place shortly around
food products and supply inflation.
Disposables, huge things coming, and part of that is the plants that make the plastics and the foams. A lot of
them were affected either by COVID or by hurricanes, so there’s a lot of the plastics manufacturing and raw
materials comes off the southern Gulf coast, the areas around Beaumont and that geography, and they’re still
closed. A lot of those plants, the company says they’re down 35% capacity. Well yes, because they don’t have
plants running so they’re pulling capacity from either imports or other parts of the nation. Right now, the
industry, the structure, consolidation, it continues. It’s a trend that’s been going on for close to 40 years, Sysco
started it. The competitive landscape will be more concentrated and really, this becomes a people battle
because, let me give you a great example of how functionalisation, which Sysco did a little, US Foods pushed it
hard. In essence, they took decision process away from the local markets, especially on the processing side. So,
let’s go now and let’s talk Kan City, St Louis. You had local people, local knowledge base, they knew where, if
we don’t get it from our big, national supplier, I know where to get it more locally, because we have
relationships, we keep those people in play for these very reasons. When you go through functionalisation, you
wipe those relationships out. In essence, somebody in Chicago makes a decision of where you’re going to buy
thousands and thousands and thousands of SKUs. When that supply chain gets disrupted, no different than
what’s going on with Ford pickup trucks right now, they don’t have chips. We’re living in just in time worlds.
They didn’t have any backup supply. Well, the same thing happens in food service, sometimes because you
can’t have backup supply because the product ages, but what happens is, if you lose your people with supply
chain knowledge, you get a disruption and nobody in Chicago knows how to fix the problem in Kan City. To get
through the red tape, to break out of the functional roles, for someone to get creative, it’s harder for US Foods
than it is for Sysco because Sysco kept a lot more local knowledge, which maybe they spend a little more
money doing it, but right now, they’ve got an advantage because they’ve got people on the ground that can
help resolve these disruption problems. Same thing would go with freight management, you can’t get a load
picked up and you’re managing that freight nationally and you can’t get that load picked up, if you have a local
logistics manager, he’s got friends that have trucks and he can go bend the rule and go get that product, even if
they pay him USD 1 more a case, because for the customer, they would have paid the dollar more and have it,
than not have the product. So, having a little bit more local horsepower for a company during a crisis like
COVID is actually an advantage. For the people in the functional world, I think they’re learning that
functionalisation works to a certain point but when you change the path and the direction that a company has
to go because of a COVID, it gets kind of rocky.
I’m seeing it because I get to look at what’s being invoiced over close to USD 20m of food service distribution.
I get to see what people don’t have, they’re running out of, and so actually, that’s part of what I do. I’m one of
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those people that knows where there’s product and places to get product. I help my customers do that, which
in essence, with the functional ones, the distributors were really good at. Sysco is a little better than US Foods.
PFG, they don’t carry near the SKUs, they don’t have near the risk. They’re still suffering with it but they’re not
the players in the world that I operate in. They are a bigger player, obviously, in the northeast because
Reinhart and MPFG both had lots of distribution there.
[00:20:21]
Q: You mentioned restaurants struggling to find labour and losing talent to warehouses. Have any leaders in
the restaurant industry successfully addressed these labour challenges through methods such as automation
or higher wages? What are the trends around the talent exodus to warehouses?
BF: You’re seeing a lot of pad point of sale applications, so you’d sit a customer down, you hand them an iPad
or iPad knock off. You let them generate their order and you use food runners to bring it to them, both alcohol
as well as food. That’s something that’s going to probably continue to grow. It was really infantile pre-COVID.
There were people doing it, but in the big scheme of things, it was a nothing burger. There was nothing there.
There wasn’t enough of that activity to even register, so COVID changed a lot of people’s thinking about that
and they realised that, “Well, I don’t need wait staff, I can actually use food runners which, I can get food
runners. I can still have them be part of the tip pool, and I can essentially operate almost like an on-premise
ghost kitchen,” would be an example. So, the labour fight, right now, it’s raising wages. I’m watching people try
to open restaurants because they took advantage of people that bailed in the early part of COVID and their
location was reasonable, it was equipped fairly well. Let’s go in, let’s put our concept here with a re-model, let’s
put a concept here. Well, they’ve had to push off openings 30 days because they couldn’t assemble a staff so
when you get to that point, then what you do is you go and you go in a restaurant, and you essentially offer
whoever looks like they know what they’re doing, USD 1-2 more an hour to come work for you. Even in a tip
based world, you can get people to respond to that, but it’s a nasty old trick in the industry. It gets
restaurateurs all pissed off at each other in a local market, but it’s an old school approach that, “We’re going to
pay you more. We’re going to give you a signing bonus. We’re going to give you,” Red Robin’s done this,
Culver’s has done this, if you bring an employee, you bring a coworker in, and they make it through training,
you get X.
They make it 60 days down the road, you get Y. So, it could be USD 200, USD 300, it’s just incentive that what
they’ve discovered with a lot of millennials, they want to be a part of something so if somebody can reach out
to an employee, bring them in, make them part of the team, it’s money well spent to build that up. It doesn’t
solve the problem because, until there’s immigration feeding the bottom of the industry, so in essence, a lot of
immigrants, green card holders, would start in the dish room and be on the line, support for the kitchen.
Those folks are pretty bright, they end up, sometimes their career moves along in less than a year. Six months,
that they’ve figured out what to do and how to do it, and suddenly they leave a barely minimum wage job to
one that pays a few dollars over minimum wage. That starts the cycle, you’ve got to have somebody to feed that
first position. I think what everybody is learning about not having a, I’m not being political, I’m just stating the
facts of the National Restaurant Association, that the not having an immigration policy that works, to feed the
low-end wage workers into the system, everyone sees the dysfunction of that right now in the restaurant
business. If you talk to restaurant owners, people on the board, I know people on the Restaurant Association
Board, the National, that a lot of them are hardcore, “We need strong immigration laws, but we also need
more workers.” Okay, well, figure it out. There’s a whole lot of not being figured out in that issue so for a lot of
folks, this is a real crossroads on the labour thing, I don’t see, post-COVID, this labour problem going away. I
think it’s still going to feed headaches to the industry on a regular basis just because the people aren’t there.
There will be some come back, but there will some that will never come back which I think we’re seeing that in,
not only this industry, there are some surveys that I’ve read that some companies, once COVID is backed off
and everybody goes back to the office, that there are some industries expecting 20% turnover because people
realised, working at home, they didn’t like working at their office, or wherever their place of business was.
They’re going to find another job, so the whole disruption of this industry is, I think, it’s going to go in
directions that a lot of people aren’t predicting just because society and the restaurant business in particular, is
really affected in ways that no-one could imagine. Yes, I’m optimistic it’ll work through. There are robots for
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running food being tested right now, that technology is really expensive but if you don’t to retrain the robot, oh
well, that’s a really good thing because the robot isn’t going to not show up to work tomorrow. There will be
jobs being able to manage those kinds of technologies, not as many, but the average restaurant worker is not
trained in robotics so there’s a whole other class of worker that will come from this. Having somebody
technically smart to run all your entry screens, like in a McDonald’s, there was a little bit of work for them to
get that right, to have their technology be stable in a town of 1,000 people and you’ve got remote kiosks for
people to order. What you did find, a lot of people turned them off because they couldn’t manage the
technology, customers were struggling, whatever the issue was, but nonetheless, there’s going to be a march
towards more technology in restaurants. Quick serve will definitely lead the way, they’ve got the easiest model
to implement this kind of technology.
We’re talking McDonald’s, the Culver’s, the Freddy’s, the Taco Bells, the Yum! Brands. Those folks will be way,
way ahead. Domino’s Pizza proved that having the best technology can really make you a dominant player,
they couldn’t have been in a better place going into COVID than Domino’s was, with the technology they had,
the customer-facing technology was really exceptional. I don’t know if you’ve ever ordered a Domino’s pizza,
I’m not a big fan of the pizza, I’m a huge fan of the technology. It’s really good. I don’t like the pizza, but that’s
fine.
[00:28:41]
Q: How do you think US Foods is leveraging technology to capitalise on the changing landscape? Is it lagging
vs peers? You said it lacked Sysco’s talent breadth. Could you elaborate on the innovation challenges at US
Foods, including its ability to adapt new technologies to improve processes?
BF: During my time, I saw them force-feed a lot of technology, and it was kind of like, “We’re going to throw
out 150% of what we’d like, and if we get it to 90 or 80, we’re going to feel pretty good.” So, that was just the
feelings of the IT leaders, that, “We’re going to give you more than you can do, and you’re going to do 80% of a
lot of it.” I wasn’t a big fan of that, I saw some of that kind of thinking. I saw acquisitions that, when I was with
Sysco, and we’d acquire a company, we would run parallel their finance back of house system on our system.
We’d run it six months. We’d do technology deep dives, we’d look for anomalies in the data. I was on teams
that did that kind of work. At US Foods, we’d buy a company, we look at their data for a couple of months, we
don’t even run a parallel, and we flip the switch. Now, that was a super duper mistake, two times, that I saw.
Somebody finally realised how much business was being lost because they didn’t move the technology at the
right pace for the new company so I think that’s why you’re seeing the Food Service of America acquisition to
US Foods in the northeast moving really slow, because they did a really good job of buying something and
breaking it. When you buy something and lose half its sales, even if it’s small, at some point somebody notices,
“We didn’t really do that right.” I think PFG is in the same boat right now, that’s why they haven’t on-boarded
their acquisition of Reinhart onto their main system, because they don’t want to break it, but PFG is lead by
ex-Sysco executives so they get the, go slow and make sure you’re right. You don’t have to have the rush speed
to market. US Foods have a rushed speed to market for technology and I think it’s better than what Sysco has.
I think they really disrupted their customers more than they had to to get it implemented quickly, and who
knows what that agenda was. Maybe it was a Wall Street story, maybe it was the going public. There are a lot of
reasons why big companies do what they do, but without question, US Foods is ahead of Sysco on the
customer-facing technology for, I’ll give you no reason why Sysco won’t catch up, because they’ve always been
really good at realising, “We’re behind. We’re going to put some money at this,” and they do have deeper
pockets so they have the ability to put in a problem faster than US Foods. US Foods, a lot of times, have to go
to TKNR and say, “Hey, we want you to buy another couple hundred million dollars of stock from us,” and
that’s been the solution, but it’s just a capitalisation level issue. Sysco’s had a lot more years to build up a war
chest, and I think coming out of COVID, you’re going to see that war chest used so there’s going to be
competitive pressure that US Foods did not see pre-COVID coming from Sysco post-COVID. That’s from
talking to executives, in fact I have a lunch today with a Sysco executive at noon, and I get a chance to ask the
questions to broaden my knowledge of, “What is it that you’re doing,” but that’s been pointed out in their
board meetings at Sysco that they haven’t leveraged their market presence for growth like they should have.
Their new CEO is going to put the hammer down and they’re going to get that activity. I’ve seen it from them
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approaching me about my customers, of what they’re willing to do. A lot of it’s just a price function, that if
they’ve got more profit to give, they can get a customer to move as long as their technology works and the
service works, you can exchange distribution partners fairly easily, because in big markets, everybody has got
the same products because you have to.
There’s a local flavour to inventories, so if you’re in Chicago, Sysco, US Foods, Gordon’s and Reinhart, PFG,
they’ll have a few thousand items that are exactly the same because the market demands it. You can, as a small
player, you buy 5,000, 6,000 a week in groceries, you can move fairly easily and they’ll make adjustments on a
couple of items and move you over. Restaurateurs are going to have an opportunity and inflation always gets
restaurateurs looking for somebody that’s going to somehow not have inflation in their pricing. That
distributor doesn’t exist, but nonetheless, inflation creates, it’s kind of like a Vicks reader for restaurants, that
when the mix is high, people are moving around, a lot of stocks are moving around. Well, there are some
businesses, when inflation’s high, that same thing happens. It gets people thinking about things they wouldn’t
normally think about, as far as their distribution channels. So, I’d say that’s the next year-and-a-half, two-year
story because I don’t see supply disruption getting fixed because as soon as we get it fixed in the United States
and Europe and Asia, they get all their shit together, the demand for exporters to grab product and send it
overseas and make a better margin, you’re already seeing that with pork products. There are products moving
to China because they can make more money even floating them on a boat, so it creates disruption. If your
plant doesn’t have enough people, I live in the heart of barbecue country.
There are actually barbecue chains, people that buy millions and millions and millions of dollars of ribs, that
can’t get their rib stack made because there isn’t the labour to make that rib stack. In essence, the packer’s
looking to where their best margins are, where they can place their labour and those are the lines they run. The
line that trims and peels ribs, which is getting pretty much in the weeds but nonetheless, if you’re a high
quality barbecue place you have a stack, and your customers expect that, you’re not able to get it so you’re
having to change, which means you’re having to look at, “Alright, my rib supplier can’t help me. Who’s going
to be my new rib supplier?” That could include a manufacturer and a distributor change because logistics
matters, and if you find a new supplier for ribs, and logistics doesn’t work, you’re going to find a distributor
that does. That’s getting into the minutiae a little bit but you take that problem around that product, and take
it times a couple of thousand, you’ve got an idea of what restaurateurs and distributors are facing right now.
I’ve never really seen it in my career and I grew up in manufacturing and distribution. I’ve never seen anything
quite like it, there’s willing buyers and product not being able to be produced.
[00:37:19]
Q: You mentioned that US Foods, Sysco and PFGC are the distribution industry’s three top players. Could you
quantify their market shares? Beyond those three players, why does the market seem so fragmented across
regional and local distributors?
BF: As far as who owns what, if you’re looking really high, 10,000 foot level, US Foods is the bigger player to
healthcare and hospitality, hospitality meaning the hotel business. Why is that? They’ve made partnerships
with GPOs, a vendor in the hospitality world, so if you go to a Marriott hotel, and oh God, hundreds of other
brands, the products you consume, from soaps to eggs at breakfasts, are purchased through a GPO, through a
little bit of Sysco, a whole lot of US Foods. So, the hospitality industry, the healthcare industry, is probably, if
you want to say the dollar spend, it’s probably 60-70% through US Foods, the rest through Sysco and others.
Why? US Foods has as long-term relationship with Premier. Premier is the biggest GPO in the world, so food’s
a small part of what those people buy for hospitals. I think they spend more money on x-ray films than they do
on foods, to give you a weird comparison. They are embedded, so Premier and Vizient, which is the old
Novation, are the one and two players in the hospital long-term care, acute care world. They are US Foods
customers, so they slant a lot of what they do at US Foods because you take that piece of their business, you
glob all the three of those together, that’s over 30% of their cases, of just those segments. Everybody is all
onboard all across the nation to make sure that they have the best customer experience, so they go through a
full RFP, not really, every 3-5 years. They always end up staying where they stay.
The converse of that is, business dining, which I’m really surprised how well Sysco has done, their biggest
Private and confidential 8
business dining customers, Sodexo and Aramark, are the negative to the (inaudible 40.26) Premier positive.
They’re trying to bring on their management, hotels, hospitals, that they provide and manage the service and
they buy their products through Sysco. So, it’s kind of like the distributor, Sysco, fights for hospital growth
using Aramark and Sodexo and if they win, then that hospital stops self operating. They don’t have a local
control any more of their operations, not like the kitchen staff, you have a person that runs food service in a
hospital, they’re making their own decisions. They’re answering to the hospital boards. Well, when you hire
Sodexo or Aramark, you’re getting a whole suite of supports that has really been interesting to watch, if you
don’t know the industry, that US Foods and Sysco, is, through their proxies, which is Premier and Aramark,
are fighting the battle for this segment. It’s just one of those anomalies of an industry, and PFG just watches it
all go by. They’re not really in either segment. Then you take the independent restaurants portion of the
market, which without question is the most profitable for anybody, for your little independent, your PFGC,
your Sysco, US Foods, doesn’t matter. Your independent restaurant segment is the most margin. A whole
bunch of reasons for that. Private brands, which is somewhere on your list, or if it isn’t, it needs to be. Private
brands really lead the profitability in independent restaurants because they have less, they don’t buy enough of
any items to stack it with the distributor.
They don’t buy many 20 cases a week items, so if you’re a USD 4,000 restaurant, you buy 4,000 a week, two
USD 2,000 orders, you’re all-in margin in that perfect world distribution, your all-in margin for a restaurant
like that is close to 20, 22%. The buckets of that are freight components of inbound freight to the distributor,
purchase programmes, which could, in a customer like that, could run as high as 12%. So, before they put a
markup in, they could easily have 13, 14% margin before they mark it up. So, the independent restaurateur
may have an artificially low margin but the distributor has better profitability before the sale. A lot of that is
over the roles that the functional purchasing put the pressure that, “We’re only going to buy things that we can
put into our brand and we’re going to sell those things to our customers.” Now, if you’re a bigger customer,
you’re going to go, “Yes, that’s nice. I appreciate you have that in your brand. I buy enough of this, I have a
direct relationship with the manufacturer, I’m not going to use that brand. I’m going to use this. Here’s my
price, here’s my contract from the manufacturer bringing in the stock for me.” Smarter restaurateurs have
understood that owning proprietary slots are a big part of surviving the push in margins that distributors are
going to have to do. Sysco is the professional, they’ve been at it the longest. No question.
[00:44:19]
Q: Could you evaluate the success of US Foods’ private label strategy?
BF: It’s been very successful. It’s been one of the things they knew they had to do, and part of that reason why
they have to do it is, that 60% of their business or more is floating through a contract. That means that the
margin is dictated for that customer, so you have to go make money in other buckets. Sysco, that’s less of a
problem, they have a lot of contract business, a lot more than US Foods but they’re also double the size so that
the big numbers thing comes into play. But, the delta between national brands and, this is going back to Sysco
brands as well as US Foods, the delta on a case sold is 7-9% better for the distributor if they can have it in their
brand. Now, there are all kinds of gyrations using AI to figure out what’s the right price to bring all these
products into their brand and sell it to the marketplace. In reality, that’s the starting point. The marketplace
tells you really quick if you’ve got it wrong, so you think you’re going to make 20% purchase income on this
disposable item, when in reality, the little distributors don’t have that private brand component, so they’re just
buying product and going to the marketplace. They actually perform the keep you honest task for US Foods or
Sysco. Sysco has just more products in their own brand, so they’ve got a lever that US Foods is yet to create,
but it’s not for lack of trying. It’s not that they’re not working real hard to get more into private brands.
Sometimes, moving something to a private brands can disrupt the customers.
As an example, this poultry supplier, very predominant in a given geography, and you’re US Foods, you go,
“You know what? We’re going to take this poultry from this supplier to this other supplier.” Because you don’t
have the right person making that decision, you end up not matching up and the customers immediately
notice a difference. It could be size poultry, it could be the colour in the fat, believe it or not. There are some
differences in feed profiles that cause that to happen. Well you do that in the market, and all of a sudden
you’re scrambling to bring back the old supplier because you made a bad decision in a given geography and
Private and confidential 9
now you’ve got to unravel the work you did. On something like soy oil in private brand, yes, it’s very
interchangeable, doesn’t matter. So, there are things that go private brand real, real easy. There are things that
do it really hard. It varies almost sometimes by geography, that what might be a change out in Kan City won’t
work even a little bit in Miami, Florida. So, Sysco got good at picking regional partners for brands. US Foods is
still learning about that, and I think with the acquisition of Food Services in the northwest, they’re seeing that
there’s a whole distribution supply chain supporting the northwest of the United States that US Foods didn’t
really participate in because they were big enough to know the difference. Once they bought a major player up
there, it was like, “Oh shit. We don’t do business with any of these people,” and so all of those people had to be
brought in and understood because they couldn’t do what they did in the midwest. They could take an
acquisition that’s got great value and great intellectual property, and break it, and lose a third of the business
to Sysco and the independents.
I think they finally thought, “We’re not going to do that.” That gets confusing in private brand direction when
you have to do regional decisions. Bakers is a great example. It’s okay to have a regional baker in your private
brand. The trick is, how do you make that bread for a hospital group look the same in Fort Lauderdale as it
does in Mobile, Alabama, as it does in Atlanta, Georgia. Sometimes, if it doesn’t, and you’re a group like
Premier or Vizient, you’ve got people that move around these hospitals and go, “What the hell is this? This
isn’t the bread we get in St Petersburg.” It’s really funny, the nuances of food, that make it not easy, let’s just
do it, private brand evolution. There have to be smart people in the middle of the decisions and lots and lots of
testing and comparisons before they make those changes. It was easier for Sysco in some respects because they
had years, decades, to migrate through this process. US Foods knew they had to do this to make their margins
work, so they slammed a lot of stuff home and some of their private brand decisions had to be unravelled, they
had to be backed up because they weren’t made in the right way.
[00:50:24]
Q: Could you outline US Foods’ acquisition strategy? How does the company source acquisition targets? How
would you assess its previous acquisitions? Is its strategy fundamentally flawed in any way?
BF: I don’t think it’s flawed. I think their biggest problem is the candidates, that Sysco swept in over 25, 30
years, and really purchased everybody but a few players. So, they bought a lot of really good companies as they
grew. They were early to the game, they were the only people doing it, so roll the calendar forward about 30
years and US Foods is now looking to find these same acquisitions, and a lot of them won’t operate. They’ll
have to be tucked in. Others will have to operate because they have facility constraints. Right now, tough to say
what a constraint is because COVID did eliminate a lot of product and inventory in distribution facilities, just
because the people weren’t there to buy it. Now that’s all coming back, so finding what the right size of these
distribution facilities is, is literally being discovered again. You buy somebody, you buy a USD 20m
distributor, and you say, “Alright, I don’t want your building, I want your business. I’m going to tuck you in to
two distribution facilities.” Well, as easy as that sounds, there’s about risk about half that business because
there are just cultural differences in a USD 20m company and a USD 700m yearly volume company. Things
just don’t work the same, so you buy the little company, you book on the top line USD 20m gain and then you
bleed off, if you can buy a USD 20m company and only lose USD 5m, that is a super success in today’s world.
Whereas, Sysco did something like that, a lot of people lost their job.
They did it with a little Italian distributor in Toledo, they bought it and promptly found a way to lose over half
the business, so everybody slowed down at that point at Sysco and go, “We’ve got to understand the culture of
who we’re buying.” US Foods did a lot of those little acquisitions and lost a lot of business. Yes, they got to
book the sales of the acquisition, that made everybody feel good, helped the stock price, but in reality, they
weren’t making great decisions on culture. I think what’s going to change with the acquisition of Food Service
of America is, you’re going to get a little pickier about getting the right culture because they’re having to study
really hard to not break Food Service of America because it’s just too big and too important. They took the
stock hit when they made that acquisition because a lot of Wall Street investors said they way overpaid for
that, and in reality, maybe they did, but they needed it because they had no geographic coverage up there.
Somebody needed that company, and if it wasn’t them, PFG, (inaudible 53.54) get through Reinhart, it could
be PFG buying that, because PFG is going to have to do something like buy a Shamrock, as an example, in the
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west. Sysco won’t be able to buy Shamrock, US Foods won’t be able to buy Shamrock, because the feds will
never tolerate that, but I think they’d take somebody like PFG, they could. Those kinds of big, Gordon’s,
Shamrock, Ben E Keith, those people are almost off the table to Sysco or US Foods. It’s going to be these USD
20-30m distributors that, I’ve worked with those acquisitions, both platforms, Sysco and US Foods.
Those are really messy acquisitions. There is a lot of effort to get that USD 30m and not lose five, 10, 15 million
of it. A lot of work and resources have to go into that, and I think US Foods is realising it, and Sysco already
realises it. So, Sysco’s strategy, quite honestly, has been build another building closer to the supply. US Foods
hasn’t got there, and a little of it is just access to capital. A great comparison of cultural organisations. Sysco
was on, I understand warehouse logistics, Sysco was on triple pallet jacks and three compartment trucks, as
we’re going to implement this 20-something years ago. In essence, they controlled their shrink better because
you had frozen in a freezer, cooler in a cooler, dry in a drawer. US Foods is still on old technology that you’ve
got the freezer product in a compartment, you’ve got dry and refrigerated in another compartment, which
means refrigerated doesn’t stay very temped properly, especially in hot, humid weather. That’s a real
difference between cultures of what they’re willing to spend money on. Pallet jacks, in a warehouse, Sysco
configured warehouses 20 years ago to run a triple or quad jack through a pick path in a warehouse. So, a pick
path is, it’s night time, you’re picking groceries to put on trucks to ship tomorrow. Well, think about the
efficiency gain when you can run three, four pallets and a picker, doesn’t come off the floor, picking until he
fills four pallets that’s configured to go on the truck, to get off the truck to the right customers. Whereas US
Foods is doing it in most of their facilities still with two pallet jacks.
They’re trying to do three but they really struggled, culturally, to bring that through. So, you take those kinds
of differences between the two and the way I look at it is, US Foods has got all kinds of gains. Once they can
embrace that simple technology, those two things, their shrink, their loss to product damage is going to go
down because the trucks are going to protect the product better. They’re not going to round trip the cases, and
they’re going to use less warehouse people because they’re going to be able to implement basic warehouse
technologies that they’ve avoided, didn’t want to do it, whatever their excuse way. They’ve got a pick up
coming, operationally, expense wise, just like they have a pick up coming as they get through the private brand
struggle. They’ve got to get it done. It’s a little bit messy, but every time they do it, they’re picking up points of
profitability on that case to their customer base.
[00:57:55]
Q: What is your two-year outlook for US Foods and the distributor industry? What are the possible best- and
worst-case scenarios?
BF: Worst case scenario is what we went through, we get to go through again. I don’t know if, that’s not really,
that’s out of the control of a Sysco or a US Foods, another pandemic, or something like a pandemic. I think
that’s the worst case. I don’t think the independents are going to get stronger. I don’t think small providers like
Warehouse Depot are going to make inroads against the Sysco and US Foods in a big picture. Really, it’s
unforeseeable economic issues. Price of oil goes to USD 120. Well, all slap on fuel surcharges. They’ll do it
really fast. Yes, it’s a problem, it disrupts things but the product still flows. I think the trucker shortage, the
labour shortage in manufacturing is probably the biggest risk but those almost hit everybody equally, unless
you’ve just got better people to resolve your problems, which I believe Sysco’s winning in that battle. They’ve
got a little better personnel to solve the problems on the supply chain. That’s going to keep bothering
everybody in the industry, but it should be pretty even across all, and if US Foods chooses not to have the right
people in place then yes, it will affect them and they will lose customers over supply. That’s the meeting I’m
going to have today, is Sysco’s going to supply me with their supply metrics. I know what they read like, and I
then have the perspective for my customers, who’s going to be the best solution, US Foods or Sysco, so us over
the next 2-3 years.
As far as the upside is, the restaurants that are there now are really strong. The ones that made it through are
going to do a lot of business if they can find help. That’s going to be in whatever form, it’s going to be
technology, robotics, just stealing the other people’s help, causing wage inflation, that’s what’s coming and it’s
going to be bumpy while that’s going on but I think for an investment to be invested in US Foods and Sysco,
Private and confidential 11
I’d probably, because of the dividend, be a little more excited about Sysco and they’ve got better access to
capital to grow faster, even though that’s not been their MO. I think US Foods is still going to play from the
second position where their strengths are, but they’re going to see pricing pressure on independent
restaurants like they’ve never seen. It’s only because Sysco could make that decision to do it and has the
money to do it. I think that’s the biggest risk.
[01:01:30]
NH: Brad, I think that it a great place to conclude the Interview. Thank you very much for your insights.
Clients, thank you for joining Third Bridge Forum’s Interview today. If anyone would like to speak with Brad
in a private call or meeting, please let your relationship manager know. Thanks again, Brad. Take it easy.
BF: You bet, guys.
Transcription ends at 01:01:47 of the recorded material
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